Experience of investor owner, UOAQ member
As well as the achievements and benefits that have flowed to our Body Corporate from our UOAQ membership, the other side of the coin for many owners is their relationship with the resident letting manager. Although this is not the direct responsibility of the Body Corporate, it certainly affects owners who place their unit in a letting pool.
Here is a cautionary tale with some advice for owners in this position.
Many owners buy when on vacation, and may not compare with similar properties. It can be a rushed decision, with an imminent return to their main place of residence pending, and there is little chance to evaluate the honesty, work-ethic or competence of the letting agent. The letting agent expects a new owner to meekly inherit the contract that is currently in place with the outgoing vendor, and there is no chance to make comparisons or collect feedback from other owners.
If an owner wants their rental unit to be managed on-site, then there is no choice of letting agent. Some owners don’t realise that they can place their property with an outside real-estate agent for holiday letting, but this does have significant disadvantages – for guests there is no representative of the owner onsite, and they won’t get bookings from ‘walk-ups’ who happen to see the unit from the street, for example.
In Queensland the letting agreement is commonly referred to as a ‘Form 6’. It is nearly always drafted by the letting manager, and is offered to an owner who wishes to let their unit on a ‘take it or leave it’ basis. The power imbalance is obvious – one party controls the wording of the contract, and the same party has information about all the other units in the letting pool whereas the owner is on their own. The letting manager often decides on rates, and even availability and how the units are allocated.
We realised that elements of our Form 6 agreement and the way it was being applied were unfair. Some were legacy items from when our scheme was established in 2004, and were no longer fit for purpose, but the letting manager was continuing to reap the benefits. As owners of one of the units in the letting pool, how did my partner and I deal with this situation?
There is strength in numbers. If several owners are raising similar issues then it is harder for a letting agent to ignore these, or to be punitive to one particular owner. Our first step was to make contact with other owners in the letting pool. Your Body Corporate Manager (the issuer of your quarterly levy notices) is obliged to give you names and contact addresses for all owners in your scheme if you ask.
Some owners were simply not interested, but our concerns resonated with others. We swapped information – discussing issues that we were not happy about, and shared the monthly letting information for our unit with each other, so that all of us could see data like nightly tariffs and occupancy rates.
A group of us decided on a plan of action. To always be polite, and respectful, but to ask questions, and to seek documentation where necessary. We decided to raise issues one at a time, so that our objective of gaining a fairer contract and letting system was not insurmountable and did not lead to implacable opposition. The timing was fortunate – we had discovered that the Management Rights for our complex were ‘on the market’. The letting manager was keen to sell, and had an incentive to keep as many owners in the letting pool as possible, to achieve the best possible price. Another factor may have been that he knew he was leaving, and would leave a fairer contract as a ‘welcome’ present for his successor. We raised questions and complaints about the current Form 6, and refused to sign a new Form 6 until we were satisfied. This strengthened our position, given that the incoming letting manager would expect to inherit a full suite of letting contracts.
What were the issues? Many of you may be affected by at least one.
- Bank fees
Our monthly statements showed a deduction of $5 for ‘Bank fees’. At $60 per year, with 13 units in the letting pool, this was $780 p.a. that we were challenging. There was no reference to ‘Bank fees’ in our Form 6. Because this was not in the Form 6 we had the implied threat of raising with Queensland Fair Trading. We argued that banking rental income was a business expense for the letting agent. We were successful and this item was no longer charged to us.
In a similar way there was a monthly deduction of $5 for ‘Postage’. Again, not referred to in our Form 6, so invalid, and $780 p.a. that was conveniently ‘expense reimbursement’ rather than taxable income for the letting manager. Of course just about all communication in 2018 is electronic. Another success to us – this deduction was removed.
Each month every unit in the letting pool, but not the six outside the letting pool, were charged $33 for ‘PABX’ – the internal telephone system. We asked to see receipts and challenged the cost. The result – the amount was lowered to $11 per month – an annual saving to each owner of $264.
- Minimum tariff rent for the unit
We created a spreadsheet analysis of our outgoings on a typical 3-night rental. Outgoings deducted from the gross income included electricity, water, repairs, advertising, manager commission at 12% plus GST, commissions paid to OTAs (Online Travel agents such as booking.com who take 12%), cleaning, linen, welcome packs etc. We established that with some bookings the tariff was so low we were losing money. These stays provided commission income for the letting agent, but at rates where effectively we were paying the guest to stay. When you sell your house you set the selling price, and it should be the same with holiday rental accommodation. We insisted that we had the authority to set a minimum tariff for our unit, and ultimately had a clause to this effect written into the new Form 6.
- Cleaning charges for correct number of person per stay
We analysed our monthly statements. These included a count of the number of guests for each stay, relevant because it impacted the cleaning/linen fees, with a 2-person stay costing us less than a 4-person stay. The graphic is self-explanatory – something had changed in 2012:
When confronted with this graph the letting manager admitted that in 2012 he had decided, unilaterally and with no consultation, to charge each stay as a 4-person linen-replacement, and had reported all stays to owners as 4-person stays when there were actually often only 2 guests. This was in contravention of the Form 6 at the time. The outcome was that the letting manager engaged an accountant to go through the records of stays in our unit since 2012 and we were refunded about $1,000. Advice to the reader: look at your statements.
- Direct booking vs online travel agents
As owners, we always prefer direct bookings rather than through an OTA. Why? Paying 13.2% commission rather than 25.2% in total. Our letting manager had no system in place to encourage direct bookings, and indeed did better out of OTA bookings because he was still paid the same commission, but these bookings came in automatically, with no time taken up on the phone or email etc. This was eventually improved when the letting manager left, and the new MR holder upgraded the website and offered a ‘Direct booking’ facility, with a 5% discount to guests, but a net improvement to the owner.
- Advertising and promotion: request accounting for the expenditure
The old Form 6 allowed for a deduction of $120 per month for ‘advertising and promotion’. The letting manager was obligated to proactively account for this with an annual report to all owners in the letting pool on how their contributions were being spent, but only did so twice in seven years when asked directly. His excuse: “You are the only owner who asks for it”. The two reports we did receive showed spending that was decidedly dubious – significant payments to the local bowling club, and $4,000 on ‘Bonus’. That was never satisfactorily explained. It could well have been on liquor: “We sometimes give guests a welcome bottle of wine”; but receipts were not provided, and wouldn’t have proved that the item reached the guest anyway. No reviews on websites ever mentioned delight from guests about welcome gifts. The replacement Form 6 we negotiated lowered our monthly contribution to $90, and our new letting manager is spending advertising money more appropriately. Advice to the reader: if you make a contribution to marketing, demand to see it accounted for, and ask to see receipts.
- Restriction for personal use of our unit
Our original Form 6 specified that owners could only stay in their own unit outside high season and outside school holidays. This was unacceptable to us and we demanded that there were no restrictions on our staying in our own unit provided we gave 3 months notice. This change was accepted.
- Threat of being dropped from letting pool
We raised a dispute with QFT (Queensland Fair Trading) and refused to sign any replacement Form 6 until this was resolved.
The detail of the complaint:
We complained about the practice of charging 13.2% commission on the gross amount received when the apartment is let by a third party agent, for example booking.com, which also takes a mandatory commission. We believed the commission should be charged on the ‘net’ amount received, because this is the ‘actual amount of rent collected’ – as per section 88 of the Property Occupations Act 2014 and section 22(3) of the Agents Financial Administration Act 2014;
88 – Commission may be claimed only for actual amounts
1) This section applies to—
(a) a property agent who performs, for the payment of a commission, a service of selling or letting property or collecting rents; or
(b) a resident letting agent who performs, for the payment of a commission, a service of letting lots or collecting rents.
(2) The property agent or resident letting agent must not claim commission worked out on an amount more than the actual sale price of the property, the actual rental for the property being let or the actual amount of rent collected.
This issue typically arises when the holiday apartment is booked through an on-line channel such as booking.com, wotif etc. The on-line channel takes a mandatory 12% commission, and then our letting agent takes a 13.2% commission on the full amount – so altogether we are paying a 25.2% commission. We believe the 13.2% should be applied to the actual amount, which is the full rental less what the on-line channel is automatically paid out of our gross rental.
At the time we believed this matter has already been settled in our favour in the Queensland Court system – we referred to the recent judgement below, which may not have been disseminated to some letting agents and owners.
Queensland case law does not allow a letting agent to calculate their commission on income before an agent rebate has been applied: Chief Executive, Department of Justice and Attorney General v Peterson Management Services Pty Ltd.
Unfortunately this decision was reversed on appeal. But by being ‘in dispute’ we believed this gave us some protection from being dropped from the letting pool. This had happened to one owner already at the time when we made the complaint to QFT – this owner had been asking too many awkward questions of the letting manager.
- Know the details of the terms and conditions
The letting manager was not prepared to share information about forward bookings with some owners. It emerged that, for example, they did not accept arriving guests at weekends because they may not be available and were not prepared to make the necessary arrangements. Websites often showed the complex was fully booked, but then when an owner received the monthly statement, there was no occupancy for the equivalent period. There may have been last-minute cancellations, or alternatively the apartment may have been occupied by non-paying guests – we had no way of knowing.
Two regrets as an owner:
(a) we should have engaged a private investigator to offer cash to stay in our unit (over the tenure of our letting manager we never once had a statement that showed a guest had paid cash); and
(b) the electricity retailer at our unit does not offer a smart meter where you can see daily electricity usage – we do have this at our main domicile in a capital city, and an owner could immediately determine when their unit was occupied and when it was empty. As part of our information-sharing between some owners, we reported to each other when our units were occupied.
None of the issues we confronted and dealt with are the province of the Body Corporate, because they only affect owners who engage an on-site letting manager. However the Body Corporate does engage the caretaker, and with that appointment comes the ‘gift’ of Management Rights.
Individual owners are on their own here – but can achieve a better outcome if they communicate with other owners and ask questions. It is amazing how a letting manager will have their mind concentrated by the prospect of owners leaving the letting pool, and they loathe the prospect of owners communicating with each other. The sayings ‘Divide and conquer’ or ‘United we stand, divided we fall‘ come to mind.
Chairperson [Scheme name withheld]