Podcast: Power grabs and fraudsters – two rants

This week’s podcast is short but not very sweet (despite it being our 200^th). Sue is away in the UK, which allows me to vent about a couple of issues that have been bugging me.

They are not particularly new – it’s just I’ve been irked by new examples.

The first is based on a post to the Forum which details how a small-scale developer and his family have cynically and meticulously manipulated the votes in their strata scheme.

Firstly they inflated their voting power to elect themselves as the committee, then avoided paying levies for the Unit Entitlements that they used to dominate the voting.

Then they stacked the votes so that they have a veto over any big decisions the purchasers of their homes may want to make.

Is it legal?  Yes, mostly, but they tripped themselves up over one crucial detail.

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LISTEN HERE

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Then we have the issue of phoenixing and, more to the point, what the government isn’t doing about it.

In my book of strata nastiness, phoenixing – where a developer walks away from their liabilities over defects, dissolves the company then starts another doing exactly the same thing – is fraud and the perps should be in jail.

There’s no point expecting Building Commissioner David Chandler to come to the rescue. These are existing properties, not new builds and in any case, company law is Federal, not state business and ASIC clearly doesn’t care.

They’d rather protect the “rights” of businesspeople to screw up and try again than our right to get what we paid for when we buy a home.

Meanwhile, apologies for the late arrival of last week’s podcast (and thanks to Chris for the heads-up). Human error meant it was posted late.

And getting back to last week’s references to our automatic transcription service getting things wrong, this week it has “pheonixing” as Phoenix Singh – I think I’ll make that my drag name.

TRANSCRIPT IN FULL

Jimmy  00:00

It’s Sunday morning and here I am, all alone in our makeshift Flat Chat podcast studio (which is basically my desk, with the door closed). Sue Williams is not here; she’s in London, as we mentioned last week. And that’s a shame, because this is our 200th episode. Not only that; we are getting perilously close to having had 50,000 listens to the podcast, over the past couple of years, which is a big milestone for us, that’s for sure.

So this being Sunday, I have to apologise if what follows turns out to be a bit of a sermon. But there’s a couple of stories that have caught my attention in the past week, which are all about doing the right thing and the people who do the wrong thing and get away with it. I’m talking about people who take control of their committees of their strata schemes, by pretty dodgy means.

And I’m talking about phoenixing developers, who leave ordinary people with huge debts and defects in their buildings. That’s a lot to talk about, so we’d better get on with it.

I’m Jimmy Thomson, I write the Flat Chat column for the Australian Financial Review, and this is the Flat Chat Wrap.

[MUSIC]

Jimmy

A couple of stories have come to my attention in the past week, both of which really bothered me. One of them is in the Flat Chat forum and that’s about how a family, who are all connected to a developer, have managed to structure things so that they retain control of the building, regardless of the opinions of people who buy in.

The other one is a story (I think one with which we have all become familiar over the years), of a developer, who’s gone out of business, leaving huge debts for unfixed defects, and has started up another company with a similar name, doing exactly the same thing, and claims that this is not phoenixing. So we’re going to have a look at both and see how this can happen, and what can be done about it. 

So starting with the power-grab; the family power-grab in this story in our forum. Basically, what’s happened here is a developer has started building what they call a stage-development. That means that they can start the building work… They can even put people into the townhouses or apartments in the stage-development and carry on building as they go. I wouldn’t want particularly want to live in those places, with all the building work going on, but it’s a way of getting into the market. 

Okay, so what has happened is that this person; this developer, has first of all, structured the unit entitlements, so that even though his voting power is reduced to 1/3 of what it should be (that’s the law. If the developer still owns more than 50% of the units, then their voting power is reduced by two-thirds). He’s got around that by putting one member of his family into one of the units and that unit has a huge number of unit entitlements; something like 400 or 500-unit entitlements, when the average number of unit entitlements for each unit, is going to end up being about 80.

At the same time, the developer is claiming first of all, that the unit entitlements for the unbuilt portion of the project, he can use that in his vote, but at the same time, he’s managed to find a wrinkle in strata law. That means that he doesn’t have to pay levies, for those unbuilt units. So he’s got his cake and he’s eating it, basically. He’s got the unit entitlements; he can vote, he can change things… He can (as has happened), elect themselves and no one else, to the committee of this strata scheme, and just basically do whatever they want.

Then what has happened, is he’s got to the point where is going to be over the 50% limit, and there are going to be individual owners coming into the building, who will want to have a say in how the building is run. Suddenly, they’ve held a committee meeting and said “okay, now we want to change the unit entitlements back to a ‘fair level.'”

And this is what alerted our Flat-Chatter. They saw the unit entitlements (for them; their levies), triple, so they were paying on 30-unit entitlements, and now they’re paying on 80.  Now, for those of you who are not familiar with this; unit entitlements are a figure attached to your apartment or townhouse, roughly guided by the value of your home. They are what decide what your levies should be, but they also give you a certain number of votes. If you go to a general meeting, and you’re not satisfied with a vote that’s just done by a show of hands, you can say “well, I want to have a poll vote,” where all the people who are voting then declare their unit entitlements, or their unit entitlements are counted. And that means that the people who’ve got the most money invested in the property, get more votes. It’s a  perfect example of user-pays and money having the power to influence things. But that’s  how it is and and some people feel that’s the way it should be.

So what this family have done is said “okay, we’ve had a committee meeting, and we’re changing the unit entitlements, so everything’s going to be on a level basis now.” And the way they’ve structured the unit entitlements, is so that they retain 26% of the voting power in the building. Why is that significant? Because it means that nobody can change the bylaws, if they don’t want them to. Because you can only change bylaws; you can only make big decisions, with a super-majority of 75. If more than 25% of owners say they don’t want something to happen, and it requires a special resolution, then it doesn’t go through. It’s a veto.

So they’ve basically given themselves the power of veto over special resolutions. And you’d be surprised; you’d be astonished, at the number of decisions made in strata that have to be done by special resolution. So they very neatly tidied all this up. They’ve taken control of the committee in the first place, they’ve structured the place to suit themselves. And now that other people are actually buying into the scheme, they’re saying “oh, yeah, well we want this to be ‘fair.'” Only problem is, that strata committees cannot vote to change unit entitlements. Anybody who wants unit entitlements changed (and any owner can apply to do that); they have to apply to the tribunal, to NCAT. 

So our Flat-Chatter said “hey, you’re saying you’re changing the unit entitlements. You’ve tripled my levies, but you’re not allowed to do that.” And this is where it gets interesting and ugly, because the strata manager comes back and says “no, no. This is all legitimate, under some provision of the Property Act. They’re allowed to do that in the initial stages.”

And our Flat-Chatter, who quite clearly has been around the traps a few time (this is not his first rodeo), says “no, you can’t.” So then he gets a letter on a lawyer’s letterhead, saying ‘oh, we’ve looked at this and the strata manager is right.’

And then he noticed that the signature on the bottom of the lawyer’s letter ,was from a member of the family, who is somehow connected in property law. So that was how they got their signature on this letter. So he’s gone back to the law firm (and not the member of the family), and said “I don’t accept this. Can you confirm and please tell me where it says in the law that they can do this?”

And then the law firm has come back and said “no, you’re right. They can’t do that.” So now the family is applying to NCAT to have the levies altered, on the same basis, so that they will retain this power of veto. Hopefully, somebody at NCAT will go “on your bike. We can see what you’re doing here. This is just wrong.” I say hopefully, because the Tribunal is not renowned for making logical decisions about things like this. They look sometimes at the letter of the law and say “well, no law has been broken here, therefore, it’s okay.”

Quite clearly, this is not okay and I really hope that if this goes to Tribunal, the member there will say “we can see what you’ve done here. You have disenfranchised the majority of owners, or at least you’re planning to do that, if they ever decide to do anything that you don’t like. This may be perfectly legal, but it is against the spirit of the law and we are not going to allow you to do that and we want you to come back with a better set of figures.” 

Look, it’s a toss of a coin; it’s a roll of the dice. I mean, the things that I’ve read about the Tribunal, NCAT over the years, suggests to me that they may well decide that everything’s hunky-dory, because it ticks all the legal boxes and this is where I think strata law is sadly lacking. All through strata law you’ll come across the phrase of ‘people acting in good faith.’ There’s nothing there that defines what ‘in good faith’ means and there’s nothing that enforces the idea of people acting in good faith.

So I think there should be a checklist in strata law, that says ‘if you are doing X, Y, and Z, that disenfranchises or disadvantages the other owners, then you are not acting in good faith, and you are going to have that power taken away from you.’ And I think the way they can do that, is first of all, if somebody complains, they can issue a warning and say “you’ve got to fix what you’re doing here. You’ve stacked the strata committee; you won’t let anybody else be involved.” If you’ve got somebody like the chairman and the secretary, who are in cahoots (or even the same person), it’s very easy for them to control what’s going on and control the message. So that when people complain to them about the way they’re behaving, the rest of the owners never find out. It never gets on the agenda; it never gets on the minutes. So that puts people in a very strong, powerful political position.

Okay, sometimes you need to have people who are capable of making decisions, but they’ve got to do it ‘in good faith.’ So I reckon the next review of strata law should have some provisions in that, where you say ‘here are the triggers for an action of lack of good faith. You have stacked the committee, you’ve excluded people, and you’ve created a system where the majority of owners are disenfranchised. We are going to give you the chance; we’ll give you a warning to fix it. If you choose not to fix it, we will appoint a compulsory strata manager to take over the running of the scheme and we will ban you from holding office in your strata scheme, for the next say, five years.’

I think something like that would sharpen people’s ideas about how they can and should behave. I mean, there are so many wiley politicians in strata. So I think integrity has to be part of the next review of strata laws. I think we have to be looking at what good faith actually means in strata and what happens when people don’t act in good faith. When we come back, I’m going to talk about phoenixing and what we need to do and what we could do, about this absolutely disgraceful and disgusting corruption of the law. That’s after this

[MUSIC]

Jimmy

There was a story in one of the papers the other day, about a couple who’d bought an apartment in a block. There are terrible defects, they got messed around, they got lied to… Eventually, they won a court ruling against the developer, that the developer had to fix their apartment, or compensate them for several $100,000. Surprise, surprise, the developer immediately declared bankruptcy and the company was wound up and it had no money in the bank. And he wandered off to do what? To start another company, developing small apartment blocks.

This couple are saying ‘this is phoenixing,’ which it totally is. It’s so obvious. Now, David Chandler (a man for whom I have a huge amount of time and respect), has brought in this system called iCIRT, which developers can go and try to get approved. They’ve got a star-rating and if you get three stars, that means that you’re basically doing the right thing; you’re not perfect, but who is? If you’ve got fewer than three-stars, you’re not even listed. You know, if you’re a two-star company, you don’t even get listed, which is a shame, because they should be listed. But maybe, they want more to encourage people to come forward and look at the benefits, rather than the potential disadvantages.

That’s fine and this company will probably eventually, will never be able to build another building, with the directors that they have. Because they’ve been phoenixing, quite clearly and there’s been complaints about them, and they’ve had rulings against them and they’ve gone into bankruptcy. When the iCIRT inspectors come around and they say “oh, can we have our five gold-stars, because we’re really, really good?” They will say “no, you can’t. In fact, you’re getting nothing and anybody who buys an apartment from you in the future, is an idiot and deserves whatever you give them.”

That’s the future. What is happening right now, is that people are getting ripped off and people are quite blithey going “oh dear, oh dear. We made a mistake and we’re terribly sorry and we’re closing the business because you know, obviously we are incompetent and it’s our bad luck, as well as yours.” Except, it’s only the customers bad luck, because the developer then wanders off and opens up another company, intending to do (presumably,) exactly the same thing to their next set of customers.

That might sound harsh. Maybe they’re not intending to rip people off, but maybe they’re not intending to change their business practices, either. So they will get the cheapest tradies they can find. They will rush things through; they will use poor materials. They will not attend to their defects. Because, you know, they think if you’re stupid enough to want to live in an apartment, then you deserve whatever is coming to you. 

Now, this is company law… Company law comes under the Commonwealth Government. It is not a State issue; a State responsibility. So David Chandler, with his star-rating, is trying to clean up things in New South Wales. What is happening in Canberra? Where is ASIC, the Australian Securities Commission? Where are they in this? They are the ones who are running around, chasing up frauds (allegedly chasing up frauds), and hunting down people who are ripping off businesses. Where are they in the case of these phoenix people, who are quite clearly (in my book)…

If you go and say “I’m going to sell you something, and I’m going to guarantee that it will be okay, so give me all your savings and whatever you can raise in a mortgage and you’ll be fine.” And then they turn around and say “I’m sorry, we can’t build it to those standards. And by the way, sorry about it falling down, but we are off now; that company is now closed. See you later.” Next time you see them, of course they’ve got a different name on the side of their van or their truck, but they’re doing exactly the same thing. To me, that is fraud; that is corrupt. Where is ASIC in all this?

 And I know (again, to mention David Chandler’s name);  he has asked ASIC to step up. I think he got into trouble, because he said it was time they put their big-boy pants on. Well, okay, maybe that’s slightly sexist, but it’s absolutely true. Start helping real people, who are suffering real problems. People are being ripped off, left, right and centre.

Okay, we read the big stories of Melissa Caddick. You know, rips off all her friends, for millions of dollars. If she’d been a property developer, she would still be wandering around; she’d still have her left foot attached to her body, because nobody would stop her from doing what she was doing, which is ripping off ordinary people.

So I will say to ASIC, David Chandler cannot say this; I will… Put your big-boy pants on! Start putting people in jail! And here endeth today’s sermon.

[MUSIC]

Jimmy

Thanks for listening to the Flat Chat Wrap podcast. You’ll find links to the stories and other references on our website, flatchat.com.au. And if you haven’t already done so, you can subscribe to this podcast completely free, on Apple podcasts, Google podcasts, Spotify, Stitcher, or your favourite pod-catcher. Just search for Flat Chat Wrap with a W, click on subscribe, and you’ll get this podcast every week, without even trying. Thanks again. Talk to you again next week.