Developers under fire for selling off management rights in 25-year deals

Thousands of unsuspecting apartment owners have found themselves tied to costly 25-year deals, with developers pocketing the profits. But change could be on the way. Read our special report.

DEVELOPERS are selling off contracts for caretakers to manage Gold Coast unit blocks before residents move in – tying owners into controversial deals of up to 25 years.

A lucrative industry has sprung up trading management rights, which frequently change hands for millions.

Owner advocates say they are “golden handcuffs” for bodies corporate, who find it nearly impossible to terminate agreements when building managers do a poor job. But the industry insists the long deals help lower costs.

In advertisements promoting management rights deals, property agents frequently stress the long contract terms and minimal work required.

“Brand new 25-year agreements,” read one for a Gold Coast unit block, where the rights were on sale for almost $1 million.

“Construction almost completed. Body corporate salary of $99,600. No set office hours and no requirement to live on-site.”

Owners claim the result is often poorly maintained buildings, with caretakers who are rarely seen.

“I’m paying astronomical $4000 a year (body corporate fees) and getting nothing much from management,” one said. “The on site manager is rarely here as he runs other businesses while he takes in $120,000 a year for virtually nothing.”

Another said they had “yet to experience a caretaker that does the job they are paid to do.”

“The problem is they know that they cannot be terminated,” the unit owner said. “They take advantage of the situation. The committee and body corporate managers end up doing most of the things they are tasked to do, costing lot owners even more money in fees.”

Grace Lawyers partner Jason Carlson.

‘INCREDIBLY DIFFICULT’ TO TERMINATE

A survey by Australian Apartment Advocacy found 57 per cent of Queensland unit owners reported they had a dispute with their caretakers.

But Grace Lawyers partner Jason Carlson said it was “incredibly difficult” for bodies corporate to terminate management rights contracts, with the likelihood they would face expensive legal action if they tried.

“These long-term contracts are only possible because developers put them in place when they have complete control. They’re another source of profit on a development,” Mr Carlson said.

“When the legislation allows developers to sell management rights for hundreds of thousands if not millions of dollars, it gives caretakers a million reasons to litigate if there are concerns over their performance.”

Trevor Rawnsley, CEO of the Australian Resident Accommodation Managers’ Association (ARAMA), disagreed that contracts are hard to terminate, and said in any case, the majority of bodies corporate were happy with the services provided.

“Our evidence shows that body corporates are happy,” he said. “On 85 per cent of occasions when extensions or top-ups (to contracts) are sought, they’re granted.”

Mr Carslon said figures which emerged in a recent case showed one building manager on a ten-year contract was operating on a profit margin of close to fifty per cent.

However Mr Rawnsley said long-term contracts could help keep costs under control.

“Contracts of up to 25 years are in the best interests of the scheme, because it enables the management company to carry out their duties in a cost-effective way, knowing that they have more certainty,” Mr Rawnsley said.

“What we say to people in a scheme who think that their agreement is not fit for purpose is go to market and test it against service providers who would otherwise provide those services.

“On 87 per cent of occasions they’ve been proved to be cheaper, to get more things done for less money, than outside contractors.”

Australian Apartment Advocacy CEO Samantha Reece.

AN ‘ANTIQUATED’ SYSTEM

The management rights industry emerged on the Gold Coast in the 1960s as an efficient way of maintaining holiday lettings.

It has since extended to developments designed for long-term residents, even including suburban townhouse schemes.

Prominent Management Rights brokers ResortBrokers, in a report released earlier this year, said “off the plan” opportunities sold by developers “over the past five years have developed into the most sought-after management rights type”.

Australian Apartment Advocacy CEO Samantha Reece said the changes showed the system was “antiquated” and needed to be changed.

“The whole idea was from when you predominantly had short-term leasing in the apartment complex, especially here on the Gold Coast,” Ms Reece said.

“... The system is outdated, it’s antiquated and it certainly does not favour the owner or the consumer. And if developers actually have to rely on the sale of management rights to make any kind of profit, then they shouldn’t be in the business in the first instance.”

Strata Community Association QLD General Manager Laura Bos. Picture: AAP image/David Clark.

CALLS FOR CHANGE

Reform of the industry is being considered by the state government’s Community Titles Legislation Working Group.

In New South Wales, developers can’t issue management rights for periods that extend beyond a body corporate’s first AGM, while any subsequent contracts are limited to ten years.

The effect is to greatly limit the industry in NSW, with one prominent broker admitting it “is nowhere near as prevalent as it is in Queensland”.

Strata Community Association QLD General Manager Laura Bos said the organisation would like to see similar provisions in Queensland law to stop management rights contracts being like “golden handcuffs” for bodies corporate.

“Management contracts in the right context and for the right terms are a wonderful thing,” Ms Bos said.

“... But it was designed for short-term letting.

“If a residential unit said we think having an on-site manager would be good for us, that’s all well and good, as long as it’s determined by the body corporate under a fair vote and under fair contract terms, so that if it doesn’t work out that as with any other service agreement they can walk away.”

ResortBrokers director Alex Cook said reducing terms is “not the answer” to rare issues with bad managers.

“ResortBrokers acknowledges in a small minority of cases a scheme can be lumbered with a bad manager and that it can sometimes be hard to get rid of them,” Mr Cook said.

“There are myriad legislative changes that can be made to resolve this issue but reducing term is not the answer and likely to worsen the quality and value of the caretaking service.”

Mr Cook said developers were required to disclose management rights agreements before any sale takes place, meaning it was wrong to suggest anything underhand was occurring.

“This means disclosing full caretaking and letting agreements including full schedule of duties, the caretaking salary and the term of the agreements,” Mr Cook said. “If any changes are made before settlement, this amounts to material change and purchasers can terminate.”

UDIA QLD CEO Kirsty Chessher-Brown also urged caution.

“Any significant change to current arrangements may have potential ramifications for (our) members and in turn the delivery of a consistent pipeline of product to market, further exacerbating the ongoing rental affordability crisis,” she said in a message to members.

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Originally published as Developers under fire for selling off management rights in 25-year deals