Not getting the fundamentals right

A recent decision of the NSW Consumer, Trader and Tenancy Tribunal has highlighted the importance of ensuring that the fundamentals are right when entering into management rights agreements.

The decision related to a large, mixed commercial and residential scheme in Sydney comprising 117 lots being 111 residential lots, one caretaker lot and five commercial lots. The developer sold the management rights to the building and the minutes of the first annual general meeting recorded a resolution appointing the management company as building manager on the terms and conditions contained in the written agreement. However, immediately, under the resolution, the following wording was included: “all owners (excluding the representative of the original owner) wish to register an objection to the motion as the contract is for a 10 year period and other quotes were not tabled at the meeting”.

Three years later, the owners corporation applied to the CTTT to have the agreement declared void under section 183A of the Strata Scheme Management Act on the basis that it was unfair, harsh, oppressive, unconscionable and unreasonable.

To demonstrate that the agreement was unfair, the owners corporation tabled three quotes to the tribunal for provision of the caretaking duties at a fee well under the $157,612.00 originally being paid to the caretaker. The owners corporation also argued that the agreement was oppressive in that the manager’s lot (a standard two-bedroom unit) included on the title to the property the reception area in the foyer, numerous floor spaces throughout the building and multiple office and storage areas and garages. In effect, the area of the manager’s lot was six times the area of a typical lot, yet the unit entitlement was the same as a standard two-bedroom unit in the complex (warning bells!)

The tribunal decided:

1. That the building was a “large strata scheme” as defined under the act because it has more than 100 Lots.

2. The act requires that an owners corporation of a large scheme must obtain at least two quotes in relation to proposed expenditure in respect of any one item, if the proposed expenditure exceeds the amounts prescribed in the regulations.

3. The regulations prescribe an amount of $25,000 in relation to any one item or matter, (other than seeking legal advice or the provision of legal services or taking legal action).

4. Because the remuneration under the caretaking agreement ($157,612) for the first year exceeded the $25,000 threshold, the owners corporation should have obtained two quotes.

5. As only one quote was obtained and put to the first annual general meeting and voted on, the resolution was a nullity and was declared void. Any contract entered into as a result of the illegitimate resolution had to be treated as being tainted and of no force.

6. The tribunal also found under section 183A(2) of the act that the contract was not only unconscionable due to the circumstances proceeding the execution but its continued existence was unreasonable and terminated the agreement forthwith.

Lessons to be learned

This case highlights the importance of developers getting it right when selling management rights and buyers of management rights ensuring that they only use legal practitioners experienced in this area.

The level of remuneration being paid for the provision of the caretaking services should have rung some alarm bells. A simple division of the commencing remuneration by the number of lots would raise concerns for this type of inner city building with next to no gardens or grounds and where the primary cleaning duties relate to foyers, hallways, car parking areas and garbage disposal. Caretaker’s remuneration can always be reviewed under section 183A of the act.

Also, the unit entitlement attaching to the manager’s lot should have raised immediate concern. Clearly, the unit entitlements were stacked firmly in favour of the owner of the management lot and this was always going to be become a problem with the other owners.

Obtaining alternate caretaking quotes will need to be addressed when new buildings are brought on line.

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