Slings and Arrows: Rackets and rorts run rampant on SA's strata properties

Strata home owners’ horrors

For the tens of thousands of South Australians who live in strata properties (flats, units or apartments) there are at least two realities of life. Firstly, when ‘professionals’ are delegated responsibility to manage their buildings, land and associated fees and payments, bad things can happen. Secondly, when legislators’ attention is sought for help, time crawls. A state parliamentary committee that began hearing complaints in April 2015 recently concluded in March this year – only three years later.

It reviewed the plight of many of these owners. Results relating to some of Adelaide’s ‘body corporate managers’ (BCMs) were the most disturbing. These are the ‘experts’ to whom many strata group owners delegate management, because they don’t have the expertise.

You would think that aggrieved owners would have shouted their complaints to parliament from the rooftops, but as the committee learned, many of the 22 that reported were so afraid of repercussions that they asked for anonymity. This said something profound about how small is the ‘body corporate manager community’ in South Australia (virtually an oligopoly as a result of many mergers), and how vulnerable flat and apartment owners felt about talking about their myriad bad habits.

To cut to the chase, the committee recommended that the state’s Attorney- General address at least two of the big problems: conflict of interest, and failure to declare fees, bonuses and commissions.

The young and the restless

These possible changes – not guaranteed by any means – would be welcomed by thousands of owners, if they knew about the rackets. Many don’t.

One of the notable features about the strata property industry is how real estate sales folks don’t much mention the tricks and traps behind professional strata management. Not their problem. Millennials looking for their first property purchase won’t find any mention of rackets and ruses in the glossy city advertising, for example, when contemplating the hipster joy of buying an apartment overlooking the city. Neither will they find it in the suburban display ads when an ‘impeccable two-bed unit’ pops up for sale and is tagged ‘first-home owner’s delight’.

In each example, they’d also be buying a share of a strata property, a vote at the strata meetings, but most importantly, a responsibility, if a BCM is involved, to pay that person for their services. This is where problems can begin.

Self-interest over-rules best interest

“There is a clear and loud message from strata owners that they feel that BCMs are not representing their best interest,” the committee noted. It observed that in SA there is an “environment where practices that would not be acceptable in other businesses become prevalent. [One submission made] a convincing case that the owners feel they have lost control and their rights…”

There are no minimum training standards and managers do not operate in a licensed environment. This might be one reason that new people to the body corporate management industry seem to think that some dodgy procedures are okay.

“Many submissions commented on … a conflict of interest with a BCM having a personal or commercial arrangement with suppliers of goods and services,” the committee recorded.

Undeclared co-ownership of property maintenance companies means that some BCMs can recommend using their own firms, and retain control of the revenues. If the work does go to independent tradies, secret bonuses and commissions are alleged.

“The committee considers that for all services the original quotes for service should be supplied. BCMs should advise their clients that they re-invoice insurance premiums or when adding a further fee to any service. … The practice needs to change so that the informed client can decide if the total service fee is fair.”

Other rorts alleged in submissions included a practice of some BCMs re-directing interest on strata funds to their own accounts. One might conclude that these are the habits of small, fly-by-night managers, but that’s not the case.

Investors asleep

One of the other obscured problems with South Australian strata property management is the high prevalence of investor ownership, whose investor owners care little for the quality or cost of strata managers – because they don’t want to get involved, and besides, it’s all a tax deduction.

“This scenario makes for an environment where those engaged to manage the strata units, body corporate managers (BCMs), can operate without the restraints imposed by a more demanding clientele.”

In other words, they can get away with it, tapping a regular flow of other people’s money. The dominance of investors on some strata committees, often giving voting rights at annual general meetings to the managers themselves, also can lead to vigilant owner occupiers becoming powerless to stop rorts, even if they know they are occurring.

What odds of change?

One of the disturbing features of this review by parliament’s Environment, Resources and Development Committee is that, although an ‘instrument of parliament’ it is toothless. It has called on the Attorney General to act, but it can do no more.

Moreover, its timing is interesting. It was completed three days before the state election. There’s now a different Attorney-General. She may have no sympathy with the previous 2015 advice given the committee by former AG, John Rau, and may sense no urgency to prioritise, given that Labor didn’t for about three years during its last term.

For the frustrated strata owners, the parliamentary effort may all come to nothing. Meanwhile, the rorts continue… and there are many others: South Australian parliament, ‘Strata Titles’, PP 181, 81st report, 40 pages.

Ash Whitefly is Executive Director of the Adelaide Whitefly Institute of Diplomatic Studies.