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We Live Here - April 2018

28 Mar 2018

Embedded kickbacks

We Live Here has had a request from the ABC for information about embedded electricity networks.

The broadcaster is investigating an issue arising from electricity companies in strata complexes with embedded networks having difficulties trying to change electricity providers or take over the network.

If your OC, or if you know of any OC that has had trouble changing their electricity contracts, or find that the contracts have been rolled over without realising, or have chosen to pay for the infrastructure to allow the OC to take over the embedded network – please let us know.

OCs might find that the contracts are worded carefully to avoid the word “commission” and importantly, the margin skimmed by the manager is not disclosed. Under the terms of some contracts, managers can claim “commercial confidentiality” to avoid disclosing just how much they make from the electricity account of each occupier.

In a building of 400 apartments, a 10 per cent kickback on electricity could swell your property manager’s account by as much as $500,000 per year, coming out the pockets of owners who often don’t even know about the commission.

The reforms to electricity distribution, due to take effect in 2020, will make it possible for embedded networks to be challenged. This is a long overdue reform. Until then, you may be paying 10 per cent or possibly 20 per cent above the best available rate to cover the commission being paid to your property manager. Have a look at your supply and megawatt rates and compare them.

Owners pay for proxy farmers stitching up lucrative contracts

Owners at two Southbank apartment buildings have recently been left battered and bruised after nasty fights with their property management companies. The owners were out-manipulated and out-voted.

Armed with a swag of proxies gathered from overseas owners, Network Pacific ousted a committee of owners who had questioned the contract performance of subsidiaries in the group.

The ABC’s 7.30 picked up on the ugly stoush, which ended up in VCAT.

It started with the committee of owners cataloguing more than 400 problems with the management of the building – improperly maintained fire extinguishers, poor cleaning and failure to repair damage. There were also serious concerns about how the funds were being spent, given that the contractors were under the effective financial control of the property management group.

The property manager called a special meeting, circulating information to owners that was described on 7.30 as false or defamatory.

Two real estate companies with links to Network Pacific gathered a large number of non-resident proxies and the proxy-holders voted the whistle-blowers off the committee. The property manager-linked contractors were subsequently reappointed for three more years.

The disaffected owners took the matter to VCAT which, unsurprisingly, found no issue with the proxy farming.

Meanwhile, another Southbank building is having similar issues with a property management company.

At a recent AGM hundreds of proxies from non-resident owners were used to oust the critics of their operations. Only four members of the new committee are independent owners, the other eight have connections to the company or its associated companies. Two of the proxy holders – a director and an employee – held more than 85 per cent of the proxies between them. This is an instance of proxy farming at its worst, and could soon become illegal.

One of the options considered by the Department of Consumer Affairs in its recent review of the Owners Corporation Act, with the findings due to be released soon, is to limit the total number of proxies held by one person to no more than 5 per cent!

Across town at a Docklands apartment, a developer’s associate voted to give himself a highly profitable lease on his lot to be used by the owners’ corporation. The 20-year lease was about 20 per cent above the market rate with no option for the OC to terminate.

All three situations have arisen from lucrative management contracts being granted hours before the off-the-plan units are settled, and no doubt are just the tip of the iceberg.

We Live Here calls on the state government to:

  • Limit developer-appointed contracts to 12 months to allow new owners coming in to have some say in how the contracts are awarded;
  • Require that all these management contracts should be disclosed in the section 32 to allow investors to be aware of the costs;
  • Make it mandatory for all relationships between the developer and contractors to be disclosed;
  • Proscribe any person with an interest, shareholding, directorship or association with a property management company from sitting on an owners corporation committee; and
  • Compel all contractors to disclose commissions paid to developers or building managers.

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