MINIMISING THE RISK FOR OWNERS CORPORATIONS –
APPOINTING A STRATA MANAGER
Owners corporations, both large and small, are finding it increasingly difficult to manage their schemes themselves. Increased insurance obligations, mandatory disclosure requirements, together with the policing of the Strata Schemes Management Act (SSMA) by the New South Wales Consumer, Trader and Tenancy Tribunal and the Office of Fair Trading have persuaded many owners of self-managed schemes and developers to engage the services of a professional strata management agency.
Similarly, we have observed a number of cases where developers who had engaged asset managers without strata management qualifications to manage their strata schemes have found themselves in breach of laws (and subject to fines) as a consequence of their manager’s lack of experience and technical expertise.
Insurance companies have felt the full effect of the recent floods and cyclone in North Queensland and Victoria with claims totalling over $50 billion. Consequently, they have advised owners corporations across NSW to expect premium increases in the range of 20%. We are only now starting to see the fall-out from these claims with some schemes receiving renewal terms with premium pricing in excess of the 20% mark and further, some insurers are simply refusing to offer terms on properties that are not considered a “good risk”. Some of the reasons given include:
- Rubbish such as cardboard and pallets continually left outside the property and bins left unlocked on common property giving rise to public liability and fire/malicious damage risks
- Graffiti on walls and regular vandalism – failing to remove it quickly often results in more graffiti and vandalism
- Fraudulent claims by owners corporations.
- Non-compliance by owners with the strata schemes by-laws.
In many cases owners simply do not have the time to enforce by-laws and, unlike in some states such as Queensland, enforcement of those by-laws is not compulsory and so owners and tenant breaches of such by-laws goes unchecked. Further, owners at self-managed schemes are usually unaware of their legal requirements to insure property under the strata laws. This can and often does result in owners corporations being underinsured and potentially liable when a claim does arise. From anecdotal evidence, we understand some insurers are reticent when providing terms to self-managed owners corporation simply because they have been ‘burnt’ before. There is an expectation by insurers that owners corporations that outsource the management to a professional strata management company will be better managed and, in particular, legal requirements to repair common property and sufficiently fund the sinking fund will be better satisfied.
In our experience, we have managed to obtain very good renewal terms for schemes that have previously been poorly managed. By taking into account our overall very low claims history and our attention to high standards of estate management, those renewal terms often result in a reduction of insurance premiums in excess of the fees we charge to the strata scheme for managing all aspects of the scheme.
Strata Schemes Management Act (‘SSMA”):
The SSMA is complex and holds owners accountable for the management, control and administration of the strata scheme. Non-compliance with each section can result in fines being imposed by the CTTT. A professional strata manager is not only qualified and experienced in complying with the law, but also holds professional indemnity insurance in the event of a claim. The manager can guide owners through the often restrictive provisions to ensure that owners corporations can legally and effectively achieve the results they wish
There have been many instances where the books and records have been inspected by the inspectors only to find that:
- Meetings held not in accordance with the SSMA. Consequently, levies could not be recovered because the meeting was deemed invalid.
- Alterations had been made to common property during the initial period. Some “illegal” alterations have had to be returned to original condition at great expense to owners.
- Approval for alterations had been granted without the correct motions or voting rights.
- Wrong/invalid motions had been included in agendas.
There is no excuse for non-compliance and unfortunately many owners corporations have found this out the ”hard way.” While some of these issues seem trivial and bureaucratic, owners corporations are exposed to considerable risk by owners (existing and/or future) if matters are not dealt with correctly. This is because lawyers, as a matter of course, will almost always check that decisions of owners corporations have been validly made in order to determine whether they can serve their client’s needs based on a “technicality.”
Accounts and Financial Management:
The obligation to maintain a trust account (with both Administrative and Sinking Funds) and make adequate disclosure of financial accounts to owners is something often neglected by owners corporations – the Office of Fair Trading has been active at reprimanding such schemes. We have observed situations where failure to maintain adequate records has resulted in owners being billed for wrong amounts of levies and budgets being calculated incorrectly. A lack of independence and transparency can breed corruption in some schemes with, for example, inappropriate payments made to related entities, unapproved loans being taken out (for which all owners are liable) and given.
Similarly, the SSMA is very clear in how each account must be managed, so ensuring the correct transaction occur from each account is paramount. In particular, we observe many schemes that have underfunded sinking funds. While some owners are anxious to keep levies to the minimum, the legislation does require owners corporations to set aside an appropriate amount of money to deal with large expenditure for capital items. A professional strata manager with experience of managing many buildings can make owners aware of those obligations and ensure a sufficient sum is put away for the benefit of all owners with the result that the owners corporation is not in breach of its obligations. Some owners lose sight of the fact that the ‘savings’ they make by underfunding a sinking fund is more than lost through failure to repair and maintain common property and/or the underfunding will be considered a ‘negative’ by the market when assessing the suitability of a lot for investment. An independent strata manager can guide an owners corporation to ensure that the interests of all owners, not a select few, are protected.
The statutory obligations such as those relating to Occupational Health and Safety (now known as Work Health & Safety) and Fire Services place a heavy obligation on owners to maintain a safe work environment. In the past, Workcover would only investigate if there was injury. However, since January 2012 legislation provides for fines of up to $600,000 to be issued if it can be proven that there is a risk.
As you would expect, the responsibilities placed upon owners corporations is expanding at an exponential rate. It is impractical for owners of many schemes to remain up to date with their obligations. Strata managing agents are required to keep current with these obligations – outsourcing the ‘risk’ to such professionals is an affordable way for owners corporations to manage their risk. And, as professionals licensed by the Office of Fair Trading, strata managers are required to maintain a sufficient level of professional indemnity insurance.
For further information on how Beaumont Strata Management can save owners corporations money and mitigate their exposure to risk, please contact Ashley Bassa or Grant Beaumont on 9846 1699.