Newbies get one shot at curbing locked-in rorts

Let’s be clear about this, if you have bought into an off-the-plan apartment, or a brand new one that hasn’t held its first AGM yet, you have one chance to stop rip-offs that state governments know about but are slow-walking the strata law changes needed to curb them.

I’m talking about embedded networks, which are suddenly a hot topic in property media, although we have been writing about them for almost two years.

At best, combining the costs of, say, electrical supplies can represent a cost saving to both developers and apartment owners. 

However, they are also used to sneakily transfer the cost of essential infrastructure from the developer to owners through maintenance contracts that they are expected to approve at their first strata general meeting.

These could take the form of maintenance contracts for anything from storm-water drains, to lifts, to garage doors, CCTV systems and internet provision.

To be clear, most agreements made by the developer before the first AGM fall over if the owners don’t approve them at that meeting. This is standard everywhere except for one instance in Queensland, where the law forbidding pre-signing of contracts by developers specifically excludes the legalised corruption of the pre-sale of caretaker management agreements.

Otherwise, all contracts set up by developers have to be approved by the owners corporation (body corporate) or they are invalid.

This may seem like a fair and reasonable opportunity for owners to scrutinise, analyse and negotiate deals which they (and not the developers) will have to pay for. However, in reality it merely provides a highly deceptive illusion of accountability and transparency.

Purchasers of new units are often only given a few days to peruse contracts that can fill a thick ring binder, then come to a meeting at which they are encouraged – and sometimes bullied – to vote to accept the whole package as is.

And once they have voted in favour, strata and contract laws make those decisions binding and almost impossible to rescind.

Even if individual savvy owners don’t agree, most of the others, who may never have previously encountered the complexities of strata and contracts law will. Strata managers, the professionals in the room who should know better, will often stay silent lest they incur the wrath of the developers, lose ongoing contracts and get a reputation in the industry for being “difficult”.

The fundamental problem is that hidden in those contracts may be agreements to pay for all sorts of things that should have been at the developer’s expense.

That includes elements like storm water tanks, where the developer gets infrastructure that is essential for the building, installed at a massively reduced price.

In exchange, the developer agrees to persuade the new apartment owners to collectively sign a long-term maintenance contract at hugely inflated fees.  Those fees more than cover the cost of the installation, and then some.

That’s precisely the example NSW Property Commissioner John Minns offered when we chatted last week. He cited a complaint brought to him by someone in the building industry of a developer being charged less than $20,000 for infrastructure that should have cost more than $100,000, on the proviso that the developer would con the new owners into signing an inflated 10-year maintenance contract.

He says the NSW government is aware of these dodgy dealings and there will be measures to curb them in future strata legislation. But the problem is that none of this is illegal. Take the developer and service provider to court and they will say that the owners had a chance to accept or reject the contract and they accepted it.

One idea is to have two-stage inaugural general meetings for new apartment blocks.  The first AGM elects the committee and then they go off, hire some legal help, and come back with a report on what contracts owners should sign and which to renegotiate.

However that won’t happen this year and maybe not even next. So what do we do while we are waiting for the legislative wheels to grind that one out?

One answer is to stand up at that first general meeting and ask both the developer’s representatives and the strata manager: “Are there any contracts before us for which the developer has received financial or material benefits in exchange for the owners being burdened with inflated payments?”

Record the exchange on your phone and ask for it to be minuted. If they don’t tell you the truth, then the contracts are being signed under false pretences and that at least gives you a starting point for legal action when the true situation is eventually revealed.

Of course, none of this would be necessary if developers and builders were held to the same consumer standards as, say, the purveyors of electric toasters or cars. In the great apartment industry tradition of fleecing the unwary, we are but lambs to the slaughter.

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