Monthly Archives: August 2011

Markets Boom And Markets Bust But Then What

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It wasn’t that long ago and the mantra of property developers was, ‘build it and they will come’. Today we see in the news stories of heavily discounted apartments failing to sell at auction.

The Australian Financial Review reports today that the auction of the final 36 units in the Crowne Plaza Resort and Spa on Queensland’s Sunshine Coast failed to make a single sale, although post auction negotiations are continuing. A similar thing is being experienced on the Gold Coast, and I am told some student accommodation properties in Adelaide and Melbourne are struggling to find buyers.

Internationally we are seeing something of the same, massive discounts in Dubai and early concerns being expressed about the oversupply in China where massive towers stand mothballed without any tenants at all. Ireland conducted the first of its distressed sale auctions over the weekend and bargain hunters in the US have been busy for a while now. Advertisements have started appearing in the local papers for retail investment in Australian registered property trusts investing in USA residential property. When the retail trusts start buying assets, you can be sure the owners have nowhere else to go.

So what happens to common property in a building when a market fails? If the collapse comes partway through building the first thing to happen is that the new builder put in by the receiver looks for ways to cut costs in construction. Lesser quality materials will be sourced and pride in workmanship will slip as the focus moves from ‘brand consciousness’ by a developer/builder with a sustainable business to the ‘finish and flick’ attitude of a receiver interested only in covering the bank debt and the receivers fees. The effects of this change in mentality live with a building forever. The new committee inherits a mess and in larger buildings (generally more than three floors) without homeowner warranty insurance, the owners will be slugged financially for levies to fix what the developer ought to have delivered.

The next thing to happen is that the receiver will dump the unsold stock onto the market at once ensuring the entire building is devalued. Discounts of up to 50% are being recorded in some oversupplied Australian markets at present.

In my thirty years of professional life I have seen markets come and markets go, and I am sure of this; neither investors nor developers are capable of stopping when they have had too much of a good thing. An area we should be looking at for reform in is homeowners warranty insurance for buildings over three floors.

The assumption that these buildings are only constructed by large companies with a brand to protect is demonstrably wrong. Insurance to protect the investors from these major collapses will come at a cost to investors but maybe that is a price worth paying to ensure you get what you bargained for and don’t spend the first ten years of ownership clawing back value to equal what you paid when times were better.

Michael is speaking on insurance law reform for owners corporations and strata investors at the Owners Corporation Network (ACT) Public Forum in Canberra on Saturday 21 May 2011. Email to book your free seat.


All hail the resurrection of the ancient principle Caveat Emptor

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Political back flips are fairly common these days with poll-driven politics the order of the day. Less common is the legislative back flip.

Governments don’t often pass laws to revert processes to that which applied a decade or so previously for fear of looking regressive. It is, as Sir Humphrey would say on Yes Minister, ‘Indeed a courageous move’. Yet the Queensland government has done just that with quite an extraordinary law passed on 14 April 2011 about the way bodies corporate adjust entitlements used to calculate levies.

When reviewing the Queensland strata laws in 1997, for reasons no one can remember or is now admitting, it was decided bodies corporate should have the right to adjust contribution entitlements where developers got it wrong. Hard to believe, I know, but a practice developed in the 80’s and 90’s by which some developers lowered the levies on the penthouses they intended to keep or sell to their mates. This didn’t occur elsewhere in the country because laws on how entitlements were set in the first place were more proscriptive.

For more than a decade then battles have raged in Queensland buildings about whether some pay too much and others pay too little. Various judges and tribunals have espoused theories along the way and the minutiae of building operations have been dissected by experts to decide if a unit on the 6th floor really does use as much common property power as one on the ground floor.

Like parents sick of the squabbling, the Queensland State government has taken the toys away altogether. As of 14 April 2011, if just one owner wants the system to revert to the pre 1997 entitlements, then that is what must happen. Of course there are a few exceptions for material changes to the building in the intervening years that might make this reversion inequitable but they are very limited circumstances.

There will be much bleating by those who lose by this reform but they will probably be penthouse owners and will be fewer in number than those who will win. The real victor here is the principle of ‘Caveat Emptor’ – buyer beware. What these laws do is return owners to the way it was when they bought in – for better or for worse, which all fair-minded people should be able to accept.

There is a certain transparency about strata that enables a prudent purchaser to inspect the record before they purchase. If they like what they see about the rules for splitting common property costs, they will buy. If they don’t, they should pass – you can’t get much fairer than that.

Courageous indeed Queensland – but well done.


National Volunteers Week Sharing the Load

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It is National Volunteers Week, and I wonder how many of our owners corporations and bodies corporate committees are at full capacity with a waiting list of people to join in to share the load?

I suspect few. The general feeling seems to be it is getting harder and harder to attract and engage good people. This is the week to ask why this is so and what can be done to improve things? I have some ideas.

Perhaps we should start by viewing body corporate and owners corporation committee work as community service. As an industry, I don’t think we do see committee work this way. I think people in strata services see committee work as the owners obligation or a statutory obligation which of course it is, but that’s not how owners see it. Owners see committee work as a chore and resent that other owners don’t do their bit.

The resentment towards owners who don’t do their bit is greater in strata than in other types of community work. That’s because a strata is a compulsory not for profit organization rather than the voluntary type of not for profit that we join because we are passionate about the cause. As a mentor once said to me

‘Michael, no one buys an apartment to become a member of a body corporate’.

So what is to be done about the struggle to get willing workers who view strata management work positively rather than begrudgingly? I think we have to start with a charter about how we treat one another within the committee and more broadly, how we agree to relate to one another within our strata community. I have been doing some work recently on discrimination within strata communities and that has taken me to related areas of harassment and intimidation. I had a case last week where a resident manager caused police to visit a committee member because he had a different view to the manager on a point and was reported for inciting violence within a townhouse complex. When community living comes to this it is no wonder we are having trouble finding willing stewards.

For National Volunteers Week, I have written a policy for treating each other fairly within strata communities, which you can download via this week’s StrataSpace or please feel free to email Vivien Hodges at and she will be happy to forward you a copy. I hope you will use this to start a discussion within your group and National Volunteers Week will not be wasted on the strata sector.


Making Our Apartments Last As Long As We Do

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When the oldest standing apartment block in Sydney was built in 1904, life expectancy was just 57 years.

If like me, you were born in the 1962, the year the controversial Blues Point Towers at Milsons Point was built, your life expectancy is 71. Yes, we only have 23 to go.

People born in Australia this year the CIA tell us will live until they are 81.81 years – just why the CIA can tell us this and our own Government can’t is perhaps the subject of another blog.

In extending our life expectancy, we must be doing something right. The question for the strata industry is this; what are we doing about extending the life expectancy of our strata titled buildings?

The answer is; ‘not much’. City Futures research shows despite laws for compulsory replacement plan studies, only 37 % of strata buildings in Sydney are using specialist consultants to estimate the cost. Less than 2 % are using finance to renew their buildings and the rest are striking special levies or doing nothing.

The trouble with using finance and special levies to do major works rather than progressive savings is that when the time comes, it’s just too hard. It’s like doing your first exercise class when you are 78. So if we want to make our apartments last as long as we do, it’s time to get moving.

Click here for a full copy of my latest presentation, ‘How to Make Your Apartments Last as Long as You Do’

Less is more in strata law reform

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To mark the 50th anniversary this year of the first strata title laws in this country, I am presently reading, ‘Strata Titles’, Rath Grimes and Moore, 1962. It is a handbook about The Conveyancing (Strata Titles) Act 1961.

The foreword by his Honour B.P. Macfarlan begins:

‘The dynamic growth of Sydney in recent years has created many problems. Not the least of these has been the demand for increased domestic and professional accommodation in the city and inner suburbs.’

The insurance provisions contain three sections; one about the duty to insure the whole building, another about mortgagors interests and a third about applying the proceeds in the event of destruction. The note says this is perhaps the most difficult section with which the Act was required to deal.

Queensland now has no fewer than 25 sections of its laws to do the same job, New South Wales, 20, Victoria, 13 and ACT, 11.

Other than requiring valuations at least every 5 years and the laudable Queensland practice of compelling disclosure of insurance details at each AGM, the reforms of the last 50 years are unnecessary. They complicate the very simple proposition that the whole building must be insured for the collective good for no discernible benefit. Indeed by trying too hard, for example in Queensland by allowing for adjustments of premium contributions for different use, the reforms promote disputation.

Even the two reforms that seem like good ideas didn’t need legislation. The first statutory obligations for strata required replacement value insurance. Common sense and the fear of lawsuit for underinsurance should be incentive enough for regular valuations and disclosure at the AGM costs nothing and promotes continual awareness of joint ownership rights and responsibilities.

More laws equal less responsibility. Join me in the fight against unnecessary law reform.

Its Not Easy Being Green

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It seems that just as the green movement in strata has gained some momentum, roadblocks have been presented. At least that is the case for the advancement of solar power in strata titled apartments.

In NSW the new Liberal government has slashed the rebate on surplus power generated by solar installations and sold back into the grid. It might be that the first price put on this power was too generous but those that have bothered and borrowed to install the solar generators are annoyed that in dealing with government apparently “a deal is not a deal”.

In terms of installation, there are new fears that government subsidised installers have cut corners and lives are at risk by shoddy workmanship. With the pink batts fiasco fresh in our minds, owners corporations are concerned about their liability. A by-law will protect this but nevertheless, it is another hurdle to be overcome.

On top of these problems comes news of an income tax private ruling in the ACT holding income earned from selling power to the grid in the form of reduced common property energy bills, is taxable income in the hands of the owners. The prospect of owners complicating their personal tax returns to account for a share of a reduced bill to the owners corporation, will kill most solar proposals within an owners corporation.

While solar initiatives in hi-rise flounders under these government caused problems, the City of Willoughby and stoically push on and have organised a forum on green initiatives for buildings on Saturday 23 July 2011. The forum is focusing on measures to reduce consumption and TEYS Lawyers are proud to be among the inaugural sponsors of this event. Follow this link to read more on the Sydney Green Apartments Forum

Privacy peeping and prying which one of these things is not like the others

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In the heat of a strata community battle, allegations of peeping, prying and breaches of privacy are often made. The truth is, only peeping and prying in strata communities is against the law.

Despite opinions from bush lawyers to the contrary, privacy laws deal only with privacy safeguards relating to the way government departments collect, store and use personal information. It does not cover privacy issues between individuals, and unfortunately provides no solutions to the problem of nosey neighbours and overly officious owners corporations.

The Federal Privacy Act, which was introduced in 1998, does not apply to organisations with a turnover of less than $3,000,000 except for a limited number of circumstances which will not be relevant for owners corporations. Further, even if the law does apply, specific legislation that compels information to be given such as the right to inspect strata records and take copies of the roll of owners, overrides the more general privacy provisions. The state-based privacy laws are even less relevant to strata communities and basically apply only to government and semi government bodies.

So this will come as a great shock to those who refuse to do all manner of things in the name of the Privacy Act. Strata managers cannot use privacy laws as an excuse to keep documents from strata inspectors. Resident managers will not be able to use privacy laws as an excuse to protect letting owners from disclosing the identity of their troublesome tenants. Committee members will not be able to use privacy laws as an excuse from providing a list of owners to their political opponents.

Now prying and peeping is another matter all together. There are laws against this behaviour but it doesn’t go as far as allowing your neighbour to restrict what you do in the privacy of your own home.


Developers and Their Cash Are Not Easily Parted

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As the property market comes to a grinding halt, developers yet again find themselves holding unsold apartment stock.

Developers are like farmers who tend to engage in commerce on the basis that they pay their bills when they sell their crop. This presents problems for other less hardened members of strata entities.

With a developer holding in some cases up to 40% of unsold stock, the pressure on remaining owners to pay 100% of the bills with only 60% of the income is excruciating.

In these situations there are few alternatives other than to flog the willing by striking special levies to finance the developer’s default.

While it is true that so long as the unit is sold one day, the fees will get paid, there is collateral damage for the newly formed owners group.

The developer’s levy payment default will coincide with that time when building defects will need to be remedied. Sinking fund surpluses should be squirreled away during these formative years but this won’t happen if the paying purchasers are being stretched. In these circumstances unit owners will be quick to conclude inactive strata managers are in the developer’s pocket.

Unit owners will need to take swift action against developers in these times. A winding up notice may be the best solution in order to force the developer’s bank to meet the market and sell some stock to pay the outstanding levies.

Buying off the plan is full of risks not properly understood by purchasers and this is just another of those.

Mortgage Defaults Rise Watch Levy Arrears Blow out

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The latest issue of ‘Inside Strata’, the magazine of Strata Community Australia (NSW/ACT Edition Oct/Nov 2011), claims a new memorandum will resolve common property confusion when nothing could be further from the truth.

The memorandum, originated by SCA and championed by the Strata Industry Working Group, seeks to define the difference between common property and lots for determining who is responsible for repair, replacement, or maintenance of an item or area within a scheme. A laudable objective though this is, the initiative goes one step too far by suggesting it can be adopted by existing schemes as well as new schemes.

The problem you see is that a strata scheme’s plan together with the strata legislation does this work. Where there is conflict the courts resolve the matter and under our system of justice, these judgments are binding precedents for determining future disputes.

The imposition of a generic list written by the bureaucracy and supported by a group of surveyors and strata managers disrespects this legal process.

The adoption of the list by existing schemes will inevitably create more confusion not less and will give oxygen to invalid claims that might otherwise have died the natural death they deserved.

Apparently neither the Law Society of NSW nor the Australian College of Community Association Lawyers Inc was part of the SWIG meeting that lead to this initiative.

If there is confusion about the current legislation and court rulings, then this can only be fixed by new legislation. Issuing a memorandum and a press release just doesn’t cut it, and with good reason. Governing by press release is not subject to the same degree of public consultation, parliamentary debate, and intellectual rigor that accompanies drafting new legislation.

This initiative, far from resolving strata community conflict will fuel more and a whole new legal debacle is about to unfold.

Everythings going up except strata management fees in the Shire

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Spending on goods rose 2.6 % in the past year outstripped by spending on household services (paid gardening, washing, cleaning) that grew by 3.8 % reports the Australian Financial Review (27 June 2011).

You wouldn’t know it, however in the Sutherland Shire, New South Wales, a reader of this blog spotted this A-frame advertising board on the back of some poor struggling student at a train station last week. I have obliterated the strata manager’s name to protect the guilty.

This has been the conundrum for strata managers for thirty years. Lots of talks at conferences about increasing fees matched only by actions like this, dragging the base fees down for everyone. So much so that many believe the base secretarial fee of $120 per lot per annum hasn’t moved much at all in three decades.

Usually when this happens in a market, a category killer will come along and decimate the competition by a price cut of 30 – 40% achieved through wholesale purchasing power or real innovation. Think ‘Jet Star’ for successful reform to budget travel, no frills on-line bookings and check in, reduced baggage allowances, pay to eat catering and in-flight entertainment and presto two-thirds the fare for the same basic service. Qantas is now the poor cousin to its more profitable stable mate.

In strata management, purchasing power is irrelevant so it’s likely to be via on-line innovation so that amateurish price cutting stunts like the A-frame board at the train station, are relegated to the dustbin. Real innovation for strata owners will be 24/7 online access to everything including accounts, paper free meetings and levy collection, electronic voting for annual general meetings (which no one sees any sense in attending anyway) and Skype committee meetings.

When this happens, watch the strata manager responsible pick up more than their fair share of the increase in spending on household services by time poor strata owners.

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