Posted on December 12, 2013 by

The Strata Revolution

On Friday 2 November 2013 the Minister for Fair Trading, Anthony Roberts, used his address to the Strata Community Australia Convention to outline the State Government’s foreshadowed changes to Strata Legislation.  Much is expected of the review following the State’s extensive consultation over the past few years and the Discussion Paper issued last year.  While the anouncements made to the Strata Convention might be more in the realm of ‘evolution’ rather than ‘revolution’, the full package released on 14 November 2013 delivers the promise of fundamental change.

The Strata Title Reform: Strata & Community Title Law Reform Position Paper (Reform Paper) was released on 14 November 2013.  Although promising change to Community Titles legislation the paper notes on page 4 that a separate paper outlining proposed reforms to the community title laws will be released in the coming months.

Strata Titles legislation falls into one of two main acts: the Strata Schemes Management Act 1996 (SSMA) which deals with the day to day running of strata operations; and the Strata Schemes (Freehold Development) Act 1973 (Development Act) which deals with development and approval of the built form of strata constructions.

(The  Strata Schemes (Leasehold Development) Act 1973 deals with a separate class of strata development based on leasehold interests, but follows generally the Development Act in practice)

The Discussion Paper issued last year sought input on whether there should be a change to simplify the legislation, reducing the five Acts which currently make up Strata Legislation into one or two Acts only.  The Reform Paper is silent on the question.  This may mean that we will be dealing with major re writes to five Acts, rather than an entirely new legislative regime.

In this article I will deal with the foreshadowed amendments to the SSMA. The major changes to the Development Act, including the ability to terminate on a 75% majority vote, will be the subject of a separate article.

Simplified meeting and record keeping procedures

The Reform Paper foreshadows major changes to the conduct of meetings, allowing attendance by way of teleconferencing and electronic voting (Recommendation 1.1).

Most significantly,  proxy farming, where an owner collects the proxy votes of a large number of owners and uses them to support particular votes, will be thwarted. A strata with more than 20 lots will only allow any one person to carry 5% of the voting proxies, while a smaller scheme will allow one person to carry only one proxy lot.  The legislation mirrors the Queensland example (Recommendation 1.14).

Proxies will no longer be necessary to secure quorum for meetings as the teleconferencing and electronic voting will make it easier for owners to take part in absentia.

Hand in hand with electronic voting and attendance are a series of proposals to allow records to be kept and accessed electronically; to allow for access to be given to records by email; and to allow inspections to take place on line: Recommendation 1.19.

For conveyancers this may result in more easily accessible section 109 certificates and a review of fees with the intimation that they will be lower in cost than they currently are.

Tenant participation

Recommendation 1.5 advocates a limited right for tenants, who apparently are more than half of the occupants of strata developments, to have a right to attend owners corporation meetings.  Tenants will also be given the right to elect a non voting memeber of the owners corporation executive.

It will be interesting to see how the drafting will mirror the reform.  Tenants advocates have hailed the reform proposal an important step, but it is difficult to see how a non voting representative can impact on decisions.  As most tenants are transitory members of their stratas, query how the tenants’ representative can galvanise tenants in relation to any decision of the strata corporation.

Conflict of Interest provisions

Page 7 and following of the Reform Paper is entitled ‘Transparency and Accountability’ and there are a number of provisions which will impact the strata industry at a fundemental level.

The executive committee of the strata will now be known as the ‘Strata Committee’.  Office bearers are to be directly elected to their posts on the Committee rather than elected by the other Committee members once they have been endorsed by the general meeting which is the situation at present (Recommendations 1.6 and 1.7).

There will be no upper limit on the numbers of the Strata Committee, so long as a large scheme has no fewer than three members.  A ‘large scheme’ is one where there are more than 100 lots or an annual budget of $250,000.00 or more.  Curiously there is no lower limit set.  What if they held an election and nobody came? (Recommendation 1.9)

Committee members will have to declare any conflicts they have, and may not vote on an issue, unless the Strata Committee votes to allow them.  The vote on whether the conflicted member can participate will take place without the conflicted member. It will become an offence under the Act to fail to declare such an interest with a penalty so far not disclosed: Recommendation 1.11.

Perhaps the most serious change at the executive level is that managing agents, letting agents and building managers will not be able to serve on the Strata Committee.  They may attend committee meetings only at the invitation of the Committee as an adviser: Recommendation 1.12.

Strata Managing Agents

This will perhaps be the most hard fought part of the reform agenda, outside of termination of schemes.  Strata management contracts will be limited to three years with no roll over (Recommendation 1.16).

The Minister chose the Strata Community Australia Convention to release the ‘bad news’ that the Government will review commissions paid to strata agents by compulsory strata insurers.  There are a series of areas where strata schemes must have compulsory insurance.  Over the years this has led to a situation where 15 to 20% of those insurance premiums are paid as commissions to strata managing agents. (source: Jimmy Thomson, NSW strata law revolution, Sydney Morning Herald, November 4, 2013).

Multiply that commission by the 72,000 strata schemes in NSW and you can see that a substantial part of the income of strata managing agents comes from the insurance industry.

At very least the Reform Paper will require managers to reveal what they have received in commissions to their owners at the Annual Genaral Meeting: Recommendation 1.15.

Strata owner groups want the commissions banned. They argue the commissions are a clear case of conflict of interest, and the size of the commission may affect a manager’s decision on what the best policy for the individual strata scheme is.

The Minister has foreshadowed in his address that ‘We will continue to listen and work to find an outcome that balances the interests of all stakeholders’ . This is not the blanket ban on commissions which the owners groups looked for, and the strata managers feared.  It may be that the Minister is hoping that once strata owners become  aware of the fact that their managers are receiving 15 to 20% of the insurer’s commissions they will insist on being shown more comparisons before committing to an individual insurance policy.

Is it too much to hope that a player will enter the market which will offer strata owners, rather than their agents, a better deal on insurance?  That must be the objective of a Liberal Government law reform: to allow the market to correct an anti competitive practice by exposing its existence.  If strata owners pay attention there may be no need for further reform.

By Laws

Often the greatest challenge to the harmony of the building comes from by-law disputes, with many owners and tenants finding the by-laws an unecessary imposition.  There has been the need for legislative intervention in the past, with the introduction of section 49(3) to the SSMA introduced to strike down by-laws restricting the occupation of a unit by children; and section 49(4) SSMA striking down by-laws which restrict an occupier having a guide dog (yes, there are people who would prevent a person occupying a unit because they had a guide dog).

Many stakeholders had hoped for a relaxation of by-laws, or at least a qualification that by -laws needed to be reasonable, or related only to a defined set of areas.  Currently section 43(2) SSMA states that the list of by-law areas set out in section 43(1) is not  exhaustive. Any one who hoped for such a limit would have been disappointed with the Minister’s declaration at the Strata Community Convention that ‘I often refer to strata schemes as the fourth tier of Government’. The laws of this fourth tier of Government are by-laws.

Recommendation 4.1 seeks a broad principle in the Act requiring by-laws that are not ‘unreasonable, oppressive or discriminatory’. How this very sensible reform is drafted will be crucial.

Part of the problem with enforcing compliance has been the lack of a consolidated set of by -laws.  While it is possible to compile a set of by-laws from the documents lodged on title with a strata scheme, Recommendation 4.2 requires the secretary of the scheme or the managing agent to keep an up to date set for the perusal of owners and tenants.

More ink has been spilled in the press about amendments to by-laws which will limit occupiers smoking in strata property, and requirements for strata approval before installing hard wood floors than perhaps any other reform in the package.

There are more amendments to by-laws which are of an even more fundamental change.  There will be limitations of the number of occupants who may live in a strata lot: Recommendation 4.8.  This makes an interesting conflict with planning law.  Normally issues like the number of occupants would be a matter for development consent, and enforcement is a question for Councils. This recommendation will give the strata itself the ability to deal with overcrowding.

While strata owners may see this as an advantage, it may be the commencement of a change to enforcement generally.  Perhaps the role of policing consent conditions will be shared in the future between Councils and strata committees.

Penalties for the breach of by-laws will be higher, although the paper does not designate what they will be.

Perhaps most importantly for Councils is Recommendation 4.14.  This allows the strata committee to negotiate with Councils over the policing of strata car parks.  No longer will the debate be over stratas clamping the wheels of owners who regularly park in the wrong place. Now a strata can pass a general resolution to call in the Council to issue Penalty Infringement Notices to drivers who breach by laws.

This again is a small step to a new development in local government law.  Now private citizens can call in public authorities to police private rights. It may not seem like much at first blush, but philosophically it is a quite revolutionary. Much like the rest of the reform package.

In a future article I will review the Reform Paper’s recommendations on changing the built environment, and in particular the ability to terminate a scheme on a 75% vote.