How to avoid First AGM dodgy contract traps

Last week, an independent inquiry into strata management giant Netstrata resulted in a withering report into the company’s strata practices.

The report, sponsored by NSW Fair Trading and conducted by highly regarded investigators McgrathNicol, followed an ABC TV Four Corners track alleging that apartment owners had been misled, denied their rights and ripped off by a variety of strata managers, while too-cosy relationships with developers, service providers and subsidiaries were also scrutinised.

Netstrata denies many of the allegations in the report, but the investigation continues, Fair Trading says. Meanwhile, new consumer protection laws have passed Parliament, clearly as a direct result of the Four Corners report, but they won’t come into force until November.

In the meantime, however, newcomers to apartment living will sign up for all these deals without knowing what they really mean. With hundreds if not thousands of new apartment blocks due to come online, what can an ordinary off-the-plan buyer do to protect themselves?

The answer is, oddly enough, to do nothing, or at least the absolute minimum. Go to your first AGM, elect your new committee and then persuade your fellow owners to refuse to approve any contracts apart from the strata manager’s.

Then the committee can go away and scrutinise the contracts, take advice when they need it and find better deals that won’t lock your building into long-term rip-offs, then come back to you and your neighbours with contracts that work for you and not the developer, strata managers and contractors.

The frightening power of the First AGM

The law on all contracts related to strata in NSW (and most of the rest of the country) is simple. In fact, it’s too simple.

The law says that contracts arranged by the developer with service providers can’t be valid past the first AGM, where they have to be ratified by the majority of owners to take effect.

Your strata manager at the First AGM (FAGM) might tell you they have to be ratified, regardless. This is not true and it’s a trap into which too many schemes fall.

All contracts that are ratified at that meeting are valid, regardless of their conditions. At the moment, strata law in NSW is exempt from consumer law, so there is no such thing as an unfair strata contract.

Take the first AGM that I attended recently. All the contracts up for approval were contained in a neat little booklet that all the new owners were given.

When I say “contained”, three contracts for power supply, including the power from the solar panels on the roof, were only accessible via QR codes.

Looking round the room at the average ages of the owners, I doubted if many if any of them had ever used a QR code, and certainly not to access a contract.

If they had, they would have discovered that they were not allowed to find a cheaper provider for their power supply to their own apartment and that they would be charged the standard rate for any electricity generated by the solar panel on the building’s roof.

Yes, charged for the power provided by the sun on their roof. Why? Because the developer needed to have solar panels on the roof to get their DA approved and the energy company said they would fit one – but it’s theirs and they can charge for the power it generates.

Vertical integration

Then, inside the booklet, there was a contract in tiny type, in pale blue ink, that allowed the stormwater drain contractor to increase the charges by 10 per cent every year for 15 years – yes, 15 years – effectively more than doubling the cost of the contract.

Why? Because the drainage company had installed the storm water drains for free, provided the developer conned – sorry, persuaded – the owners to sign the contract.

Also, hidden in the strata manager’s deal was permission for them to run the show as they saw fit, reporting back to the strata committee every so often. This included using their subsidiary insurance brokers, their maintenance company, their lawyers and debt collectors, and their fire safety inspectors.

It’s called vertical integration. An optimist would say it’s a way of keeping all strata-related issues under one roof where they can be dealt with holistically, leading to savings. A realist would say it’s a way for the strata management company to milk every last cent out of the owners, legally if not ethically.

So, what do you do if you are confronted by dodgy-looking contracts at the FAGM of your new off-the-plan apartment block?

As we said before, elect your committee, maybe approve the strata manager appointment – but not full delegation – as the strata manager’s initial contract is initially limited to one year, anyway. And that’s it. Tell them the committee will now take these contracts away and scrutinise them, see shat they commit us to and find out if there are better deals to be had.

Now if your developer has stitched up some cozy deals where they get infrastructure for free and you, the purchasers, have to pay for them through inflated maintenance fees, they are not going to like this

We have heard of people going to FAGMs and have the strata manager almost screaming at them, saying that the law says the contracts must be approved. That’s only partly true. By law, the contracts have to be approved or they expire. What’s the downside for the owners if that happens? None.

If the building manager doesn’t want to do the job without a long-term contract locked in, stuff ’em. Lots of other companies will jump at the chance to prove their worth.

The power companies can’t, by law, cut off your power. The maintenance contracts for infrastructure like lifts and drains are irrelevant in the first instance because everything will be under warranty.

The recently departed Strata Commissioner John Minns and highly respected strata managers like Tim Sara, Associate Director and Head of Client Management at Strata Choice, both think there should be a two-stage FAGM.

Sweetheart deals

Tim said on our podcast that there should be a gap of three months between the FAGM at which the committee is elected, and the second phase where the contracts are approved (or better ones put in their place).

If you think all of this concern about contracts is exaggerated, look at the new laws the government has just passed. They are all about knocking over sweetheart deals between developers, strata managers and service providers that operate to the detriment of strata owners.

But they don’t come in until November and that’s why if you have an FAGM before then, you need to stand up and say the committee will scrutinise the contracts then come back in few weeks to see which of them will go ahead, and which can be replaced by better deals with other suppliers.

And if your strata manager says you must approve them all right away, that’s your sign that they should be the first to go, without even waiting for the second General Meeting.

There are plenty of good, reliable and honest strata managers who will step into the breach with just a phone call needed to get them on board. You don’t have to hire the strata manager that the developer has been working with – and many strata experts believe that shouldn’t be allowed anyway.

We as owners have more power than anyone ever tells us – and that includes the ability to say no to complicated deals that no one can understand and only benefit the suppliers and the developers.