Heading for a showdown with strata shonks

At the first AGM of a new apartment block, owners are expected to approve all sorts of contracts – but what if they are being misinformed, misled and ripped off?

As readers of recent columns will know, contrary to our own oft-proffered advice, my partner and I have bought an off-the-plan unit on the south coast.

It’s all very exciting and the initial AGM is just a few weeks away.  It’s going to be interesting – especially when we are expected to approve the contracts offered on the agenda.

Under most state laws, contracts negotiated by the developer for services such as strata management, building management, electricity supplies, solar power, internet and general maintenance must be ratified by a simple majority of owners at the initial AGM before they can take effect.

You are asked to vote on your new by-laws and contracts, possibly having read them for the first time just before or at the meeting, and you are expected to vote “yes” in every regard. Switch your BS detectors on now!

Prepare to be persuaded, cajoled and even bullied into collectively accepting contracts for which there are no competitive quotes and for which you will be told approval is “standard practice” or “the law”.

What’s the problem? Take embedded networks; that’s where a service provider installs infrastructure, sometimes for free or at a discount to the developer, on condition that they get to maintain it at a pre-agreed, often inflated rate for an extended period.

Now, there is some consumer protection legislation but it’s far from watertight. Owners may find they are restricted, at least temporarily, in their choice of energy or internet providers, for instance.

The majority of owners, especially first-timers and downsizers will assume that there can’t be anything too untoward in the contracts; the law wouldn’t allow it.  Dream on.

I’m looking at the 120-page agenda booklet for our new place which includes a contract for storm water filtration. 

Ironically, it was precisely this kind of embedded network that was used as an example by a strata manager friend when he alerted me to this widespread and dubious practice.

How it works is that developers save money on infrastructure by shifting the costs to inflated maintenance contracts that are paid for by the eventual apartment owners.

In this particular case, the filtration system will not be owned by the building but instead will be leased for a period of 15 years at a cost of $750-plus a month including maintenance, with a total declared cost of almost $140,000 over the term of the deal.

A 15-year contract? Wow! Wait, there’s more.  Tucked deep inside the Ts and Cs is an agreement that the payments “may” be increased every year by at least the Consumer Price Index or at most 10 per cent, whichever is the greater.

Assuming the company takes advantage of its guaranteed and approved annual 10 per cent rise – and why wouldn’t they – the total cost of the storm water filtration more than doubles to almost $300,000.

And here’s the sickening part; if the developer had installed the filtration system at their own expense, as they should have, I’m reliably informed apartment owners can pick up a maintenance contract for $1500 a year, rather than over $9000 and rising.

It looks like it’s going to take one troublemaker to stand up at the intitaL AGM of this shiny new building and rain on everyone’s parade by telling them they are being ripped off.

And they should perhaps check all the other contracts on the table, offered as take it or leave it options. Once they say aye, and that company seal goes on, it is impossible to remove.

I guess that troublemaker will be me.  I should sell tickets.

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