SMs turn against Qld’s pre-sold contracts

Imagine if you bought a new car and you were told you were now contractually obliged to have it serviced by a certain mechanic, on their terms, for the next ten years.

And there’s more. That mechanic could sell the maintenance contract to whomever they liked and, by the way, when the contract was about to run out, you’d be under pressure to renew it to make it easier to sell.

Why? Because the car maker had pre-sold the contract to the mechanic. Crazy, huh? You’d have to be nuts to buy that car.

But what if that wasn’t a $30,000 car but a $900,000 apartment. And that pre-sold contract wasn’t just for 10 years but 25.

That would never fly, you’d think. Except it does fly and continues to flourish in Queensland where nearly a quarter of a million lot owners are burdened by 10 or 25-year management contracts over which they had no say and have zero control.

Over the years, this column has never hesitated to call out what we term the “legalised corruption” of the pre-sale of management rights in Queensland.

Too harsh?  How else would you describe a system – legal in the Sunshine State but forbidden in NSW – where developers can pre-sell 25-year management rights contracts before apartment purchasers have set foot in the block.

Even worse, the unit owners – who ultimately service the contracts and are slugged a premium so the managers can pay off the loans raised to buy them – have no say in their terms.  And if the incumbent caretaker manager choses to on-sell the management rights, the apartment owners have no choice in who the new manager will be.

Depending on the strata “module” – standard (supposedly residential) or accommodation (purportedly holiday rental) – the contracts could be for ten or 25 years respectively.

But the worm is turning north of the Tweed, where the strata managers industry body, hitherto suspiciously silent on this scandal, is demanding radical legal reforms to protect both consumers and the reputation of the strata industry as a whole.

Late last year, Laura Bos, the relatively new general manager of Strata Community Australia (SCA-QLD)  issued a newsletter calling on the Queensland government to instigate reforms that would eventually wipe out the state’s somewhat sordid trade in home owners’ rights (our words, not theirs) while protecting the individuals and businesses that have invested hundreds of millions in this lucrative rort (again, our words).

“Currently property owners in new developments can be saddled with contracts of 25 years for site management services that have been put in place – usually for significant profit – by the developers prior to handing over the body corporate to the first owners,” Ms Bos wrote.

“In some cases, these contracts have required property owners to pay the management rights holder for services that aren’t even needed – such as lift maintenance in a building with no lifts. It’s an increasingly popular way for developers to inflate their bottom line,“ she added.

While accepting that existing contracts could be “grandfathered”, Ms Bos has urged the Queensland government to restrict new contracts to three years, as with strata management contracts, or 10 years, as in NSW (although those terms are also under review south of the border).   

Ms Bos has also called for clearer and enforceable distinctions between accommodation and residential schemes. Why is that an issue?

At the same time as they are marketing the block to long-term residents, some developers currently designate their buildings as “accommodation” (aka holiday let) modules, simply so that they can pre-sell a more lucrative 25-year contract.

The argument against allowing Queensland apartment owners to choose their own caretaker or building managers has long been that they could not be trusted to make the right choices and the resulting poor management would damage the value of all the properties.

This is, of course, poppycock. Contract pre-sales is just another way of putting money in developers’ pockets with no appreciable benefit for home owners.

Ms Bos points out that the issue is almost exclusively a Queensland one: “Of the 250,000 lots under Management Rights Australia-wide, approximately 225,000 of them – 90 per cent – are in Queensland.”

Although the NSW building industry is far from perfect, she points out that it has continued to prosper in the 20 years since similar consumer protections were introduced there.

Good luck to her and SCA-QLD.  Their potential opponents in this battle are only developers and the banks who lend caretakers the money they need to buy expensive contracts.

As for potential investors, you wouldn’t buy anything in Queensland until you’d discovered the terms of any caretaker contract and when it was likely to run out.

This column first appeared in the Australian Financial Review.