Practical learnings from a compulsory management order
Insights for Strata Committees and lessons learnt
The reasons to pursue an application for compulsory management are many and not all are valid. In this case an owner’s lawyer filed an application in the NSW Civil and Administrative Tribunal (NCAT) for orders under Section 237 of the Strata Schemes Management Act 2015 and was successful. Those orders granted an incoming strata manager the power to exercise all the functions of an owners corporation, and all the functions of the chairperson, secretary, treasurer and strata committee of the owners corporation. The owners corporation was not legally represented for the NCAT process.
The scheme was put into compulsory management for one year via the Section 237 orders, but at the end of the year the books and accounts were not returned to the owners. The Compulsory Manager (hereafter referred to as “CM”) re-appointed themselves for an additional year of voluntary administration. When attempts were made to re-appoint the CM for a third year some of the owners engaged a lawyer to write to the CM. The CM then stepped down.
Throughout the 2-year period some of the actions by the CM under the very broad terms of the Section 237 appointment were:
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Dismissing an owner’s attempt to repay possible debts of up to $78,000 referred to in the Orders
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Passing Special By-Laws that were not part of the Orders and with detrimental impacts on neighbours
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Rescinding a Special By-Law without an owner’s consent.
Following the removal of the CM in January 2020 the scheme was left with 23 corrective actions to address relating to financial matters and common property. These corrective actions are on-going. The building is old and the correct scoping of works relies on owner motivation, knowledge of construction materials, skills from a bygone era and money. This makes it difficult for any CM to progress capital works efficiently. Indeed, the most damaging aspect of compulsory management is the loss of preventative maintenance actions (if your building is managed this way) and the ability to optimise the value deployed into the asset. Without the professional handling of corrective actions the levels of toxicity rise and the scheme can remain dysfunctional.
The purpose of this article is to share insights from each key event during the period of compulsory management and beyond, and more specifically to elaborate on two questions:
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What are the implications for owners?
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What are the practical learnings that others can apply?
Event 1: the NCAT application is served by the applicant's lawyer
Implication for owners: Deciding on whether to have legal representation.
This Committee considered a lawyers quote for $16,000 but decided not to spend owners' money given a change in strata managers was planned to occur in 12 months.
Practical learnings:
Try to resolve the matter with the applicant and incumbent strata manager before going down the path of writing a formal response. Your ability to do this will be influenced by whether the applicant is willing to resolve the issue personally.
In this case the incumbent strata manager offered to step down without further conflict but asked that their annual fee for the remaining year be paid out ($3,400). This offer was rejected by the applicant’s lawyers.
Event 2: submitting a formal response to defend the scheme
Implication for owners: Deciding on whether to defend the allegations yourself.
This Committee's formal response was just under 1,000 pages long, including appendices, and was prepared over several weeks. It cost just under $1,000 to print, copy, bind and serve. There was no legal representation for the scheme.
Practical learnings:
If the matter goes to a formal hearing it is likely that what is said on the day will be the basis of the NCAT determination. The time you spend preparing a 1,000-page submission can be heavily discounted. This is because the Tribunal Member might only be allocated 40 minutes to hear your argument and 40 minutes to make a determination and will be relying on what is said on the day. Therefore, affidavits and other formal evidence are more likely to be overlooked if you are not legally trained or represented.
Event 3: attending the NCAT hearing
Implication for owners: Deciding on whether to attend.
A member of this Committee attended the Tribunal hearing without any legal representation and the process took 4 hours. Attempts were made to have the choice of CM ‘market assessed’ but this was refused.
Practical learnings:
Any new material you want the Tribunal Member to consider on the day, such as alternative quotes for the CM, is likely to be dismissed. So that some market assessment can be considered in the Tribunal Member's decision, always get quotes and supporting documentation from other strata agents and submit as part of your formal response.
In this case the applicant's preferred CM was $6,500 per annum and other quotes were $2,500 per annum. Also, if the applicant is legally represented, then as a minimum make sure you are legally represented for the hearing or have some legal training at your side.
Event 4: a general meeting occurs that does not require your involvement
Implication for owners: Strata Committee appointments revoked.
This is likely to be the first course of action of the CM. From here on you are entirely reliant on the decisions of one person, with no prior knowledge of the property, to make all decisions regarding the property.
Practical learnings:
Although owners lose all control of decisions regarding the property, the CM still has a fiduciary duty to act in the best interests of the owners corporation. This means the CM is obligated to make decisions that are conducive to how the owners would act. However, this is a difficult role when there is no prior knowledge of the building and its history. Relying on minutes of meetings will only provide a partial picture as liabilities and defects are rarely recorded in minutes. The revoked Committee needs to support the CM and this means more work than usual to bring the CM up to speed.
In this case two members of the revoked Committee briefed the CM on two separate occasions (the CM charged a fee of around $660 for this).
Event 5: your monthly account summary stops coming
Implication for owners: Restrictions on financial information.
If you are used to full access and transparency of all financial information that shows individual transactions, then be prepared for some restriction.
Practical learnings:
Make sure the incumbent strata manager gives you a full set of accounts that you understand at the time of handover. To access detailed information going forward you could be relying on the generosity of the CM, or you will need to pay for access each month like any owner wanting access to records.
In this case, the CM’s generosity waned after 2 months and owners were told they would need to pay to access the detailed accounts each month.
Event 6: your usual service providers change
Implication for owners: Dealing with dismissed service providers.
The knowledge acquired by certain service providers can be essential to the effective management of your building. The CM can dismiss these people and all of that knowledge is lost. Work orders can now be issued without owner involvement.
Practical learnings:
Prepare a hand-over document that details any prior works and a schedule for routine works and planned capital works. That way the CM has the best chance to act in the best interests of the owners corporation. If you have adopted a preventative maintenance philosophy for your property in the past, then this is likely to come to a halt. This is because the CM is not an active owner, has not had time to formulate a maintenance strategy for the building, and will tend to be responsive to the lowest common denominator. The cost of new service providers will tend to be greater.
Event 7: a new service provider is below standard
Implication for owners: Challenging the quality of work delivered by a new service provider.
If you are not happy with a new service provider you may have very little recourse. Since the Committee is revoked the owners are entirely reliant on the CM to challenge its preferred service provider regarding the work undertaken. This may or may not happen.
Practical learnings:
Most CMs will have preferred service providers, and unless by chance they have previously serviced your building and there is a relationship, they aren't necessarily the right choice to pick up routine maintenance work.
In this case, the owners corporation were charged full cost for an incomplete pest service; the owners complained and the service provider agreed to return to site if the CM requested it, but the CM refused to support the complaint. Therefore, include in any hand-over document to the CM a detailed list of the traditional service providers who have a working knowledge of your building.
Event 8: new service providers are not competitively assessed
Implication for owners: Work is undertaken on your building without quotes using redirected funds.
The CM can raise work orders without obtaining competitive quotes. They can also reallocate funds destined for future major works into other repairs that they deem more important, and the rationale for these new important items might not be up for discussion.
Practical learnings:
It is really important that you brief the CM on the priorities in the 10-year Capital Works Plan to avoid funds going into plant and equipment that still has a service life. Writing-off assets before the end of their service life is simply poor management.
In this case the requirement to bring forward by 5 years a $15,000 upgrade on a recently repaired fire alarm panel was done without any competitive quotes and a penalty of $250 was threatened on anyone who did not provide access for this to happen. Requests for competitive quotes were denied by the CM.
Event 9: the need to implement corrective actions
Implication for owners: Being left with a long list of actions after the CM moves on.
The CM does not appear to have any obligation to investigate and correct the errors of the incumbent manager dismissed through the Section 237 orders. The obligation appears to remain with the owners corporation to adopt new processes once things return to normal.
Practical learnings:
Make sure you understand the basis of the NCAT Orders and any supporting documents and agree with the CM what actions are needed.
In this case the financial auditors had stated as part of the NCAT process that the Committee (or CM) needed to confirm the reimbursement of out-of-pocket expenses. The NCAT Orders supported the need for more robust processes concerning reimbursements. Owners asked for this to happen but it was denied and the explanation provided was a preference to preserve the past. Clearly it is in the best interest of the owners corporation to recover any debts and with the sum involved ($78,000) the lack of action appears to be in conflict with any agent’s fiduciary duty to act in the best interest of the owners corporation. Schedule 1 to the Property, Stock and Business Agents Regulation 2014 sets out Rules that a CM and any agent must comply with and Rule 2 refers to fiduciary obligations.
Event 10: Special By-Laws passed for Council Development Applications (DAs)
Implication for owners: Engaging your own engineers to address hazards not considered by the CM.
Owners wishing to get their DA works passed by Special Resolution can do so without any owners voting and with very limited construction details. This means that permission to progress a DA on land owned by the scheme can be flawed and owners have to make new objections to Council to stop the works progressing in a detrimental manner.
Practical learnings:
Be prepared to spend some of your own money on engineers in order to protect your home.
In this case two Special By-Laws were passed for different projects. Firstly, a Special By-Law for a DA to extend Lot 2 required reports from geotechnical, hydraulic, civil and structural engineers. However, the CM only obtained a structural engineer’s report which failed to assess the geotechnical requirements for the foundation design. The limited design causes detrimental impacts on neighbours and blocked the second bathrooms. Secondly, a Special By-Law for a DA by Lot 4 to change the load-bearing structure supporting Lots 2, 4 and 6 which ignored the soil mechanics that had previously failed causing a 7cm collapse beneath a central column. In both cases, owners and neighbours had to call in their own engineers to document the hazards and submit new objections to Woollahra Council after the CM had passed the Special By-Laws.
Event 11: the CM extends their agency duties beyond the 1-year term.
Implication for owners: Engaging a lawyer to remove the CM.
The CM is required to call a general meeting 14 days prior to the end of the CM period. At this meeting the CM must hand over the books and records to the owners corporation. However, because this meeting is still within the CM period you are not entitled to vote on any motions and a CM can re-appoint themselves for another 12 months as a voluntary administrator.
Practical learnings:
Get a lawyer to write to the CM about 1 month prior to the end of their term to ensure that the records are returned.
In this case all owners were instructed in writing that they could not vote and that legislation required that a strata management agency agreement must not be allowed to expire. The outcome was that the CM re-appointed themselves. Without any ability for owners to vote it was a fait accompli. Owners had to call in their own lawyers who used the agendas and minutes of meetings as evidence to remove the CM. Some of the reasons used by the lawyers were based on the following legislation:
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Section 50(1) in the Act does not state that an strata agency agreement cannot expire.
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Section 237 (6) in the Act requires the CM to hand over the books and records to the owners corporation at the end of their term.
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Schedule 1 to the Property, Stock and Business Agents Regulation 2014 and breaches of Rules 1, 3 and 4
The editor has no commercial interest in any of the properties referred to in this article or the agency Advanced Community Management (ACM).