It’s been branded the biggest new rort in apartment living: a way of locking unwary new unit owners into expensive long-term contracts to pay for basic services the developer of the building should have provided.
Instead of paying to install the necessary building infrastructure, such as gas, electricity, water, stormwater filtration, heating, airconditioning and internet access, some developers are transferring the costs onto owners via inflated service contracts.
Most states’ strata laws forbid developers from signing contracts committing apartment owners to deals that they haven’t agreed to. However, some developers turn up at the first AGM of a new apartment block with complex contracts for owners to ratify, committing new apartment purchasers to huge long-term payouts for embedded infrastructure that would normally be provided for free.
“It’s like buying a car, and then later discovering that you have to pay extra for the wheels,” says strata lawyer David Bannerman of Bannerman Lawyers, who has been investigating the new practice.
“Those people would assume when they’ve bought an apartment, they’d also have bought the stormwater services, the necessary gas pipes, the cables for the phones … everything you need to live in a new apartment.
“But then they’re presented with these agreements that many of them won’t understand, or realise commit them to huge costs over a long period of time. It can be a way of shifting the cost of the installation from the developers to the new owners by charging them for the service – and the owners are getting shafted in the process.
“Some of the arrangements are appropriate, such as a good embedded electricity network that allows individual metering and can save owners and tenants money, and some are required by council – but more often than not they aren’t, and often the arrangements can amount to a rort.”
Once such contracts have been agreed to by owners at that first meeting, they can be almost impossible to get out of, too.
Some owners corporations have found themselves signed up to paying $6000 per annum for the maintenance of stormwater drains on a 99-year lease – something that might normally cost $2000 a year, being $1000 to change the filter annually and four quarterly cleans at $250 each. Instead, the $4000 extra they’re paying a year is the payback to build the system.
Others have ended up paying $5 per lot per month for 99 years for the single cable that was installed to give them access to phones and Foxtel.
Urban Taskforce Australia chief executive Chris Johnson, who represents developers, said such practices would be a concern, with apartment buyers not necessarily aware of what was happening and would simply assume that such contracts were normal.
“My feeling on this is that there needs to be transparency in the negotiations and sales between developers and buyers,” he said. “Fair Trading or some such body should make sure there aren’t these kind of loopholes and there needs to be continual tweaking [of the law] to pick up on these sorts of issues.
“Above all, dealings need to be transparent and there should be some sort of clause in contracts to make sure of the full disclosure of what’s happening in these areas.”
But there are reports that this is happening more and more frequently across Sydney as the market for new apartments softens and developers’ profit margins are squeezed. The unsuspecting buyer can then end up the loser.
“Strata schemes can be extremely vulnerable when exposed to these kinds of practices,” says David Sachs, principal of legal firm Sachs Gerace Broome. “The ways these kind of things can be done are far more sophisticated then the legislation can cope with; it’s way behind what developers may do.
“It’s the transfer of an expense from a developer to an owner, and owners can find themselves taking on a responsibility that may not be disclosed at all, or completely inadequately disclosed, and then they are stuck with it. Even with something as basic as a Netflix contract, how many intelligent people struggle to understand what they’re signing up to?”
Many strata managers are also struggling in the face of this new trend. The retailers of such services tell developers they’ll install infrastructure for free – as long as owners then agree to pay exorbitant service fees. And often strata managers, who are hired by the developers to be at that first AGM of new owners where contracts are agreed to, are unable to speak out on owners’ behalf, or warn them, against agreeing to the contracts.
“Strata managers are in an invidious position,” said one industry principal, who asked not to be named. “If we refuse to push these contracts through at the first AGM, the developers will just use strata managers who will.
“As the market softens and developers’ profits are squeezed, we’re going to see it happening more and more.”
Chris Duggan, Strata Community Australia president, says it’s an emerging trend that’s occurring across a whole range of infrastructure services. He says he encourages strata managers to remain “as agnostic as they can” with the owners, and encourage them to take independent legal advice and have the operator of the infrastructure network in to speak to them.
“It is really challenging,” Mr Duggan says. “It is very difficult to consider any other alternative to an embedded network because it’s already in-situ at that point in time. It can be hard to determine if the clauses in the contract are detrimental.”
He has seen some embedded networks, over time, that work well for owners, like electricity, gas or water systems that enable individual billing and can save people money through buying in bulk and sharing the savings. But he’s also seen some “ugly” ones like those that charge apartment owners for stormwater drains.
“You’d ordinarily expect them to be provided, but the cost is being transferred to the owners corporation as long-term maintenance contracts,” he says. “Or you’ll see other services being provided for what you might consider attractive rates for individual lots but then unattractive rates for common property, so you’re getting stung that way. It’s a worry.”
The Property Council of Australia, which also represents developers, said its work on embedded networks had been focused only on electricity network issues.
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