Contracts – Owners Corporation

NOTE Changes to OC Act from 1 December 2021 which affect future Owners Corporation Management Agreements.

Now this is an area of interest to all of us. Negotiate that good Owners Corporation Management contract and get some protection, or in the other case, discover the hard way that you really should have asked a few more questions before signing that onerous contract you or your Owners Corporation are trying to get out of. In truth, how many of us read the fine print anyway and live to regret it.

We forever hear the term ‘Commercial Resolution’ ringing in our ears when we see the ugly side of contracts that benefit all parties but you, the client OC. Your OC is a legal entity and plenty of contractors out there will take you on whether you believe you have the moral high ground or not.

Practical experience can lead to the simple things like including a “performance clause”. Most Owners Corporation and Facility Management contracts are written in terms of what you are going to get, but with no consequences if you “don’t get it”.

The SCA – Strata Community formerly known as the OCV in Victoria, the professional association in representing some 65% (at last claim) of Owners Corporation Managers in the state of Victoria has a standard contract for it’s members to use. Whilst this is commendable to have a standardized contract in use by it’s members the contract in it’s standard form includes amongst other clauses the ability for an OC Manager to sell your OC to another management company without your knowledge and automatically role you into another service agreement if you don’t give notice in time of termination of your contract. A balance is required to some degree to ensure the rights of the OC Manager that you have a contract with, to allow them to do their job, but remember you should be diligent and read the fine print. Often it can be a ‘take it or leave it’ contract and an SCA member or manager with their own agreement terms will insist that if you want them it is under their contract. The decision is then with you or your committee.

We have experienced what we term as the ‘Adversarial Changeover of Manager’. The knock down drag’em out change of manager in which the Owners Corporation becomes the spectator and often parts with some of it’s own funds as it sits in the stands as that helpless spectator and that phrase ‘Commercial Resolution’, starts rattling around again.

We recommend minor adjustments to this contract template provided by the SCA – Strata Community Australia (Victoria) and formerly known as the OCV Contract, to its members, simply to give some degree of self-determination to your OC or your OC committee. SCA Managers will sometimes include clauses for your OC’s benefit. Not all, but some from experience. Many take the view of – ‘take it or leave it’ and if this is the process of negotiation it may be advisable to leave it and look elsewhere.

And a word of caution for the keen contract negotiator out there. You may have just brought your apartment or have been an owner for awhile and you then get on the OC Committee. You are also keen for the best deal to be negotiated for your new OC Management Contract and attempt to haggle the price down. The cautionary tale is that if you want to have a good external OC Manager and are not prepared to pay a fair value you may end up affecting the value of your investment. Remember that word ‘Perception’. Again we assume many of you out there may have experienced this. You get what you pay for in many areas of commerce and this is no different.

When negotiating a contract for the supply of staff to your development, again there are many options. No one will deny the right of a company to make a profit. That is the nature of business. But you don’t want to end up with inferior quality staff that reflects on your development and most of the staff budget going to the contractor. We personally like transparency and committees should know what their building staff are being paid. It is not a good look when you are paying your staffing company good money to find you loose good staff due to them not being paid a competitive salary/wage by your contractor. It happens.

The primary driver for setting up The OCguide is based upon our own experience with all manner of conflict experienced in Owners Corporation Management to date.  Some caused by ignorance, some caused by downright poor service to the industry and some caused by committee member self interest. There are good service providers out there, but I do think the time has come to empower the ‘OC’ who ultimately foot the bill.

One can not only assume, but also experience that some of the more onerous contracts written for Owners Corporations create a negative ‘feedback loop’. This makes everyone more wary as expressed by many Owners Corporation Committees and Lot Owners over many years. Large OC’s become loath to give anything more than a one year contract agreement as often they have had passed negative experience/s.

Our advice; 

1. And haven’t we heard this one before. Read the damn contract.
2. Forget the Sales Pitch and Read the contract again.
3. Ask. What happens when we don’t get what we are paying for?

Important Note:

OC Manager Shopping? Our own experience in consulting to Owners Corporations and having actually prepared or assisted in tenders for developers for Owners Corporation management has often given us some cause for concern due to the fact that the Owners Corporation Act for Victoria does spell out the need for there to be no conflict of interest.

Experience here indicates that often OC Committees or developers will shop around in an effort to find a ‘Compliant’ OC Manager, especially where say a developer is trying to dictate the opening years budget for OC Fees in an attempt to make sales of apartments/lots more attractive or the OC Committees are unwilling to address pressing maintenance/cost issues and increase budgets. The incoming OC Manager then has to make a decision based on complying with the Act and not about how much in fees they can make from your property. This raises the ‘integrity’ issue. A good manager will hold the line and insist on correct process. Unfortunately the Manager may insist on proper process and then be overlooked for management. Often due to parties wishing to sell the management of developments just like yours.  A developer often will attempt to sell a management agreement to maximize their return on a project. Previously the developer may have sold a 6 years or longer management agreement to an inexperienced manager which means you are in trouble after 1 year and you could have many years to go. FORTUNATELY as at 1 December 2021 the OC Act changes limit this length to 3 years,

If your OC Manager tells your committee or you  how it is, you should not immediately try to rush them out the door. Sometimes the truth hurts and if you need an OC Fee increase or special levy for example, removing the manager doesn’t make the need to raise sometimes urgent funds go away. Delay just puts of the day of reckoning and from experience it is not pretty.

For a 9 year period one Director of The OCguide held registration as an OC Manager whilst he assisted various owners corporations and attended many OC Manager selection meetings by invitation knowing that often he was never going to be considered for the management of the OC in question as he went in and told them the truth about the state of their OC/multiple OC. In those cases some committees showed some discomfort, in that a potential manager bothered to research their OC. As just like them we all like to know what we are getting into. And of course like any good story, on most occasions a number of these OC’s came back to this Director to perform a ‘rescue’. Life is like that.

The lesson here is all parties and this includes you and your committee of management have to deal with the reality of situations or you could burn a good manager.

Victorian Government Review of the Regulation of Strata Managers

Submission by Consumer Action Law Centre – Victoria
27 November 2013
Owners Corporations Act Review
Regulation and Policy Division
Consumer Affairs Victoria
GPO Box 123
MELBOURNE VIC 3001
 
Dear Sir/Madam
Review of the regulation of owners’ corporation managers—Issues Paper

The Consumer Action Law Centre (Consumer Action) welcomes the opportunity to comment on
the Review of the regulation of owners’ corporation managers Issues Paper.

Our submission makes two primary recommendations:

  • that the unfair contract term provisions of the Australian Consumer Law be applied to owners’ corporation management agreements; and
  • that owners’ corporation managers be required to develop and comply with hardship policies.

Our comments are detailed more fully below.

About Consumer Action

Consumer Action is an independent, not-for-profit, campaign-focused casework and policy organisation. Consumer Action offers free legal advice, pursues consumer litigation and provides financial counselling to vulnerable and disadvantaged consumers across Victoria. Consumer Action is also a nationally-recognised and influential policy and research body, pursuing a law reform agenda across a range of important consumer issues at a governmental level, in the media, and in the community directly.

Unfair terms in managers agreements

The consultation paper notes that the unfair terms provisions in the Australian Consumer Law (ACL) (Schedule 2 to the Competition and Consumer Act 2010 (Cth) and applying in Victoria by virtue of the Australian Consumer Law and Fair Trading Act 2012 (Vic)) do not apply to the conduct of owners’ corporation managers, as a management agreement is not a consumer contract ‘to an individual’ (section 23). Instead, the management agreement is a contract ‘to a body corporate’.

Consumer Action submits that a number of the concerns identified in the issues paper, and the fairness of management contracts generally, could be addressed by applying the unfair contract term provisions of the ACL to owners’ corporation management agreements, through a relevant deeming provision in the Owners Corporation Act 2006 (Cth).

When proposing the introduction of a uniform national consumer law, the Productivity Commission noted the benefits of such a law applying to all aspects of the economy and all consumer contracts. It also stated:

The biggest concerns arise for standard-form contracts—typically used in the supply of a broad range of services including air travel, telecommunications, energy, consumer credit, car hire, holiday packages, home improvements and software sales. Such non-negotiated contracts have advantages for consumers—in particular, in competitive markets, lower business costs will be passed on to consumers as lower prices. But, by their very nature, these contract terms are offered on a ‘take it or leave it’ basis, are often complex and apparently mostly not read. The concern is that businesses sometimes use unfair terms against consumers and the public generally.[1]

Owners’ corporation management agreements share many of the same features of contracts that were identified by the Productivity Commission, in that such agreements are standard-form and often complex. We are also aware that owners’ corporations that have attempted to negotiate the terms of management agreements have been faced with opposition—agreements, particularly where the manager uses the industry body’s standard form agreement, are provided on a ‘take it or leave it’ basis.

While management agreements are between two corporate entities (a manager and a body corporate), in reality an owners’ corporation is made up of individual unit holders who share much in common with consumers generally. For example, most owners’ corporation members (at least those living in residential complexes) are contracting in an inherently personal and domestic capacity, and not in a business capacity. As such, owners’ corporation members are very unlikely to be in a position to seek legal advice before signing a management agreement. We note that Consumer Affairs Ministers recently affirmed their agreement to consider an extension of the unfair contract terms provisions of the ACL to small business, recognising that such businesses are often in a vulnerable negotiating position.[2] We submit that owners’ corporations are in a very similar position.

Section 23 of the ACL states that an unfair term of a standard-form consumer contract is unfair, while section 24 provides that a term of a consumer contract is unfair if:

(a)          it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and

(b)    it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

(c)          it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Below we identify two terms in the Strata Community Australia (Vic) Standard Contract of Appointment that we believe may represent unfair terms—the terms result in a significant imbalance in rights and obligations in favour of the manager; the terms do not protect the manager’s legitimate interests; and they cause detriment to the owners’ corporation. There may well be other terms that are unfair, including those related to termination.

Insurance agency fees and conditions (clause 1.3.1.2 of agreement)

This clause appears to oblige the owners’ corporation to be liable for an additional fee representing up to 15% of an insurance premium, where the commission payable to the manager is less than 15% of an insurance premium.

This clause may discourage the manager and the owners’ corporation from seeking a competitive insurance premium. Where a commission is not paid to the manager (perhaps where the insurance premium quote is cheaper), the manager will be guaranteed a fee as compensation. Further, the owners’ corporation will remain liable for an amount representing the lost commission, reducing the value of any competitive insurance premium.

We acknowledge that the insurance premium commission may be considered to reduce the upfront fee paid by the owners’ corporation for managerial services. However, it would be more transparent for the fee to be included upfront and, in that way, owners’ corporations can make appropriate decisions about management expenses in a simple way. Having the total cost of management services upfront will also engender competitive pressure into the market for owners’ corporation managerial services, by making it easier for owners’ corporations to understand the full price of particular agreements.

It should also be noted if the value of any commission was included in the upfront cost of the contract, and the ACL provisions applied, such a fee could not be assessed for unfairness pursuant to clause 26 of the ACL which excludes terms that relate to upfront price.

Indemnities by the Owners Corporation and Liability of Manager (clause 7.2)

This clause appears to oblige the owners’ corporation to release and indemnify the manager from any cause of action including negligence (except to the extent that such loss is caused by or contributed to by the manager’s dishonesty of fraud).

We note that under the Owners Corporation Act 2007 (Vic) and regulation 7 of the Owners Corporation Regulations 2007 (Vic), managers are required to hold professional indemnity insurance that is sufficient to meet claims up to $1.5 million in any one year.

As such, the manager should not require such a wide indemnity (including in relation to negligence) from the owners’ corporation given its risk is insured. It appears that this clause would enable a professional indemnity insurer to seek compensation from the owners’ corporation, a right which may be applied in a harsh and oppressive manner. Given the requirement for professional indemnity insurance, it is clear that there is no legitimate interest being protected (rather it is the interest of the insurer).

Role of the regulator in unfair terms

One of the primary benefits of the unfair terms provisions in the ACL is that they allow the regulator to take proactive action to address the inclusion or use of an unfair term in a standard-form contract in use in the marketplace, and do not merely bestow legal rights on the individual consumers affected by a contract term to take legal action.

This can mean that regulators can undertake ‘compliance assistance’ by helping identify potential unfair terms and working with businesses to redraft terms that better balance the rights and obligations of the parties. In our view, this has been used to good effect both by Consumer Affairs Victoria[3] and the Australian Competition and Consumer Commission.[4]

Such an approach is also an efficient use of resources, meaning that there is likely to be less opportunity for costly and timely disputes between owners’ corporations and managers.

Hardship and debt recovery

From 1 December 2012 to date, Consumer Action has received 138 consumer inquiries or complaints about owners’ corporations and managers. One of the common areas of consumer complaint to both our legal advice service and our telephone financial counselling service (MoneyHelp) is about the debt recovery practices of owners’ corporations and managers.

We submit that owners’ corporation managers could be encouraged or even mandated to adopt financial hardship policies, particularly when they are recovering owners’ corporation fees or levies from individual unit holders. We have assisted some owners’ corporation members in relation to legal proceedings for debt recovery, when it appears that there may well have been more flexible options that could be been taken. We note that owners’ corporations generally will have security over levies as these will be recovered should the unit be sold.

A more flexible and responsible approach to financial hardship may have the following outcomes:

  • it may reduce the number of vulnerable owners’ corporation members being sued for unpaid fees and levies;
  • it may encourage owners’ corporations and managers to more consistently and proactively identify and assist owners’ corporation members who may be experiencing difficulty paying levies due to personal or financial hardship, in advance of undertaking debt collection or legal proceedings;
  • it may promote early access to legal and financial counselling help for people experiencing financial hardship;
  • it may encourage consistent and ethical debt collection practices by owners’ corporation managers;
  • it may reduce court administration costs by identifying more appropriate ways for owners’ corporations to seek payment of levies arrears;
  • it may reduce court proceedings and associated court and legal costs being added to owners’ corporation levies arrears.
  • it may reduce debt recovery costs for owners’ corporations.

We would welcome working with Consumer Affairs Victoria or the owners’ corporation industry in improving debt recovery and hardship practices.

Please contact me on 03 9670 5088 or via email to info@consumeraction.org.au if you have
any questions about this submission.
Yours sincerely
CONSUMER ACTION LAW CENTRE
Gerard Brody
Chief Executive Officer

 
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