You may have seen some reporting back in March, and again in September, highlighting the unscrupulous practices which can unfortunately exist within the Owners Corporation (OC) management sector. While scrutiny on the sector can at times be uncomfortable and feel as though all Owners Corporation Managers (OCMs) get tarred with the same brush, we at The Knight believe it is ultimately a good thing to bring questionable practices into the light. Indeed, we have been calling out these practices for years.
RELATED – Stamping out unscrupulous practices in OC (Strata) Management >
In this article, we’ll explore one facet of this recent scrutiny: the developer-OCM relationship.
As you will no doubt be aware if you have found yourself reading this article, developers will often engage an OCM to assist them with the setup of the OC for their projects.
While this engagement at times is remunerated via a fee for service, the more common approach is for the OCM to undertake the set-up work under the arrangement of receiving the contract to manage the OC upon settlement.
Recent changes to the Owners Corporations Act have tightened requirements up in the developer-OCM space, including:
- Making it illegal for a developer to receive payment from an OCM for a contract to manage the property, and
- Limiting the term of the initial contract to a maximum of 3 years.
These changes were heartily welcomed by The Knight when introduced.
RELATED – 4 important changes to the OC Act that will affect developers >
However, some consumers have still raised questions about this common remuneration approach.
This is because – while the developer is the initial client of the OCM – during the Inaugural General Meeting (IGM) the OCM’s client changes to become the OC, comprising of all purchasers within the property. This change, if not properly navigated from the outset, could create a conflict for the OCM.
At The Knight, we are proud of the work we do to assist developers. Helping to set an OC up for the success of future owners is our focus from the beginning, and this should be front of mind for developers too.
Here are just some of the ways we ensure that future owners remain the focus, practices we believe should be the norm when working with OCMs.
1) Sustainable and realistic Owners Corporation budgets.
While this is now a legal requirement, there can still unfortunately be pressure placed on OCMs to keep OC budgets unrealistically low to attract potential purchasers with “low fees”.
At The Knight, we will always make recommendations to developers about the realistic running costs of a development. To account for all operating costs of a development a year 2 budget is presented at the outset to ensure any year 1 savings (due to warranty periods, for example) are not misrepresented to purchasers.
Presenting an unrealistically low budget will only result in dissatisfaction among future owners and place financial pressure on both them and the OC. Remember, unpaid fees will mean the OC does not have the funds to pay its bills, and this can have negative impacts on the repair, upkeep and safety of the building.
This can in turn affect the developer’s reputation for future projects.
2) Leasing arrangements for the purchase of infrastructure.
Rather than purchasing infrastructure for the building, some contractors will provide it to a developer free of charge, under a leasing arrangement with the future OC.
This helps developers keep their project costs down by essentially passing those costs onto the future owners. In some scenarios, these arrangements can also prevent the OC from having ownership over the assets of their building, sometimes for lengthy periods.
At The Knight, we push back against this practice, believing the OC should be in control of all assets and aspects of the building from day one.
Further, we do not believe that developers should sell a ‘feature’ which they have not purchased.
3) Making recommendations on the practical use of common property.
We have managed hundreds of OCs, of all types and sizes, and have seen just about every complication imaginable when it comes to the use of common property. Sometimes, seemingly minor changes to plans of subdivision can have unfortunate impacts on an OC.
One example is considering the maintenance implications and associated costs of including planter boxes on private versus common property. The wrong choice can have detrimental effects on the presentation and appeal of a building.
RELATED – Location of Planter Boxes – Common vs Private >
Ask us to provide suggestions and solutions that will give the OC the best chance at functioning harmoniously. We see this advocacy for future owners as an important part of the developer-OCM relationship.
4) Ensuring all Owners Corporation contracts are fair and reasonable.
At the IGM the developer approves a range of agreements and contracts on behalf of the OC. Given that purchasers will not have input in these contracts, we remind developers to keep their interests front of mind when engaging contractors.
For large ticket items included within the budget, such as cleaning and gardening, we encourage developers to seek comparative quotes, or occasionally to tender for the service. This ensures future owners are getting the best deal for their money. Whilst we don’t review the wording of all agreements and contracts, if unfair or uncompetitive terms come to The Knight’s attention, we will advise against adopting these.
Your purchasers will form their initial perception of the OC at the Special General Meeting (SGM), when these contracts are explained. If contracts are unfair, confusing or unreasonably expensive this perception may be negative, and can extend to you as the developer.
At The Knight we work with developers to create successful and sustainable projects, long after settlement has occurred. For developers looking to protect and enhance their reputation with purchasers, these are the behaviours to look out for when partnering with an OCM.