NAT: Many strata managers who handle apartments are conflicted: here’s how

This article about how many strata managers are conflicted has been written by Hazel Easthope from UNSW Sydney, Charles Sampford from Griffith University and Hugh Breakey from Griffith University.

Ten of Australia’s leading consumer groups have now written to the federal treasurer calling for an urgent inquiry into Australia’s strata management industry.

The open letter from Choice, the Owners Corporation Network, the Australian Consumers Insurance Lobby and seven other groups follows this week’s ABC Four Corners investigation, showing many apartment owners were being ripped off by their strata management firms.

When the ABC asked property owners about suspicious activities in the industry earlier this year, they were flooded with more than 1,000 separate reports in a fortnight.

The allegations include hidden kickbacks from builders and insurance companies, their hidden ownership of companies with which they deal, and indifference to the needs of the property owners who employ them.

Even for us, some of the allegations were shocking. But many were not – because we had just concluded our own separate investigation into strata management. We found an extraordinary array of ethical tensions in the industry.

So what did we find? And what does our research show us needs to happen next?

After thousands of Australians wrote to the ABC with stories of financial abuse, Four Corners reports on unethical practices hitting apartment owners.

How many people are potentially affected?

An estimated 16% of Australians – four million people – live in strata and community title properties. They own their own residences but share common ownership of shared spaces, including the buildings and grounds.

All strata owners automatically become members of an owners corporation, which is responsible for maintaining and managing the common spaces and usually contracts a strata manager to help with the work.

In practice, individual strata managers are often asked to provide guidance and advice, and can influence how a property is managed.

The developer often chooses a strata manager to work for the owners corporation, so that when individual units are sold or transferred to buyers there is a manager in place.

Although employed as an agent of the owners corporation, the strata manager has an opportunity to benefit by securing kickbacks for referrals to service providers and charging brokerage fees for insurance and other contracts.

We found conflicts of interest abound

We’ve spent the past three years investigating how we can rebuild trust in residential building construction in Australia.

Funded by the Australian Research Council, Australia’s professional standards councils, legal firm Corrs Chambers Westgarth, and the Queensland and West Australian governments, our Constructing Building Integrity report, was published just last month.

Our research found uneven – and in places nonexistent – regulation of the strata management industry. This leaves some people living in apartments or other strata title properties ripe for exploitation by unscrupulous operators.

To be clear, not all strata managers are unscrupulous. Many do a good job in difficult circumstances. And some states require strata managers to be licensed or registered and have minimum qualifications – but others do not.

The industry’s national peak body has a code of conduct and complaints process. However, the most serious penalty is a loss of membership and referral to a licensing authority (if one exists).

Strata managers have many bosses

As well as the conflicts raised by their own self-interest, individual strata managers have many “bosses”, including the owners corporation, the strata committee and its individual office holders, the developer who might have hired them in the first place, and regulators.

Each of these “bosses”, who expect the strata manager to respond to its concerns, can exert pressure. But responding to one boss can mean frustrating another. It might even result in avoiding crucial ethical obligations.

An example is the tension between obligations to the owners corporation and the interests of the developer who hired the strata manager.

The strata manager might avoid recommending the owners corporation take action against the developer over defects as a way of protecting its ability to get future contracts from that developer.

A different tension arises when the strata committee or an individual office bearer instructs the strata manager to do something that is not in the best interests of the owners corporation (all unit owners).

The strata manager can have little incentive to resist and defend the owners collective interests.

A further tension arises when the owners corporation is legally obliged to maintain the property, but is unwilling to do so because of the costs involved.

The strata manager has to balance obligations to the public (and to potential future owners) against its client’s immediate wishes.

Strata managers appointed by an outside tribunal to get a dysfunctional scheme in order experience this tension acutely.

Aggressive competition between strata management firms and work overload further increases the pressure and ethical tensions strata managers face in their day-to-day jobs, as they try to respond to the demands of multiple bosses.

What can be done?

Even before this latest scandal, there were signs the strata management industry was ready for reform.

The New South Wales chapter of the peak industry body, Strata Community Association, adopted a Professional Standards Scheme in 2021.

In response to concerns about what the ABC described as a “decade-long history of self-dealing and conflicts of interest” at the strata management firm Netstrata, in April Strata Community Association Australasia announced a six-point plan to ensure confidence in the industry.

Among the points were mandatory disclosure of contracts with insurers, brokers and software providers, and an independent chair for the association’s complaints and conduct panel.

An independent review of the claims against Netstrata is being undertaken at the request of the NSW Commissioner for Fair Trading.

In June, NSW Fair Trading banned a strata manager for 10 years, in a sign that breaches of obligations are being taken seriously.

More action is needed

While these measures are welcome, they are unlikely to be enough to restore confidence in the industry, especially while professional associations lack the tools needed to obtain evidence and ban people from the industry.

The best approach will probably be co-regulation, with government regulators and professional associations acting as partners, each playing to its strengths.

But increased regulation by itself will not be enough in the context of aggressive competition between firms and the massive amounts of work expected of individual managers.

Giving them legal and contractual frameworks that allow them to push back, along with professional support, will also go a long way.

There’s never been a better time to start fixing things than now.

Hazel Easthope from UNSW Sydney
Charles Sampford from Griffith University
Hugh Breakey from Griffith University

This post appears in Strata News #712.

Have a question or something to add to the article? Leave a comment below.

Read next:

• NAT: Strata Insurance Commission in Australia: Is transparency enough?
• NSW: Insurances, Commissions, and Kickbacks in Our Strata & Community Title Schemes

This article is republished from The Conversation under a Creative Commons license.

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