4 trends to leverage in your 2022 investing journey
After a year of staggering price growth across Australia, many investors might be wondering: where do we go from here? ...
This episode in the Smart Property Investment studio, host Phil Tarrant is joined by lawyers Ian McKnight and James Nickless to discuss the ins and outs of strata.
In this special episode of The Smart Property Investment Show, our guests explain the rules behind strata, the politics involved with the owners' corporation as well as their tips and tricks to ensuring buyers receive the right advice at the right time.
All of this and much, much more on this episode of The Smart Property Investment Show.
Tune in now!
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Welcome to the Smart Property Investment Show, with your host Phil Tarrant.
Phil: Good day everyone. Welcome to the Smart Property Investment show. It's Phil Tarrant here. Thanks for tuning in. I'm flying solo today. The reason why is, I've got two guests in the studio, so three is good, four is a crowd. I wanted to keep this podcast quite lean and tight. It could go five minutes this podcast or go an hour, we don't know and one of the reasons why is, today we're going to talk about strataring. Everyone's favourite topic.
For a lot of property investors, strataring might be something that they never really get any exposure to. They might be buying a house and land packages or they might be buying established dwellings that doesn't really have a strata component but for a lot of investors, their experience or exposure to strataring, will be on a body corporate of some sort, where you own a apartment or a unit or a townhouse in a particular area, on a particular title and you'll be involved in the strata associated with it.
It ebbs and flows for everyone. Today, what I really want to chat about is, the opportunities ... A couple of things, the opportunities for budding developers to look at the potential in strataring properties. You might be lucky enough or fortunate enough to pick up a two, three, four, five property dwelling establishment. Today, it might get a bit heavy. It might get a little bit too much legalese for a lot of you guys because I have two lawyers in the studio, so don't hold that against them straight away. I didn't.
I've got James Nickless and I've got Ian McKnight in the studio. How you're going guys?
Ian: Pretty well, thanks. Good to be here.
Phil: That's good. You guys are from CK Strata, so this is a relatively new division of an established law firm, is that right Ian?
Ian: Yes, that's correct in actual fact. CK, ClarkeKann Lawyers have been around for a long time but having regard to what's happening in the strata area, it was thought by the firm, that they should have a discreet or niche area, in which strata could be practiced.
Phil: Observation wise, you're probably at the back end of ... Not the back end but towards quite established in your career and James, you're probably a lot newer to your career. You guys have joined forces in CK Strata, to deliver I guess, strata services or strata consultation or strata stuff around it.
Ian: That's exactly right. That's right.
Phil: I'm also with you Ian, how has the world of strata changed over the course of your career?
Ian: Quite dramatically. When I first started in the area, some well decades ago, let's admit it, you were concerned with buildings that were essentially top story, three stories. Now of course, you can go up as far as 90 stories and you can get all these permutations. Stratas within stratas almost. Various bits of the building, hived off to one owner. All sorts of variations.
You've got a community title regime now, that's a sub-division in the horizontal plane. Strata of course, is concerned with sub-division in the vertical plane, so it's changed quite dramatically and even more dramatically, the government just recently, New South Wales has introduced two new acts, which have updated what had been, I suppose, the practice for some 20 years.
Phil: Just for our listeners that aren't really familiar with strataring or what strata is, can you just give us a quick brief –
Ian: Non legalistic burst.
Phil: Just on that basis and before we go any further, I just want to remind our listeners that this is just a general chat around strataring today. Obviously, it can be quite technical, strata, so we're going to have just a generic chat around what it is and how it works and hopefully can help frame the way in which you might be approaching strata moving forward.
My advice would be to speak to the relevant professional, if you really want to pursue this. Ian, as about to say, can get quite technical, no doubt.
Ian: It is and it's probably best put simply and that is this, that if you own a freestanding house, obviously you've got what's called a Torrens Title property. Strata is a little different in as much, it's still Torrens Title but in a sense, you only own the air space. You own air space within a building and other owners own bits of air space as well. You've got this entity called a body corporate or owners’ corporation, which basically manages the building.
Owners I suppose, take the advantage of living collectively. They've got the benefit of this thing called an owners corporation, to look after the building maintenance, insurance, fire services, management, all of those sorts of things. Owners I suppose are trading off in one sense. They lose some degree of independence because they've got to work with a whole lot of other owners.
But they've got the benefit of course of, the ability of everyone to work together for specific end maintenance of the building, upgrading where necessarily, general ease of living.
Phil: Our conversation today is going to be mainly around residential strata but is the basic principle or premise the same, irrespective whether it's residential or commercial?
Ian: Yes, it is.
Phil: Okay, so you can assume that what we're talking about here, is relevant to both and if you're looking at commercial property on a strata basis, that the same principles will apply. It's just some of the nuances will be different and therefore, you probably need some reasonable advice around it.
Ian: That's exactly right. I suppose how you would differentiate it is, that the rules can be slightly different. You've got as I said, the owners corporation responsible for the management of the building. It has to comply obviously with the legislation. We won't go through all of that because as you said, that can be a little technical but you've got these rules for the day-to-day operation of the building.
They're called by-laws and these by-laws relating in a residential situation. They can relate to pets or parking, garbage. Now in a commercial block, the rules would be slightly different. Obviously they're not concerned about pets. They're no doubt still concerned about parking and garbage. Hanging washing out on balconies is obviously something not relevant to commercial stratas but hey, it certainly is in relation to residential strata. They're the essential differences, if I can simplify it.
Phil: James, how did you end up becoming a lawyer that specialises in strata and I guess, also litigation?
James: A bit by default actually. I started off my career as a litigator on the Gold Coast. To cut a long story short, about 80% of the litigation on the Gold Coast is strata related because ...
Phil: Surprise, surprise.
James: Yeah. It's one of those strata capitals. After fighting it for many years and doing a wide range of different types of litigation, I ended up coming to the realisation that I'd actually over the course of that 10 year period, become a bit of a specialist in this area and although it seems like a rather sort of short time to specialise, it's the type of thing that there's so many recurrent themes that run through strata. There's various stakeholders that have similar type of interests.
In Queensland, we'll have the building itself made up of the body corporate and its lot owners. Then there'll be an onsite manager or resident unit manager, who operates the management rights. You've got the body corporate manager, that does the administrative services and what I found after 10 years of doing a lot of litigation, was to say, "Well hang on, surely on the front end of these things, we can do things a little bit better, to stop having to mop up all of these fights at the back end of things."
That was probably wishful thinking because I think, they are a complex little beast and I think aptly kind of described the fourth tier of government. People are probably used to the local councils telling them what to do. When you enter into a strata environment, you've also got the body corporate telling you what to do but similarly to government, the body corporate or the owners corporation in New South Wales, is simply a body that all of the lot owners are a part of.
They elect a committee and that committee can make certain decisions and the general meeting makes other decisions. I think one of the key challenges for people when they come into a strata environment, from that standalone, detached dwelling, is this concept of, the body corporate or the owners’ corporation is doing things to me. What they don't get is, it's part of this political process that they can become a part of and they can start to gain some influence and they can get some traction.
There's a few technical issues around powers of attorney and other things, where people can get what is a very legal but almost unfair advantage, by using the rules of how these things operate, in order to get the outcomes that they want, rather than going to court.
Phil: This is the way I see the world. To summarise, the strata is pretty much the rules that govern what happens within a complex of a property. For example, so there's 20 units, it's the rules that govern everything that happens associated with them. That means every single person has a role to play, as belonging to that strata. One of those roles will be paying your money into sinking funds and levies and stuff, so the building can operate and continue to do what it needs to do.
When you look at strata and most people's perception around strata is that, strata becomes an issue when there's a problem and there's often problems because people being people, people create problems and typically it's a difference in perception of how something should be or look. Someone not behaving properly. Someone doing something that's wrecking their living environment and it goes onwards and onwards and onwards. Some people have different objectives in investing in strata.
They might want to try and create some capital growth, for some renovations or some developments which are associated with it. Then other people who probably can't afford, they can't do it. Strata is important because it helps give the rules around conflict, I guess in many ways. People who are property investors, myself included, what can I do better do you think, to be a better citizen of a strata?
James: It probably starts with really strong due diligence prior to acquisition. In New South Wales, things are even more complicated and I'll let Ian discuss this a bit later but we've got a few different varieties of strata in Queensland because the legislation's kind of evolved over time and now we've got a few different acts that kind of sit next to each other. When you get permutations of things, like you might have a mixed use development, that's retailed down the bottom, that you might have some apartments, that are all just holiday let and some that are owner occupied.
A unit looks like a unit, looks like a unit, whether you're in Singapore, New York, Dubai or here and people can quite easily understand that, "Okay, I'm buying a unit," and they get what that means from a property perspective but when the set of legal rights that flow with that, are vastly different in New South Wales to Queensland and then when you look at the overseas example but then even within New South Wales, there's some company title, there's some community association.
In Queensland, we have some schemes that are operated under some legislation. Some that are under their own legislation as the integrated resort. Understanding what it is that you're buying, before you get in there, is probably the first place to start. Rather than just looking at it in terms of financial return, if it stacks up, then look at it from the legal point of view and go, "Well okay, what is this unit comprised of? Is it part of a mixed use scheme?
Is it part of a layered scheme where, I'll be not only contributing to my own body corporate but also to the principal body corporate and the primary thoroughfare and secondary thoroughfare and how does that all hang together?" In some places like Hope Island or Sanctuary Cave on the Gold Coast, there will be even within that scheme, multiple schemes that they've all sitting next to each other like lot owners within the master scheme and then the principal body corporate telling all those guys what to do.
There's a lot of regulation within a very short period of time, for those guys. I'd say first point of call, has got to be that thorough due diligence that’s worth, and on defect rectification as well, making sure they get an engineer to go through the scheme because ultimately that scheme land, is what they're inheriting as a buyer and they've got strict liability in relation to it. If it fails, they are responsible. Even if they've got a builder to chase, it's pay now, fight later.
Phil: It's obviously incumbent on the purchaser to actually understand what they're buying into. Is that something their conveyancer would help them with or is that a little bit beyond the typical skills or capabilities of a conveyancer?
James: The answer to that, is probably no. Conveyancing has become a bit of a race to the bottom of fees and so, a lot of the time, you might be buying a million dollar apartment but you'll go with the $500 conveyancer, rather than go to a solicitor and get the full sort of advice. The other thing is and when I first started my career back when I was an article clerk, I used to do a bit of residential conveyancing and you'd give them the list of all the different searches that they could do, then they just tick the usual ones and come back.
There's probably from my mind, a greater role for real estate agents to play in this space, to fully impart to people why these things are necessarily and important. I think that if real estate agents don't either understand the product well themselves or they're just not translating that, then the problem is, by the time it gets to the conveyancer, the buyers already sort of emotionally invested and they're saying, "well, let's just go to a cheap conveyancer and get this run through." So, I guess it's a double edged thing.
Yes, it's available for them but they'll pay more for it and they may need a specialist to give them advice in relation to some aspects, of what those searches show.
Phil: Do you find yourself more involved at the back end, when there's litigation around this type of issue, rather than seeing people be proactive and try and seek your advice beforehand, which I imagine you would recommend?
James: Very much so. We are usually the "after the fact" solution and a large part of what I do is, dealing with building defects in buildings. Trying to find ways other than litigation, which is the ultimate, if you must go there, but we've had some poor decisions in the high court that have made life a bit difficult for bodies corporate in that regard, but usually it's a situation that, the schemes coming to us saying, "We've got this problem. How do we now unscramble the eggs?"
Proactivity would be great to see in this industry because I think, there's a lot of people who go into it with all the best intentions in the world but because it is so complex, you can't just take your standard detached dwelling glasses and look at strata in that way. There's just so many hidden costs and hidden risks, so we're usually dealing with the fights that come out the back end.
Phil: Yeah. You've probably seen it all as well, Ian, over your experience. I imagine a lot of people, when they think of strata, they think about the financing or the purchasing opportunity for them. It's a bit of an afterthought and we've just spoken about the need to be proactive about it but when you get to the back end of it, when you're trying to de-tangle a strata issue, it puts a lot of emotional toll and stress on people, if they get to that point.
I think a lot of people don't think about the hassle and the trauma, that going through a legal process can put on yourself or a relationship or your health or anything like this. Have you seen this happen in the past?
Ian: Oh, absolutely. There is one thing that I would add and James has made the very good point about, people should make themselves very aware of what they're buying into, but I'd add something else to that and that is this: that they need to understand how this owners’ corporation functions. I said earlier that, the owners’ corporation is responsible in effect, for the administration or management of the building – arranging maintenance, insurance – all those sorts of things.
It can only do that through the vehicle of a meeting and it's really important that owners when they buy into a strata situation, understand that. It's unlike a situation where you and I for instance, can make decisions about painting our house, if we live in a standalone house. We can just go off, being natural people and make that decision. An owners’ corporation's quite different. It can only do so through the vehicle of a meeting. It's a bit like a company and operating through a board of directors or in general meeting.
So it is in a strata situation. In relation to the comments that James made, yes, absolutely spot on but it's also important for people to understand the vehicle of meetings and what they do. Their proper regulation notices, minutes, all those sorts of things. To come to your specific point about disputations, yes, all these things should be gone through at a meeting, which proper notice is given, proper discussion.
There should be I suppose full transparency given and that can take the form of documents being annexed to the notice paper or even bringing in people who know something about the dispute. If it's a defects problem that James has spoken about, you might get an engineer in. You might even get a lawyer in. If it's an issue surrounding the accounts or something, you might get an auditor or accountant in and deal with it like that.
The issue about emotional stress is a high one because people often get like that because they don't know how to handle it. What are they looking for? They haven't got any direction. It's really important that they understand that, in the manner that I've suggested and James has suggested as well. A lot of the disputation can be reduced, if the emotion is taken out because once you start to bring in people's feelings and their concerns, emotions, it can spin out of control. Yes, they do lost control and I've seen that very situation.
In fact, I gave some advice just before I came over this afternoon, to a client, who's got a major issue involving trees, as a matter of fact. Now this is really important to her and I said, "Well basically, there are two ways you can deal with this." I said, "You can pretend your life is like a room and you spread your dispute out and you've got all the papers lined out and tables right through the room and when you need to deal with a particular aspect, you just walk over to the table and pick up a piece of paper."
"That's way one. Way two is, to put all the papers in a box and when you need to deal with some aspect, you get the box out of the cupboard, put them on the table. Then look at it. When you're finished, put them back and put them in the cupboard and I say, way two is the way to do it." I know that's very difficult for people because obviously it effects amenity of life, maybe their financial situation but those two ways, way two, option two that I've just described, is certainly the way that I'd be recommending.
Do away with emotion because people become very distracted and warped in their thinking.
Phil: That's the way I deal with most things. It's just compartmentalized it and don't, when it's an issue, think about it and worry about it. If it's not, don't worry about it.
Ian: I say to clients, I think if worry was going to help you and stressing out would help, then yeah, please do it. Absolutely, bring it on but unfortunately, it's not.
Phil: You're right. So if you own a property and let's use an example, if you own a property in a 10 year old development of 20 units, if you don't sit on the committee, so the strata committee, in terms of your access to anything associated with the strata and the running of the strata and the performance of the strata, everything should be available to you whenever you want it. You shouldn't be restricted from looking at anything within...?
Ian: That's correct. You've got a right, as a matter of law, to have access to documents.
Phil: In terms of regular meetings and they happen on a different basis, depending on the nature of the strata, can anyone who owns property in that same complex attend a meeting, even though they might not have voting rights? Can anyone attend and go to it?
Ian: An owner has a full right to attend a meeting. They can do so personally or they can do by way of what we call a proxy. That is, they appoint someone else to go on their behalf. Yes, they've got a full right to attend and provided they've paid all their levies, they've got a right to vote.
Phil: That's good. Someone who feels as though they might be blocked out of joining the committee for whatever reasons – political, emotional, personality, what's your recommendation to someone who feels like they want greater involvement in a strata but they can't actually get onto a committee, to help steer the issues or the attentions or the objectives of the strata? Anything in particular?
Ian: James made the very good point earlier, about strata being like a fourth tier of government and so, the stratas can become very political. You're quite right, I mean, it may well be that there are a bunch of owners that want to stick together and it's a bit like the old mate's club. They all get on the committee and they vote out someone who'd probably be able to make a very valuable contribution but unfortunately, hasn't worked that way.
The person that stands maybe for election and they're not elected, then obviously they should maintain a very high interest in the scheme, how it operates. Get the minutes, get the notices, etc. and maybe go along to meetings but above all, not be dysfunctional. Not appear at a meeting or start writing your 30 and 40 emails a day. That's not going to cut it because that will alienate people very, very quickly.
You've always got to, even though you may not feel like it, adopt a very…dare I say, approach that is conducive and supportive, rather than being the dysfunctional person out on the limb.
Phil: Do you ever find yourself acting for those people and just trying to manage and influence the way in which they could probably get greater effectiveness out of their strata relationship? What would be those couple of points, other than just going, remember these people are just people and don't be a ...?
Ian: James is the litigator and I'm sure he'll be able to give greater insight than I but I'll start by saying this that, of course you say to people, "Adopt a positive attitude. Don't go in with the view of tearing the building down. Go in with a very positive attitude. Maybe a strategy, a plan. It may not be a very good plan or a good strategy but at least, have something that you can put to people and say, "Well, this is what I think."
Sort of try and manoeuvre the way that ... Manoeuvre these other people into a position. James as a litigator, a property person, I'm sure would be able to add to that.
James: I always encourage them to use the…political process that's available to them. Whilst it's a volunteer position, they should run a campaign similar to, you don't have our politicians or we've just had the elections in America. They don't come out at the start and go, "Vote for me. Thanks very much," and you don't hear from them for three months. They've actually got to decide to be a political figure within their scheme.
To stand for something. To garner support from other lot owners, that are feeling similar to the. As Ian said before, the worst they can be is that kook out there on the left that nobody kind of agrees with. If they happen to live on site, drop in. Have cups of tea with people. Get to know people. Get to float the idea and then beyond that, it becomes also a bit of crisis management or conflict coaching, where we'll sit out of matters in the visible sense and just say, "Well look, leave us in the background."
"You be seen to be working but this is what to say and this is what to avoid saying," because sometimes just the mere injection of a lawyer into the situation can by like nitro glycerine hitting the floor. There's times that we show ourselves and times when we just stay in the background. Because stratas one of those rare areas where, you can end up in a fight, where the other side is spending part of your money and where you all live together.
We've had disputes in the past where, the parties who are the main combatants in the dispute, park within five metres of each other and live within 10 metres of each other and have to see each other all the time. Their kids have been friends at school and how do you deal with all of this stuff? My view is, use the political process as much as possible and as you eluded to before, there are little tricks and traps.
In Queensland, at the moment, we won a case a few months ago, for Willahra Towers, which was a matter about whether there was any limit placed on how many powers of attorney that you can hold. Ian talked before about proxies. If I want to appoint proxies, there's a limit to that, so I can't just stack the vote in my favour but there's a little anomaly that with powers of attorney, there is no such limit.
If you could garner enough support of enough people, you could actually stack the vote in your favour and we had a management rights matter, where we were acting for the owner of the management rights. Instead of topping up the agreement, where you're limited to five years, we varied the agreement and got her an extra 25 years and she got powers of attorney from several people, just to make sure the vote went her way. Totally legal and she was able to use that political process to maximize the outcome.
She walked away with over a million dollars profit out of that deal. Not bad for a couple of years’ worth of work. There are ways to do it. I think if they can get savvy on what the rules are, what the process is and find where some of those shortcuts are, all of which are legal, then they're not going to win the battle and lose the war, only to get something over on the meeting, get dragged into the tribunal and have it overturned the next day.
Phil: What I would take out of this quick dialogue is that, offence is zero sum game. If you win a petty little battle over, whether or not a plant pot should sit onto the left hand side of the door or the right hand side of the door, you can cause a lot of damage in the process. You need to understand what battles are worth fighting and what is the consequence of fighting those battles.
I guess the end game for most people is that, if you're not happy with the strata, sell the property and move. You've always got that option but how would you coach people, in terms of framing ... When to actually appoint or seek professional guidance, guys like yourself and when do I just cop it on the chin and go, "It's just now worth my time"? The rules of engagement are quite hard.
Ian: Yeah. It's a good question actually and it comes back to this, just taking up a point I made earlier and James eluded to it, why would somebody want to vote against what you want? Understand their position. It may well be, as you've just said, the pot's on the left hand side. It may well be that the door doesn't open properly, by the pot being on the left hand side. Indeed, if you put it on the right hand side, everyone may be thrilled to the back teeth.
It's a case of at the end of the day, do you want to die on the ditch over this issue? Is it worth that? It may well be that it just simply isn't and you're right, they may just have to make a very commercial decision and say, "Well look, everyone in this scheme is mad. I'm the only sane one here. I need to move to a building where all the other people are sane, unlike this one." It's a case of strategising a little bit.
If you can't bring people with you, with reasoned debate and what have you, then it maybe you've got to go another route. But when do you seek advice? As I mentioned earlier, there may well be things on the agenda of a meeting that call for somebody to come in. You can say to the committee, "I've got this proposal about putting on an extra floor of the building, so we can sell it off and get a little bit more money, to help maintain the building."
"I've got this quantity surveyor who's able to come along. I've got an architect and I've got an engineer and he will give some advice. Each of these people can speak for 10 minutes." It may well be in James's area. We've got for instance, all these building defects and you'd have someone like James along, to talk about the legal process.
Phil: You guys do that sort of stuff? You would go out and speak to body corporates on an education perspective but also to look at potential disputes or implications of particular decisions and help steer them along the way, is that a very proactive path? When do you find people want to talk to you on that basis and normally you've got a savvy person on a committee just goes, "Look, just get a lawyer in and get it sorted out"?
James: Yeah, that's often the case. I mean, the strata managers are usually the conduit through which that happens. Ian and I have a network of hundreds of strata managers who know us and other lawyers and other professionals, like engineers. Usually they're the ones to and the committees tend to rely fairly heavily on their expertise. They don't try and answer the question themselves. They try to identify who the respective people are to come in and answer that.
Because of the industry being the way that it is, it's quite funnily enough, as much as we're talking about it from the lot owners point of view, that it can a fairly sort of adversarial little industry, from the service provision side, it's the same old players. It's actually quite a collegiate industry, from the lawyer, accountant, engineer, body corporate manager point of view. They quite often will have industry events, where everyone just forgets which colour they fly during the day and just gets along and talks about advancing the industry more broadly.
You guys have just had sweeping legis that have changed. We're at the process of fighting for some legislative change at the moment and seeing all of the very service providers come together, to give of their time, to try to help government make some smart decisions, in how they change the legislation. Then also provide education onto committees and lot owners. It's something that is really inherently part of the job in strata – that we don't bill for absolutely everything we do.
You just couldn't, because there's certain parts at the beginning and the end of the engagement, that are just relationship builders, that are just part of that education process. Our hope is that the schemes that we work with get smarter and more capable over time. Today's problems are, "Gee, how do we deal with the leaky walls?" Then once they've moved passed that, it starts to become, "Okay, how do we maximise some of these benefits?"
"How do we look to redevelop and everybody make money, rather than one hold out making a lot, while everyone else doesn't?" Those types of things.
Phil: I want to get onto the development aspect of strata but before I do and I've had experience with this, how do you know if your body corporate management company is doing a good job because not all of them are created equal? What are those things you really should be looking for, to make sure that they're running your body corporate in the best interests of the owners?
James: Yeah, certainly. The agreements are fairly standard across most of the management companies, but the devils' really in the detail. There's companies out there that try and provide a bit of a financial examination of what the different managers may look like but generally, there's the agreed services fee, which is holding your annual general meeting and dealing with correspondence and a few things that they can, at the start of the year, anticipate that they're going to have to do.
Then there's the schedule B fees, which are just reactive, "So this has happened and now we're going to have spent time on it." In one way, it's impossible to know exactly what it's going to cost. So I think people need to then start thinking about it in terms of value. If all they're getting is a mail handling and meeting scheduling service, then I'd say they're probably with the wrong company because there will be a lot of issues that come up, that they just simply won't be earmarked for the proper advice.
If they've got that value mindset, it may well be that their strata manager is costing them a lot of money but they may be saving the money in other areas. These schemes have to operate bank accounts. They have to engage contractors to do things like painting – that can cost millions of dollars. I've got a matter that I was involved in over the last couple of years, where about a million dollars’ worth of windows went into a scheme that was right on the ocean. It was residential grade ...
And when I say residential, I mean detached single dwelling residential grade glass that went in and it was completely useless. They put a million dollars’ worth of windows in. Then had to rip those out and put a million dollars’ worth of windows in. All of that kind of happened because nobody advised this scheme on the way in, of all the things that they should look for. They picked a cheaper contractor over a more expensive one.
Didn't think about value and lost the entire value of that contract. In terms of the value to look out for, the way in which their individual manager handles meetings, handles people, so there's almost a mediators type role that the body corporate manager will play. The less disputes that are in that building, the less it's going to cost them in having to deal with those disputes.
There might be a lot of stuff going on in the background that they don't see where that manager’s fielding 40 or 50 emails from the nutter out on the left but they're actually insulating the rest of the scheme from the cost and the effort of dealing with that individual. If they're not on top of the basic paperwork of just dealing with the statutory requirements, then they need to be replaced straight away.
I think schemes should also be more proactive in having that value conversation and saying to their strata manager, "Look, we just don't feel like we're getting the value out of you." Some of these bigger companies have multiple portfolios, different mangers that they can swap you around and if people just take it as a given that, “That's how much we're getting charged and that's the end of it”, well then that's the service that they'll get but I think if they're more proactive in seeking out the service they want, then they're more likely to get it.
Phil: Is there a benchmark number, do you think that, body corporates seem to allocate for disputes every year? Is there any sort of number that should be budgeted in this, that's part of any levies or sinking funds towards, "Okay, we're going to need legal representation for these particular things and that should be X percent of our total amount." Is that any industry norms or benchmarks around that?
Ian: Not so much industry norms. What an owners’ corporation's got to do at each annual general meeting is, look at their budget, look at its budget and say, "Okay, we're going to allocate so much for cleaning," or as you've suggested, "So much for engineers or a disputation." If they know something's coming up, for instance they look as if they're going to have to sue the builder, even in an old building that's been renovated in some way.
A roof has been put on, a new roof, it's already starting to show signs of leaking. What the owners’ corporation – and this is again a hallmark of whether the strata manager is on the ball – maybe the strata manager's got some quotes in already to consider engineers fees, all this sort of thing. Goes to a budget, they allocate it. It gets approved and forms part of the levy. You look at what needs to be done over the life of the building, over the next 12 months.
I mean, the government's also mandated a, what was called a ‘sinking fund plan’. It's now called a ‘Capital Works plan’. They look at something ... Look at things that have got to be done in the building, over a 10 year period but things can come up during the course of that time. Again, a proactive strata scheme or an owners’ corporation should be looking at those sorts of things into the future.
Telling the strata manager to help get these bits of information in that…are going to enable the owners to make sensible and informed decisions at meetings. Coming back to the idea about, what makes a good strata manager? The idea is this, I suppose, in business, we all know cash is king. Well in strata, the golden rule is, knowledge is king. If owners can have their manager maybe get quotations, get reports.
They get reports themselves, informed decisions are going to be able to be made and it may well be in getting those sorts of things, budget allocations are made and they shouldn't have to have special levies, extra levies through the year, if they've done their job very thoroughly. Unless of course, something unexpected comes up.
Phil: Interesting. We're running out of time and we're going to fit you guys back on because there are so many different scenarios we want to chat through with you but just to finish up, I'd like your guidance or some insights from you guys on people who want to start developing townhouses. They might get a big block and they might want to put two or three townhouses on a property.
Maybe more, maybe less, but have you got any fundamental essential information that they need to be thinking about, before they embark down that process of, putting strata properties onto a title or often it's just, "Look, just stick a house on it and don't worry about it"? Is there anything to guide them at all? A million things, but yeah.
Ian: In business, it's never a case of, "Don't worry about it." Again, it comes back to that essential rule, knowledge is king. What they need to do of course in starting out, is get the facts. As a very young lawyer, which I was once, some time ago, I was told, "Always get your facts and then you can apply the law later." And so it is in business. If you get all the facts, you can work out what you want to do. Obviously the zoning requirements are crucial. Construction costs are crucial.
What's going to sell there? There's no point in building a unit and you're planning to sell it for $3 million, if you're operating in an area where the best price is only $750,000. All that mix comes into it – discussions with engineers, architects, the local council people. The lawyer, to see how you might title this property. I mentioned earlier that for instance, a strata is a sub-division in the vertical plane.
The community title, we haven't really touched on that but the principles are very much the same, is a sub-division in the horizontal plane. It may well be you can adapt a particular vehicle. It may well be that you're in an area near a station, for instance. You might say, "Oh well ...We could have one of these situations where we could have part of the building for commercial and the other part, residential.” It's again, getting all your facts to the local area, the particular I suppose, constraints that can form part of all of that.
Are we on the side of a hill, where we're going to have apartments that are looking out only to the sea and not looking backwards towards the cemetery at the back there? All of those things which might determine the number of units you could have in there. All of those things are relevant.
James: I think getting the right team around you. So having a good planner….we haven't had time today but there's certain precincts in around Sydney at the moment, that Ian's working with, where as a matter of right, by virtue of the council changing their LEP, they're now able to go up a lot more stories than they were before. So you'd hate to come in, rely on yesterday's information. Do a row of townhouses and find out you could have gone 30 stories high.
You've lost a significant uplift. Getting a good town planner on board, obviously lawyers, engineers and everybody else but the other one that everyone seems to leave out, is the strata manager. The humble strata manager, who's going to be running this after it's in creation. If you get them on board early on and go, "This is what I'm looking at building. Where do you see problems?" They'll say, "Well, parking issues here because I've got a scheme like that, over in North Ryde and this is the issue that they're facing."
Or you know, "You've set this up in a particular way and looking at the way that expenses are going to run through this, that's not quite fair, given that this is how these things operate in existence."
Ian: That's a really good point in actual fact. It can be as simple as things like, the developer’s saying, "Oh, we're going to have the garbage bay over there," and the strata manager can come along and say, "Well hang on, all the trucks to get to that, are going to have to drive through the complex at 04:00 or 05:00 AM. That's going to be rather clever. Maybe we should reposition this." So James's point about the strata manger being involved early is a very, very good one.
Phil: That's good.
James: I think the other thing to them to think about as well is, cash flow and how long is it going to take for sales to happen and things like that. Because one of the unfortunate effects happens, is that when the scheme's created, it has its own legal identity. People can go from being the developer today and this whole scheme is theirs to, the owners corporation or the body corporate comes into existence and then they become a lot owner within that scheme and they've got to pay levies, just like every other lot owner.
They might have it in their head that, "Look, I'll pay everything out on settlement," because that's their mentality, "I've built these things. I'm going to settle them and then everybody gets paid." In the meantime, three or four of the lot owners are saying, "Well hang on, we're contributing towards levies and the developer’s not." I've seen developers go bankrupt ...
Phil: Because of that.
James: Because of that. That's something for them to think about as well. Working in with the new owners early to say, "This is what our timeline for payment is. Whilst technically we are meant to be paying this stuff as we go, we'll keep you informed of sales and we'll be perhaps selling out in a unit and paying that across multiple units, in chunks that's different." That's technically not in compliance with the legislation but if you can get everybody on board, then you know ...
Phil: You can do that. Final question then, if I'm looking to develop. If it's just an idea at the moment. I might be trying to find a particular block, where I know if, I've done my research and actually understand what I can do in a particular area, what the zoning is, etc. When should a developer start engaging someone like what you guys do?
Is it before they start talking to a financier, is it before they start looking at property? Where do you guys sit within that chain from, you start a relationship and you're in a relationship?
James: It's going to sound self-serving but as soon as possible. The reality is that, with financiers, as well with engineers, will take a tag-team approach, so that if you engage us early, it's not that, "Okay, the clock started ticking. I'm just paying these guys for longer." We can provide a plan that says, "Use us now. Sit us out. Then go and talk to your town planner. Go and talk to your engineers. Get us back in, in this process." We've helped developers with site acquisition.
I'm helping a few with crane over-sailing and ground anchor issues with adjoining properties at the moment. There are various key stages, where sometimes they'll, and this is a prime example. Just before I came over here, I was dealing with a matter where, they've gotten so far themselves and now they're starting to have issues with adjoining land owners. They've saved whatever they've saved up till now but I may now find problems with what they've done previously.
At least if they come in early, they can get the full roadmap and then they'll know where the touch points are to get us and others involved.
Ian: Yes, that's right. Early is better and again, as James has said, the lawyer doesn't have to be involved every second of every day. It doesn't work like that. They in effect, provide a strategy, a plan and the client can look at all of that and say, "Well, I can get half way down the road here, just by speaking to X and Y. Then if I run into a problem or indeed I need revision, get the lawyer back at that stage." Similarly with an engineer.
They might not be involved every day of the project as well. Probably more likely to be than the lawyer but the reality is, you assemble your team, as James has said, at the outset. So when you have a problem or you think you've got a problem even, then you've got people on standby and they're ready to respond to whatever the problem may be.
Phil: That's good. Just finally, three things, so our listeners are right across Australia and some of them are having incumbent relationships with a team of people. They might be looking for new relationships. If I'm looking to develop and I'm looking to find myself a firm that can support me in what you guys have outlined, what are those three things they need to be looking for in a firm, to make sure that they're going to be able to service me as well as they possibly can?
James: I'd be looking for a firm that has that end to end approach. There's some firms that are boutique in the property development space but then once the development's up and out of the ground, they don't really do anything from there and there's other firms that do a lot of things like levy recoverment and by-law enforcement and all those sorts of things, on the back end, in the litigious side.
You want a firm that does the whole ambit, so that throughout your whole strata journey, whether that starts as a developer, goes on as a lot owner and might deal with site acquisition in the future, you've got skillsets within that firm, that can handle every single matter. You might have a good relationship with your bank now but then when you've got two or three developments on the go, you need a new financier to get some more money in.
You want a team within that law firm that spends everything from, property development, banking and finance, litigation – the whole show.
Ian: I'd agree with that and I think experience is important too. I mean, no lawyer knows everything and it may well be that, there may be an aspect of a particular matter for which you need to go outside the firm even. I think a good lawyer will admit that. He might need to go to a barrister to get a particular point clarified. He might need to go to a particular expert in another area of the law.
I think we did, James and I did, a little summary of how many acts of parliament are caught up in this strata area and I think we got to over 200. No lawyer can get cross 200 acts, at least not properly or honestly. So it may well be that the experience, while the wide range of the firm is important, again it's a case of knowing who to look for, when to look for them etc, to bring about a complete package.
Phil: That's good. I'll throw in a third point there. I would say that you shouldn't really price shop on lawyers. Just because they're the cheapest, doesn't make them the best. Sometimes you need to pay good money for good advice and that's my experience for lawyers but that's three really good tips for our listeners. I really enjoyed it.
Thanks James, thanks Ian. It's been a good chat. I'm sure we'll get you back on and we can chat about some more strata-orientated stuff and we only just touched the surface. If people want to know more about you guys, how can they find you? Are you online?
James: We are online. Probably the best place to find us is via the ClarkeKann website: www.clarkekann.com.au and we're under the CK Strata section. I'm sure if they just type in "CK Strata," they'll probably –
Phil: They'll probably track you down.
Phil: All right and are you happy to answer questions or anything?
Ian: I think that's part of a service of being a lawyer. It's not just a case of conducting a business, it's providing a service to the community and I'd like to think that there's some old school attitudes still out there.
Phil: Nothing wrong with old school and the thing that goes back to it, a good book and old school communication. Old school, just being a good person, is the best way to get yourself through any strata issues. You don't want to be that crazy lefty out there, sort of yelling and screaming with the world against you because you're only going to end up probably not winning. Just be nice to each other, is how I'll finish it.
It's the best way to run a good strata. Thanks again guys, really appreciate it. Remember to check us out at smartpropertyinvestment.com.au. You can find us on Facebook, LinkedIn, Twitter, Instagram. I think we're all over the place. You can follow me if you like on Twitter @philliptarrant. If you've got any questions for us, please email [email protected]
Anything around strata in particular, happy to take them and I can see if we can pass them onto the guys here. Thanks again for tuning in. We'll see you next week. Bye-bye.