by Robert Van Aalst of Lawyers Central
Part 2 of 3
Realistic and Comprehensive Reform
What will be required is realistic and comprehensive reform that addresses the existing publicized issues, conflicts of interest, and disclosure. This reform should assist the many ethical and professional strata managers and deal with and expose offenders, ensuring they are brought to heel. In addition to major fines, extreme and repeated breaches should result in the revocation of their licenses.
Strata Schemes Committees and Company Title Boards
Strata Schemes and company title buildings are also businesses. Large one’s deal with millions of dollars of annual income and expenditure.
Few committees and/or board members, all of which are volunteers, are equipped to deal with the complexities of the law of accounting and meetings.
Their roles are also part time and often thankless.
Their mandatory legislative duties and responsibilities are onerous and to make matters harder they are often surrounded by self-interested and/or apathetic owners and residents.
Committees and/or boards must work co-operatively with their strata managers and stop the blame game and use their time together productively.
Linton added “..there are lots and lots of personalities that live in apartment buildings and in strata schemes. Not all of them are easy to get along with. All of them, good and bad, expect to be served by the strata manager, and the workload that these people at the front line have really is almost impossible, at some firms, dozens of buildings. I had one strata manager tell me they had a portfolio of 100 buildings to manage. Now, I don’t know how that is possible, 100 AGMs a year, just that alone, let alone all day-to-day stuff.”
Some committees/boards treat their schemes and companies as their fiefdom and strata managers as their serfs or domestic help. Those situations also call for review in a similar way coercive control is being studied and solutions developed.
Shooting the messenger needs to stop. Some committee/board members, owners and residents would benefit from civility and anger management lessons.
Othering
During and since COVID key board warriors came out of their caves. There has been an exponential increase in “othering.” I am not sure if this was a result of some people having too much time on their hands or wanting to blame someone and allow inherent biases to bubble to the surface.
For those unfamiliar with othering, according to the Cambridge Advanced Learner’s Dictionary and Thesaurus it means the act of treating someone as though they are not part of a group and are different in some way. Strata managers seemed to fit the bill of not being part of the group and different in some way.
People search the internet, and/or social media to find information which supports their thinking and encourages their unreasonable behaviour and demands.
Like never before, there is the means to broadcast unsolicited views, biases, suspicions and divisive behaviour.
Some of these people believed COVID was not real and vaccination unnecessary. They were uncomfortable with what they did not understand and could not control. This unhealthy attitude has rolled over to other things including how strata management is misunderstood.
I think othering is also a reason why strata management in general finds itself under more negative scrutiny and attack than usual. The reaction to outrageous behaviour of some has been the poison chalice for all. The perpetrators dowsed fuel on the fire of suspicion and distrust against strata managers generally.
Complexities
My experience is that some committees, owners, and residents either don’t know or don’t care about the day-to-day burdens and complexities faced by strata managers. They want and demand instant answers that are either not available or unreasonable to expect. Owners sometimes misguidedly say, ‘You will do what I ask; I pay your fees.’ Owners pay the strata contributions, and the owners corporation engages the strata manager and pays their fees.
Owners also forget that at the relevant AGM or general meeting, they approved both the appointment of the strata manager and the terms of the strata management agreement. They also forget that they were provided a copy of the agreement with the agenda and had time to consider its terms and raise any concerns either before or at the AGM/General Meeting.
The same applies to the financials, which are also attached to the agenda and available for scrutiny and questioning both before and at the meetings in which they are considered.
Unreasonable expectations are a result of ignorance, apathy, selfishness, or a combination of all. Knowledge, patience, and participation are the answers.
Professor Sherry has written, “Strata title raises extremely complex questions in property law. It creates individual and collective titles to land/air space, as well as governing the ongoing rights and obligations between people in the resulting communities.” Despite strict statutory obligations, many committees and, by extension, owners know little about these complexities. Nor do owners have proper knowledge of their mandatory legal duties. Hence, my recommendation for the education of office bearers, committee members, and owners is also important. New legislation is in the mix for this too, but I believe that what is proposed is a knee-jerk reaction.
Strata Management Agreements
Irrespective of the terms of the strata management agreement the ultimate decision making remains with the owners and in the case of company title the board/shareholders.
Before strata management agreements are put in place the owners corporation should obtain legal advice, but in a majority of occasions they don’t opting to be penny wise and pound foolish.
It is pointless being a member of a committee or the board if they do not use their voice and vote in the best interests of the owners corporation or company even if that voice is in the minority.
Don’t blame strata managers if before entering the agreement people do not exercise their right and legal duty to properly read and understand the management agreement and/or the relevant legislation governing the managers duties and obligations.
Ignorance of the law is no excuse, owners, committee/board members and office bearers cannot obfuscate their legal responsibility.
The Solution is Education
The solution to the problem is not moaning, groaning, and finger-pointing. It is education, education, and more education for strata managers, committees, owners, and residents. With education and taking responsibility, there would be less ignorance, vulnerability, othering, and blaming, and there would be increased confidence, trust, and respect, which are currently missing.
Strata or community living is a democratic process and demands knowledge and cooperation. It’s not for everyone. If one finds the processes too burdensome, they should not buy into strata or company title. If you have bought in but find it all too much, sell up and buy a house where one can be the king and/or queen of their castle, no questions asked.
Professor Sherry writes “governments, the judiciary and citizens need to better understand the ramifications of private communities. When we understand the property rights and obligations involved there is better chance for co-operation and harmony on all levels and less unreasonable expectations and disharmony.”
She also acknowledges there is both “the good and not so good side” to community living. In an interview she acknowledged as an academic at times to “being a bit negative about the law” but having said that she also believes “it’s a pretty good system with some inherent problems.”
Those inherent problems need attention and resolution because like bad habits they die hard but if remedied community living will be better.
It’s Not Just Insurance
Insurance commissions and brokerage and the cozy relationship with Steadfast and other suppliers is a problem, but a lot more needs attention.
I maintain the real problem is cultural and a change of culture is very difficult. It is time consuming and often costly but when done properly change it is worth the time, effort and cost.
Having said this, if you want to delve into the detail and understand strata insurance, I recommend the paper published and co-authored by Professor Nicole Johnston called “A data-driven understanding of strata insurance in Australia and New Zealand.” Here is the link.
Brokerage versus Commissions
I am not sure most people know the difference between brokerage fees and insurance commissions and their effects on fees charged by strata managers.
Commission is a percentage of the premium paid by the insurer (insurance company) to a strata manager or the broker for introducing or maintaining a policy. Crudely putting it, it is a referral fee for referring or renewing a policy with the insurer.
The commission is paid directly to the strata manager.
A brokerage fee is a payment to a broker for providing professional advice, comparing policies, and handling insurance matters on behalf of the strata scheme.
An insurance broker may be engaged by the strata manager on behalf of the owners corporation.
Commissions are paid by the insurer as a cost of acquiring business.
Brokerage is typically paid directly by the client (owners’ corporation) or built into the premium by the insurer. This can be shared with strata manager.
Cost Impact:
Commissions may increase the total cost of the insurance premium since they are a percentage of the premium charged by the insurer.
Brokerage fees may be an additional cost on top of the premium or negotiated separately.
Transparency:
Commissions are often embedded in the policy cost and may not be as clearly disclosed unless required by law. Hence the recent changes to disclosure requirements.
Brokerage fees are usually explicitly agreed upon and disclosed upfront.
Under the current law strata managers can lawfully receive both commission and brokerage fees if they are licensed to act as an insurance broker and as such provide advice or administration.
Netstrata pushed the boundaries as did some other strata businesses by forming wholly owned brokerage firms, which they did not properly disclose and collected brokerage fees and commissions. These fees were astronomical.
The latest amendments do not make either practice unlawful. They do tighten the disclosure requirements which I will discuss in the next paper.
Some strata managers don’t collect commissions, some collect them and pass them back to the owners corporation, and some keep the commissions but adjust their fees down in favour of the owners corporation.
If in the future commissions are legislated as illegal, it is my view there will be an increase of strata fees, so strata managers are able to make up their loss in income.
ABC 7.30 Report
The focus and expose in the 7.30 Report centred round the interview by Linton Besser with Stephen Brell of Netstrata. That highlighted the lack of disclosure, conflict of interests, an ignorance of fiduciary relationships and double dipping and kickbacks.
Netstrata has a number of subsidiaries through which it carries on side businesses, Strata Insurance Services Pty Ltd (the brokerage firm), WinFire Pty Ltd (the fire protection arm), Resolute Maintenance Group and PG Martin Plumbing.
The nub of the allegations against Netstrata was its failure to make a full, frank and proper disclosure about its ownership of these companies.
Linton referred to the financials of Netstrata which disclosed substantial income earned in addition to strata management fees. I doubt many owners know how to access the Netstrata financials and if they did know, how to read and understand them. The same applies to the other big players who have wholly owned subsidiaries.
The recent amendments are designed to increase upfront disclosure but not make this questionable business practice illegal.
Strata Management Fees
Although, some people feel strata management fees are too high, in relative terms across the board they are low. The workload of strata managers is often greater than that of most lawyers and accountants, and despite the lack of available educational standards, their responsibilities and exposure to being sued for professional negligence are as high, if not higher.
It is my view, despite the recent exposure, strata management fees need to increase.
Some strata managers may move from hourly charging to fixed fees which will result in less charging for extraneous items but increase management fees. That is what happened when lawyers moved away from time costing to fixed fees.
No need to panic, water usually finds its own level. One benefit of fixed fees is management agreements may become simpler.
Disbursements will still be charged either way. Fixed fees won’t cover additional fees being charged for extraneous professional work outside the scope of day-to-day management.
The owners corporation and company title buildings will need to consider which option best suits their requirements and independent legal advice should be obtained before entering these agreements.
I agree with Michael Teys who has written about overcomplication of strata management agreements and suggests they need to be reviewed and made simpler. That will make life easier and more certain for both strata managers and their clients.
Some members of the Australian College of Strata Lawyers have been very vocal about what they suggest is wrong with strata management including strata management agreements, and generally what needs fixing. Maybe since they profit from strata generally, they could put their collective heads together and design what they suggest are new fairer strata agreements and offer those free to both owners corporations and strata managers.