The Fiduciary Timebomb Ticking Under Your Strata Business Model

The thin veil of vertical integration: What strata agencies are really doing

Strata managing agencies that follow the lure of vertical integration are burning some serious cash on high-priced lawyers, working out how to make their business models comply with both the common law and strata laws in each state and territory.

Breaking down vertical integration: More than just appearances

Vertical integration is a strategy where a company takes control of multiple stages of its supply chain or distribution network. Rather than relying on external suppliers or distributors, a vertically integrated company owns and operates different parts of its production and distribution process.

This is how vertical integration commonly works in strata management:

• a strata management agency develops its own property maintenance division instead of outsourcing

• a building management company is formed to provide onsite management services

• the company creates an in-house cleaning service team rather than contracting external cleaners

• an insurance brokerage is formed to handle strata insurance needs

• an internal renovation and repairs division is launched to service strata schemes under management

• a dedicated property inspection team is established instead of using external building inspectors

• a legal firm is acquired to handle by-law registration and strata disputes.

The legal minefield: Fiduciary duties exposed

There are serious questions about the legality of these arrangements because strata managing agents are fiduciary agents of the strata schemes’ they manage. This means two things – strata managers must not gain any unauthorised benefit from the relationship, and must not be in a position of conflict.

Contrary to popular opinion, disclosure by itself does not cure all: consent is also required. And the consent must be fully informed consent. The courts have said this means consent to disclosure that includes the nature and amount of the benefits the strata managing agent would receive from the transactions. Disclosure and consent in strata vertical integration are rarely done properly.

Professors Mathew Conaglen and Cathy Sherry suggested at ACSL 2025 that 'the only reason this does not come to light more often is because owners cannot afford to or are disinclined to litigate in superior courts'.

2025 compliance revolution: New rules that will reshape strata management business

Leaving aside the rights and wrongs of these arrangements, in NSW at least, these arrangements are now very hard to make work. Under laws applicable from the beginning of 2025, strata managing agents must give written notice before entering a contract for goods and services if:

• the supplier may provide a commission to the agent

• the supplier may provide a training service to the agent

• the supplier is a connected or related party to the agent

• the agent has any entitlement to receive income derived from a business carried out by the supplier, or to receive any other 'financial benefit or financial advantage from carrying on the business at law in equity or otherwise'.

• the agent has the power to participate in directorial, managerial or executive roles of the supplier.

The disclosure dilemma: What must be revealed

Here’s what must now be disclosed in the written notice before procuring goods and services - it's the last two that pack the biggest punch:  

• for commissions – the dollar amount of commissions and method of calculation

• for training services – the monetary value or estimate

• the nature of the relationship – shareholding, profit share, referral fee based

• why the approval is in the best interest of the owners corporation - how have competitors cost and value propositions been checked and compared?

• a statement of belief explaining why the arrangements do not place the agents' interests in conflict with the owners corporation's interests.

The consent conundrum: Why "informed" matters more than ever

Lawyers will argue furiously about how words about compliance and disclosure are to be interpreted. On one view, compliance with the last of the requirements listed above is impossible. The question the legislation asks is: does the agreement create a conflict of interest? The second last question calls for a binary answer: yes or no? The question doesn't ask how an agent might handle the conflict.

As Professors Conaglen and Sherry suggest, these matters may never be tested in the courts, but that is not the end of the matter.

The law of fiduciary duties is ancient. So much so that it's deeply embedded in our community standards. It's as if it's part of the moral compass of our commercial subconscious.  

These contracts, thinly veiled to look independent when they are not, might be at the very heart of the current lack of confidence in the sector that is holding us back.  

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