Eight billion reasons owners are ripped off

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Queensland - new management contract one day - stuck for 25 years the next

A story in last weekend’s Australian Financial Review makes grim reading for anyone concerned about the spreading trade in management rights into NSW and Victoria from Queensland.

We always knew the buying and selling of management rights was a lucrative business. Why these huge profits are concerning is that it’s going to make it harder for any state governments to put a squeeze on what can be, at its worst, exploitation of apartment owners that verges on legalised rorts.

To be clear, there are many different kinds of management rights and not all of them are in any way suspect.  If a company wants to pay the owners in an apartment hotel block a handsome sum to take over the running of the building, then that’s the owners’ choice.

If, however, the owners never had a real choice, and the money from the sale went to the developer and not to them, and then that contract is subsequently sold to another entity – again with the apartment owners having no choice – then that is another matter entirely.

Imagine if you bought a new car and the salesman said that part of the deal meant you couldn’t choose your mechanic and had to pay whatever bills they presented and, by the way, if they sold the right to service your car to another mechanic, then you’d have to go to the new guy.

And when you tell the car showroom to stick the deal, they tell you that everyone does it and it has the government’s full blessing so you may as well buy the car you want.

According to the AFR story by Larry Schlesinger, nationally the trade in management rights is worth $8 billion, a jump of 67 percent on the estimate for last year by specialist real estate entity Resort Brokers.  Part of the reason for the huge increase is that Resort Brokers – which claims to negotiate 45 percent of all management rights deals – spread its net to pull in figures from sources other than its own trades.

Its 2023 Management Rights Report, as quoted in the AFR story, says there are currently more than 4000 management rights schemes covering almost 290,000 apartments with a collective value of $164 billion across Australia.

OK, so what’s the problem?  For a start, management rights are sold on the financial benefit of multiples of net profit. 

As quoted in the AFR, the Resort Brokers report says average earnings multiples are 4.89 times net profit for short-term management rights (typically holiday apartments or serviced apartments) and 5.26 times net profit for permanent management rights (owner occupiers or long-term renters).

Where do these profits come from? There is only one source of income and that’s the fees or levies from apartment owners.  Logic dictates that they must be inflated to cover the cost of purchasing the management rights. If there’s any other source of income, someone please tell me about it.

But in simple language, to take the bleakest view, money is being screwed out of apartment owners to finance buying and selling of their democratic rights to manage their own affairs.

To be fair, in Queensland they don’t have any such rights as they have long since been handed to developers, banks and management rights traders by successive governments.

Resort Brokers claim that proof that apartment owners like this system is in the fact that 85 percent of all schemes are topped up when their original deals expire.  Impressive.

But what about the pressure put on owners to top up the deals – including, in extreme cases, threats of being sued for restraint of trade when the original contract runs out. 

Or there’s the fact that in many of these schemes the majority of owners are non-resident investors who never see the managers in action and may well assume that there is no viable alternative.

Or there’s the bullying of resident owners who might find that their needs are suddenly no longer the highest priority for manager whom they have challenged or threatened to allow their contracts to run out.

Or there’s the simple fact that Queensland’s courts and tribunal will do anything to avoid ever canceling a management contract, regardless of however egregious any breaches might be.

I have heard literally dozens of complaints about managers who have ignored the terms of their contracts and abused owners who dared to challenge them.  I have yet to hear of a single contract that has been terminated by a court or tribunal. 

Meanwhile, some developers are marketing new blocks as terrific places for permanent residents, but getting approval for them as holiday lets.  Why?  Because the holiday letting module in Queensland can sell 25-year management rights contracts while the residential module can “only” sell contracts for 10 years.

In NSW and Victoria, developers can’t pre-sell management rights … except they can.  Recently a Queensland developer completed a building in Northern NSW and used their residual voting power, and the proxies of cronies, to award a 25-year contract to a management firm, against the wishes of the majority of residents.

Building management contracts in NSW have a limit of 10 years.  But this wasn’t a building management contract – it was for rental roll management which apparently doesn’t have the same cap.

In any case, a 10-year contract is ridiculous.  Strata managers get a one-year contract in a new block, to see if they’re are a good fit, then three years at a time thereafter.  This system has been in place for almost seven years and the strata management business is booming like never before.

Getting back to the dubious awarding of rental management rights, if the apartment owners can prove that the developer gained a financial benefit from this deal, they can demand it be paid to them, under the legal precedent set by the 2007 Arrow case in the NSW Supreme Court.

But they would have to go to court to win the money back; a high-risk strategy that they shouldn’t even have to pursue.

Back in Queensland, the Strata Community Association (SCA-Qld) – the strata managers’ and service providers’ professional body – is pushing hard to get the government to rein in the management rights rort.

But what is already an uphill struggle is made much harder by the fact that the management rights business is such a huge earner for the people who buy and sell apartment owners’ collective right to choose who manages their homes.

Maybe now that it’s a growing business in NSW and Victoria, we can stop it here and hope for a reverse domino effect that will help the ripped-off residents of our northern neighbours.

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  • #71390
    Jimmy-T
    Keymaster

      A story in last weekend’s Australian Financial Review makes grim reading for anyone concerned about the spreading trade in management rights into NSW
      [See the full post at: Eight billion reasons owners are ripped off]

      The opinions offered in these Forum posts and replies are not intended to be taken as legal advice. Readers with serious issues should consult experienced strata lawyers.
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    • #71430
      Tim Eltham
      Flatchatter

        The imposition of unfair management rights and other financial commitments on unsuspecting new entrants into apartment ownership in Queensland is scandalous. The failure of the Queensland Government to address this long-running canker in its most recent changes to the legislation in Queensland is totally perplexing, unless you are inclined to give credence to conspiracy theories about behind the scenes donations to political parties, but I won’t go there on this occasion. However, until the whole mess is cleaned up, the blatant manipulation of off-the-plan buyers of new apartments in particular will not only continue but get worse as new practices to do with a variety of embedded service contracts in new buildings will spread. It is no accident that developers in other states, seeing the additional profit that some Queensland developers have been able to extract, seek to emulate them in various ways outside Queensland.

        We live in a four story, 26 unit apartment block on Brisbane’s Bayside. Our suburb is currently the locus of a boom in the construction of new apartment buildings, marketed mainly to retirees and downsizers. It’s not a market primarily aimed at investors looking to cash in on sky high rents, students or service workers. About two thirds of the units appear to have been purchased by retired owner occupiers. However, as far as I can determine, the management of virtually all these new buildings have been set up under the Accommodation Module of regulations under the Body Corporate and Community Management Act. Among other things, this method allows for the granting of management rights – including letting, caretaking and service contracts – for up to 25 years.

        Unlike genuine tourist areas like the Gold and Sunshine Coasts, letting rights in our area are a non-issue because there is so little turnover of the fewer rental properties available in each building, but the caretaking and service contracts are another matter entirely. When we bought our apartment off the plan and moved in over six years ago, we found  the developer at the first Extraordinary General Meeting and before the first AGM at which the Body Corporate Committee was elected, had given a contract to a related company to provide caretaking services for the next 25 years. This contract came complete with in-built provisions for annual price rises according to CPI and five yearly price reviews where a new benchmark price might be set. We estimated that over 25 years, the unit owners were going to be up for more than $700,000 for what was nothing more than a twice weekly cleaning service. When we queried this, we were assured that this was standard practice, perfectly legal and there was nothing that could be done about it.

        Well, as it turned out, there was something that could be done about it and we chose to do it. As a result, we have now been able to extinguish both the caretaking and letting contracts and we now manage the building ourselves. In the process, we have saved hundreds of thousands of dollars and the building is maintained to a far higher level than was ever going to occur under the previous arrangement. If you are an owner or body corporate committee member in a new apartment block in Queensland, I am happy to share a paper I have written about how our body corporate managed to extract itself from this iniquitous arrangement.

        In  the meantime, the challenge facing new apartment owners only appears to be getting more perilous. In a growing number of new apartment buildings, embedded services tied to long running service contracts are appearing that are going to lock owners into expensive arrangements that they cannot change or get out of. Contracts for not only caretaking and cleaning but rubbish removal, pool maintenance, electricity and gas supply, internet connections and repairs and maintenance to all manner of specialised equipment  to name just a few. There has never been a better time to remind people of the old maxim: BUYER BEWARE!

        #71823
        Ohtani
        Flatchatter

          Tim,

          I am an owner and ex body corporate committee member in a 32 year old apartment block of 100+ apartments on the Gold Coast.

          I read with interest on the Flat Chat forum as to how you were able to exit out of both the caretaking and letting contracts and take over the management of your building.

          We operate on a 10 year Standard Module however our current 2002 outdated caretaker & letting agreement 10 year (Standard Module) has never been reviewed and has had top up extensions/variations added at 8 of our AGM meetings between 2007 to 2022 and is now out to 2032.

          Yes a 10 year outdated agreement out to 30 years! Apparently if nothing changes it will continue forever! Our owners are committed to approximately $2 million that the body corporate will levy off our owners over the next 8 years to pay the Management Rights Owners, who ever that may be then. As you know Body Corporates have no say in who this will be in the future.

          Since 2002 our Strata CTS has had 5 different Management Rights owners between 2002-2022 and our caretaker & letting agreement no longer reflects the current needs of our strata community. In fact it should have been reviewed over 10 years ago. Who knows out of date it will be when we get to 2031-2032 if nothing changes?

          That being said I would be very interested in getting an understanding of how your body corporate managed to extract itself from this situation.

          Regards

          Othani

           

          #71825
          Jimmy-T
          Keymaster
          Chat-starter

            That being said I would be very interested in getting an understanding of how your body corporate managed to extract itself from this situation.

            Yeah, me too! I will run the paper in full on the Flat Chat website and maybe outline it in the AFR, if Time cares to send it over.

            The opinions offered in these Forum posts and replies are not intended to be taken as legal advice. Readers with serious issues should consult experienced strata lawyers.
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