A couple of questions – here on the Flat Chat Forum and in my fortnightly spot on Afternoons on ABC radio 702 – have set me thinking about Unit Entitlements.

The Unit Entitlements (UEs) of your apartment – established by the developer before a single unit has been sold – more or less reflect the essential value of your property. Or they should.

They determine your share of the contributions to the strata schemes finances – aka levies – and they also give you more or fewer votes in general meetings, such as the AGM.

The correlation between UEs and the value of your unit is not exact – it can’t be, as the real estate values of individual properties can vary greatly over time, for instance if some have had extensive renovations while others might have had views blocked by new buildings.

But, essentially, the one-bedroom apartment on the bottom floor of a block, with a view only of the back alley, should have considerably fewer UEs than the four-bedroom penthouse with a view of the harbour.

“Should” is the operative word here since this is a very easy system to exploit and a very hard set of circumstances to change.

How is it exploited? I know of many cases where the developer has deliberately reduced the UEs of larger and more prestigious properties to make them more attractive to buyers.

The benefit to the developer is that they don’t have to drop the selling price to make it more appealing while the other owners have to make up the shortfall in revenue.

The most extreme case I have heard of was where a huge, full-sized supermarket in the basement of a block had lower levies than a two-bedroom flat in the building above.

Fundamentally unfair

There are other ways that UEs can be fundamentally unfair. NSW strata law states clearly that all levies, quarterly or special, must be apportioned according to UEs.

A caller to the ABC last week asked if it was fair that her apartment on the ground floor of her block should have to contribute to the repairs of the common property balconies above. Legally correct, yes, but fair? That would be a stretch.

Another question, in last week’s Forum, asks if a major upgrade to the block’s internet service should be paid for through levies, when everybody gets the same benefit and some people don’t want or need it. NBN doesn’t care about such niceties – either everybody gets fibre to their flat or nobody does.

And what about lifts? The people on the ground floor don’t need them but, like the balcony repairs, they also have to pay a share of the running costs, repairs and, eventually, replacement.

The one upside of having higher levies is that you get more votes at a general meeting, either on by-laws or ‘poll” votes, which can be called by any owner at any time during the meeting.

However, as one writer to the Flat Chat Forum this week has pointed out, this changes strata from a democracy to a plutocracy, where the richest rule. 

It doesn’t take look for those fat cat votes to stack up and before you know it you have a committee dominated by the people with the biggest apartments who then start gaming the system to make sure they can never be voted out.

So the Unit Entitlements system is deeply flawed, of that there is no doubt. But the system for changing them is so complicated and expensive it’s usually easier on the pocket just to keep over-paying.

Lawyers and surveyors have to be hired, and court process have to be followed, and that’s even when everyone in the block agrees, which never happens because if someone gets to pay less, then someone else will have to pay more.

Zero benefit

It would surely not be beyond the wit of the policy wonks in Fair Trading to come up with a system that allowed people who get zero benefit from a common expense to be excused from paying as much as those who do.

That kind of allowance is already there for owners who take their scheme to court and win. The losing owners’ corps’ legal costs have to be raised by a special levy from which the winning owner is excluded.

The argument against it is that there are too many variables and the people who would end up paying more will clog up the tribunal objecting to changes – a classic case of not fixing it when it is “broke” as well as allowing perfect to be the enemy of good.

So we are stuck with a system that’s based on the value of the various properties but is frozen in time, unable to deal with the radically altered value of properties that have expanded into common property, for instance, or permanently lost quantifiable amenity.

How about if every strata block had to review its UEs every seven years or so with changes capped at, say, five per cent and conducted by a simple show of hands at a general meeting?

A review of the UE system is long overdue. Whatever came out of it wouldn’t be perfect but it would surely be better.

This comment is based on one that originally appeared on last week’s Flat Chat newsletter.  You can subscribe for free below.