When a family plan is a bit too cosy for comfort

In a week where we are shining the spotlight on flaws in Victorian strata (here, here and here) and addressing the challenges owners face in Queensland, it’s only fair that we expose an issue right here in NSW.

This story started life on the Flat Chat Forum but it’s well worth bringing to a wider readership. It’s all about a strata scheme being constructed by and it would seem largely for a family.

The descriptions family-run or family-owned business imply the kind of trust, care and accountability you don’t always get from multinational corporations.

However, when it comes to investing in new apartments, a family connection can occasionally have about as much appeal as “Mafia-controlled” or just like the Roys in TV’s Succession.

In the case first reported on the Flat Chat Forum recently.  A reader had bought into a “staged” development where some of the homes are already occupied while others are being built.

This scheme is being developed by a family, one member of which is well versed in property law. 

To be clear, in the early stages of a strata scheme in NSW, the developer’s voting power is reduced by two-thirds until they have sold more than half the units in the block.

This is to prevent them using the votes from unsold units to skew important decisions in their favour.

Otherwise, the voting power is calculated by the unit entitlements (UEs) of each home, which are also the figures used to calculate levies. 

In short, the more you pay in levies, the more voting power you can wield at a general meeting where the owners, collectively, make binding decisions, pass by-laws and elect their committee.

In this case, the family used very high unit entitlements in the apartments that some of them occupied, plus the UEs from unbuilt parts of the development, to vote themselves on as the strata committee.

At the same time they used a quirk in property and strata law to validly ensure they didn’t have to pay levies on the unbuilt sections of the scheme – yes, the same ones they were using to boost their votes at general meetings.

Move on a few months’ More units are being completed, ready for sale and the family performs a nifty about turn.  Now they want the UEs to be “fair” and pass a by-law to redistribute them.

These new figures just happen to ensure that even a solid majority of owners can’t change the by-laws that they have put in place.

Under NSW strata law, by-laws can’t be created or changed if 25 percent of UEs are used to vote against the changes.  In this case, the family would retain 26 percent of the voting power – a potential veto over major decisions – while collectively paying just over a quarter of the levies.

Their strata manager registered the by-law and this is where the plan went off the rails. 

Our strata-savvy reader noted this anomaly when his levies almost tripled from what he’d originally been advised.  He challenged the changes on the grounds that a strata committee can’t change UEs.  That can only be done by the NSW Civil and Administrative Tribunal (NCAT).

When our Flatchatter didn’t accept the strata manager’s assurance that it was all legal and above board, he received a notice on a legal letterhead, stating that the by-law was valid.

More alarm bells rang when he realised the letter had been signed by a member of the family, so he contacted the law firm.

The reply he then received confirmed that he was correct; the by-law was invalid and the family would be following the correct procedure to have the UEs redistributed.

That may not be as straightforward as they hope.  That decision can only be made by NCAT and the tribunal will take into account independent valuations and “such other matters as [it] considers relevant.”

Perhaps changes which effectively disenfranchise the majority of eventual owners in the scheme will be considered “relevant”. We will watch with interest.

Meanwhile, investors, consider this: when you are tempted to buy into a small development where all the power is concentrated in one family, imagine what happens when you want something that they don’t and vice versa.

A version of this column first appeared in the Australian Financial Review.