Rorting Queensland Unit Owners

RORT: an incident or series of incidents involving reprehensible or suspect behaviour, especially by officials or politicians.      Macquarie Australia’s National Dictionary

The Queensland unit industry is administered under the Body Corporate and Community Management Act 1997 (BCCMA) – a Queensland state government document, the responsibility of the Attorney General of Queensland.  The Liberal National Party (LNP) and Labor governments have ignored the rorts perpetrated on Queensland unit owners, but the clock is ticking for both parties. Both parties embrace high density living as a means of accommodating Queensland’s population growth and curtailing urban sprawl and the associated infrastructure costs.

Colin Archer in Strata Update # 9 stated:

“The trend towards community living is skyrocketing in south-east Queensland’s high density areas. New developments are on the rise in the region’s city and coastal areas and we’re getting more of an idea what the future of strata will look like.”

This trend is confirmed by the statistics obtained from the Lands Registry Office, Department of Natural Resources and Mines.

As at the end of September 2015, there were 44,734 body corporate schemes (approx. increase of 4.2% since March 2014) and, 422,852 individual lots (approx. increase of 5.2% since March 2014)

The Unit Owners Association Queensland Inc. (UOAQ) estimates that 1.0 million Queenslanders are now involved in unit ownership, that is 25% of the Queensland population.

There is no doubt that this rate of increase in body corporate schemes, will accelerate into the foreseeable future as Queensland struggles to keep pace with the demand for unit living and influx of people wanting to live in the sunshine state.

Unfortunately, the BCCMA – based on 20th century thinking – is not keeping pace with the demands of existing and new unit owners.  Many new unit purchasers are highly educated younger people wishing to live close to work in the central business district – not retirees looking for a final nest. The objectives of the BCCMA are excellent, but the expression of those objectives in legislation is stuck in the last century. The legislation has been overtaken by vested interest groups seeking to inflate their own income at the expense of unit owners. Thus a series of rorts has been incorporated in the BCCM legislation that will – if not corrected – impede Queensland unit growth and the government’s objective for high density living.

Tinkering at the edges of the legislation – as introduced by the last LNP Attorney General – will not fix the BCCMA.  Pets in units, parking problems and smoking on verandas are all annoying features of unit living, but fade into insignificance when the RORTS of the industry are exposed.

THE TEN RORTS

1. 10 or 25 YEAR CARETAKING CONTRACT SOLD BY THE DEVELOPER FOR THEIR OWN PROFIT

10 or 25-year contracts for house cleaning and gardening are unheard of outside the Queensland strata industry. The 25-year contract will escalate by compounded CPI over 25 years doubling the caretaker’s salary and costing unit owners millions of dollars. The purpose of 25-year contracts is to allow the caretaker to make massive capital gains of up to 5.5 times annual profits via goodwill when the contract is sold.  The average caretaking contract is sold every three years. This goodwill windfall to caretakers is costing the Queensland unit industry millions of dollars.

Winner – developers & caretakers                                  Loser – unit owners

2. THE INABILITY TO TERMINATE CARETAKING / LETTING AGENT CONTRACT

25-year management rights (MR) contracts are the root cause of escalating MR costs and disputes between caretakers and the owners of the buildings – the individual unit owners and their body corporate – because unit owners feel disempowered by the 10 or 25-year contract.  The Justice Department reasoning that MR contracts are too valuable an asset to the caretaker/letting agent to be regularised in any manner reverts body corporate management thinking to pre-2008. In a most unusual ruling from the District Court appeal in Body Corporate for Palm Springs Residences CTS 29467 v J Patterson Holdings Pty Ltd [2008] QDC 300 His Honour Judge D J McGill SC delivered the orders that overruled Specialist Adjudicators’ opinions that MR contracts could not be terminated because of the value of the contract.

DCJ McGill recognised these facts at [5] stating:

“Because the matter arises in respect of a caretaking agreement under the Act, the situation is rather more complicated than this, because the Act and the regulation under it contain mechanisms designed to make it difficult for a body corporate to terminate an agreement of this nature. 

His Honour continued to elucidate at sub-note [4]:

“This is because property developers who set up these schemes want to be able to sell the management rights for large sums of money, so the rights that are conferred by the body corporate while it is still under the developer’s control have to be reasonably secure, otherwise prospective managers will not be willing to pay so much for them.”

DCJ McGill further dispelled these myths at [17] stating:

“That paragraph suggests that it is appropriate for an adjudicator, or for that matter a court, to approach the resolution of the dispute with a strong preconceived reluctance to arrive at a conclusion unfavourable to the caretaker…..”

His Honour continued:

“No doubt those consequences would be unpleasant, but the adjudicator did not seem to recognise that there is more to a caretaking agreement than simply a valuable asset for the caretaker; the fundamental purpose of such an agreement is to ensure that appropriate caretaking services are made available to the body corporate, for the benefit of all lot owners.”

DCJ McGill concluded:

“What concerns me about this paragraph in particular is that it appears to amount to an admission on the part of the adjudicator that he approached the resolution of the matters in issue between the parties with a preconceived sympathy for the respondent.”(Caretaker)

It appears in a recent QCAT case (Peterson Management Services Pty Ltd v Body Corporate for The Rocks Resort [2015] QCAT 255) that the Department of Justice and Attorney General is falling into the same last century prejudicial trap in relation to 25 year contracts and unjustly protecting caretaker / letting agent’s financial interests to the detriment of fair and equitable rulings.

Winner – caretaker/letting agents                                       Loser – unit owners

3. BCCM REGULATION (ACCOMMODATION MODULE) 2008 SECTION (3) APPLICATION OF THIS REGULATION…..

3. This regulation is a regulation module for the Act.
4. For this regulation to apply to a community titles scheme-

• the lots included in the scheme must be predominantly accommodation lots; or
• both of the following must apply to the scheme-
  1. the lots included in the scheme are not predominantly accommodation lots;
  2. when the first community management statement (which could be the community management statement recorded for the scheme on its establishment) identifying this regulation module applying to the scheme was recorded, the lots included in the were intended to be predominantly accommodation lots or……..

This legislation places the decision on the correct module for a scheme in the thought process of the developer and advisers. This legislation is offensive to the Legislative Standards Act section 4(3)(k) in that it is ambiguous and not drafted in a sufficiently clear and precise way. The outcome of this legislation is that developers are placing class 2 residential buildings in the accommodation module with 25-year caretaker letting agent contracts when they should be in the standard module with 10 year contracts.

Winner – developer & caretakers                                        Loser – unit owners

4. ASSIGNMENT OF MANAGEMENT MODULES

The Department of Justice and Attorney General’s interpretation of the allocation of the standard and accommodation modules is contrary to the understanding of the UOAQ, unit owners and the minister’s explanation when the BCCMA was introduced to Parliament.

Legislation Bulletin No 6/97 explanatory notes for the Body Corporate and Community Management Bill 1997, Second Reading Speech, Queensland Parliamentary Debates, 30 April 1997 elucidated this topic.

The minister in the second reading speech outlined the initial four proposed regulatory modules:

The first module [emphasis added] being the standard module, will provide for significantly regulated management processes and is designed to accommodate predominantly owner occupied buildings. It may include developments which are a mix of permanent residential and holiday letting.

The second [emphasis added] is the accommodation module, which sets up management processes that are less regulated than the processes under the standard module. This module is intended for schemes that are used predominantly as holiday letting or serviced apartment operation with the need for accommodation management.

Predominately is given definitive meaning by Carrington Court – Main Beach [2005] QBCCMCmr 710 (15 December 2005).

The intent of the legislation is elucidated by the above recited explanatory Legislative Bulletin. The UOAQ understanding of the intent of the BCCM Act 1997 is that which best suits the interpretation in accordance with the Acts Interpretation Act 1954.

The Department of Justice and Attorney General’s interpretation of the allocation of the standard and accommodation modules is offensive to the understanding of the Parliament when passing the BCCM Act 1997 (and the associated modules).

If perchance a body corporate proves that they are under the wrong module, that is the accommodation module instead of the standard module, and the module is changed from the accommodation to the standard, section 128 of the BCCMA requires the body corporate to pay the 25-year contract, not the 10 year contract they should have been under. This RORT is to protect the caretaker.

Winner – developer & caretakers                                        Loser – unit owners

5. BCCM ACT 1997 SECTION 180 (3) LIMITATIONS FOR BY-LAWS

“If a lot may be lawfully used for residential purposes, the by-laws cannot restrict the type of residential use.”

This legislation effectively denies unit owners the right to determine how their building is used; either for permanent residential or transient accommodation- or both. Permanent residential buildings providing community expectations of lifestyle, amenity, safety and health are effectively prohibited by this clause in the BCCMA. Queensland is the only Australian state prohibiting unit buildings for the exclusive use of long term or permanent residents.

Winner – letting agent                                                         Loser – unit owners

6. PROPERTY OCCUPATION ACT 2014

Property Occupation Act 2014 introduced under the guise of reducing red tape has further disadvantaged unit owners – and in fact endangers their safety. The Act:

• Removed the requirement for a resident letting agent to live on-site.
• Allowed resident letting agents to manage more than one building.
• Removed the requirement for a resident letting agent to satisfy the chief executive that they have body corporate approval and that they will live onsite to be eligible for a licence.
• Consolidated and rationalised the licence categories.
• Deregulated resident letting agent commission rates.

Removing the requirement for a resident letting agent to live on-site

The concept of resident letting agents was to provide 24-hour security and services to buildings, especially those residential buildings that provide tourist accommodation. In Queensland many class 2 permanent residential buildings are misused for short term tourist accommodation without suitable modification of the fire detection and alarm system that is the buildings are only designed for permanent residential occupation.  In the event of a fire, without an onsite letting agent or caretaker, there will be no direction of guests to the fire escapes or fire refuge areas. Moreover, many of the misused class 2 buildings do not have a direct fire alarm connection to the fire service. Therefore, a telephone call to the fire service is required, historically, the responsibility of the caretaker / letting agent.

In addition to common property caretaking services, on site letting agents provide (or should provide):

• Meet and greet service. (book in and record occupation)
• Maintain a daily ‘Guest Room Register List’ accessible/available to the QF&RS in the event of a fire and emergency evacuation
• Explain building security and access to lifts and units.
• Explain fire safety drill.
• Check satisfaction with unit.
• Provide information on building layout for location of spa, sauna, swimming pool, local shops for food and supplies.
• Car park allocation.
• Tourism interests and times and transport.
• Explain by laws.
• Make phone call to fire service in event of fire in class 2 building with no automatic fire alarm call service.
• In event of fire help evacuate short term residents (tourists)
• Monitor compliance by residents to by-law operating hours and use of facilities such as BBQ, pools, gym and function rooms, etc.
• Proper conduct and dress of visitors. (Parties in units – noise)
• Monitor security to ensure no doors propped open to allow visitors or over occupation of units.
• Monitor over-crowding according to local law / accommodation regulations in letting units (no excessive numbers overnight).“

Allowing resident letting agents to manage more than one building

Real world experience has shown that in many cases it has been most difficult, if not impossible, to have a letting agent managing one building to perform in an efficient and cost effective manner. Experience has also proven that corporate letting agents managing multiple buildings are far more expensive to the body corporate and letting unit owners for commissions and maintenance of rental units. This is primarily due to the need to employ additional staff as the caretaker letting agent distributes duties such as reception, cleaning, gardening and maintenance to different personnel.  The idea that the resident caretaker / letting agent moves to a management role, at the expense of the unit owners, is repugnant to the original concept of resident caretakers, and introduces a further layer into the structure where unit owners’ funds are siphoned off to shareholders.

Deregulating resident letting agent commission rates

The Act removes consumer protection and any semblance of a fair commission rate. The Act pits a collective of professional letting agents against individual unit owners.  Many rental unit owners live interstate or overseas and have no concept of fair commission rates in Queensland. This places the balance of power in the hands of the Australian Resident Accommodation Managers Association (ARAMA). Letting agents have a vested interest in achieving the highest possible commission rate and, this is without the pyramid commissions applied by travel agents and letting agents where historically 12% legislated commission rates are jacked to 25%. This money comes from the pockets of unit owners.

Unit owners are further disadvantaged; if there is no regulation of commission rates, there is no recourse to the Office of Fair Trading (OFT) for unit owners to complain and get protection under the law – there is no law.

Winner – letting agent                         Loser – unit owners & tourism industry

7. LOCAL GOVERNMENT – UTILITIES AND “VIEW TAX”

The seventh rort is local government also rorting unit owners by taxing units based on height in building, commonly called the “view tax”, albeit there is no additional cost to local government based on height in building.  Local government also rorts the water supply to every high rise building. Every high rise has one water supply and one meter for the local government to read. The water usage for every unit is then calculated for every unit based on the unit contribution schedule entitlement. The distribution of water in the building is by unit owner pipes, installed and maintained at unit owner’s expense; however, every unit is charged a water supply charge on their water bill. The same principles are applied to sewerage access charges and sewerage volumetric charges, notwithstanding that the sewerage pipes within the building are owned and maintained by the unit owners and there is only one sewerage discharge point; Every unit is charged a “fixed sewerage charge”.

Winner – local government                                                 Loser – unit owners

8. BUILDING INSURANCE KICKBACKS FOR BCMs

The eighth rort is the insurance industry working in consort with body corporate managers (BCMs) taking kickbacks on building insurance. The commission is in the order of 20% of the policy premium ranging from $30,000.00 to $60,000.00. This is body corporate money that the BCMs take in addition to their contract fees for maintaining body corporate accounts and paperwork in accordance with the BCCMA.

Winner – BCMs                                                                     Loser – unit owners

9. BANKING ARRANGEMENTS NOT IN FAVOUR OF BODY CORPORATE

The ninth rort is the business arrangements between BCMs and banks. Under these arrangements body corporates receive less than favourable interest rates on sinking fund accounts and administration accounts, while some BCMs receive very favourable business and personal loans.  Bodies corporate are stripped of control of their funds by BCMs becoming account holders and primary signature to body corporate accounts.

Winner – BCMs                                                                     Loser – unit owners

10. TERMINATION OF A CARETAKER / LETTING AGENT

The tenth rort is the termination of a caretaker/letting agent. If the body corporate wins a vote for default of code of conduct, under section 138 the letting agent is given a transfer notice, but the caretaker/letting agent has nine months to sell his business before he must vacate the building.  Also, in a final insult to the body corporate, if the contract has less than seven years to run, the body corporate must, under the BCCMA extend the contract to a minimum of nine years.

Thus the caretaker/letting agent, who is in default of his code of conduct for non-performance of his contract, has been allowed 9 months to sell his business and is given a bonus of an extended contract as a reward for his bad behaviour. If the contract was down to its last year or two this bonus for breach of code of conduct is worth about $1,000,000 to the caretaker, and that is another $1,000,000 that the body corporate must continue to fund by way of the caretaker’s salary.

When this provision of the BCCMA was questioned at introduction in 2003, the then minister stated that the minimum 7 years was required by the banks and financiers to fund the purchase of caretaking/ letting contracts.

Winner – caretaker / letting agent, banks                          Loser – unit owners

CONCLUSION

The one consistent loser from the BCCMA is the unit owners.  This legislation tears at the very fabric of Australian democracy.   If the unit industry in Queensland is to expand and flourish the BCCMA must be dragged into the 21st century, and the legislation amended to reflect democratic values.