NSW: Insurances, Commissions, and Kickbacks in Our Strata & Community Title Schemes

This article about insurance, commissions and kickbacks has been supplied by Allison Benson, Kerin Benson Lawyers.

I am a little late in providing my thoughts on the ABC investigation into insurances, commissions and kickbacks within our strata and community title schemes. I thank the ABC for first, bringing to light serious issue that has plagued the strata industry and, on a lighter note, for providing me with interesting reading while I was in hospital and taking my mind off my surgery.

The fact that in the 2015 strata reforms it was felt necessary to include a new provision requiring strata managing agents to disclose commissions and training and to prohibit the receipt of gifts over $60.00 (see sections 57(2) & 60 of the Strata Schemes Management Act 2015 (“SSMA”)) shows that this has been an ongoing problem.

While my colleague, Matthew Lo has correctly pointed out that strata managers can accept commissions under the Act, and that there are consumer protections under the Property and Stock Agents Regulation 2022, what was not made abundantly clear was that this ability is limited to certain circumstances. The requirement of disclosure was not dealt with and the underlying question whether strata managers should be accepting commissions was not asked.

The alleged conduct reported on by the ABC had not necessarily been disclosed to the relevant owners corporation. In some cases the alleged commissions and payments had not been disclosed at all.

What monetary payments and training services are permitted under the SSMA & other legislation?

Section 57(3) of the SSMA permits strata mangers to accept payments and training services provided “in connection with the exercise by the agent of functions for the scheme” if the payment is in accordance with the management agreement or is otherwise approved by the owners corporation. Section 60 of the SSMA requires disclosure. That disclosure must at least be on the agenda of each annual general meeting: Schedule 1, clause 9(g) of the SSMA.

There are codes of conduct applicable under the Property and Stock Agents Regulation 2022 that are applicable to strata and community managers and they require, amongst other things, that the agent must:

• Comply with their obligations as a fiduciary to the owners corporation
• Act honestly and transparently
• Not mislead the owners corporation
• Act in the best interests of the owners corporation
• Not act, or continue to act, as an agent if doing so places their interests in conflict with the owners corporation’s interests
• When engaging another service provide on behalf of the owners corporation, must not falsely represent to the owners corporation that the service provider is independent of the agent, and if they are not independent must disclosure the nature of that relationship.

The complete codes of conduct that are applicable are in schedules 1 and 4 of the Property and Stock Agents Regulation the links to which are here:

• PROPERTY AND STOCK AGENTS REGULATION 2022 – SCHEDULE 1
• PROPERTY AND STOCK AGENTS REGULATION 2022 – SCHEDULE 4

These duties are in addition to the common law fiduciary duties. These duties are discussed in relation to a developer’s duties to a community association in Community Association DP No 270180 v Arrow Asset Management Pty Ltd and Ors [2007] NSWSC 527 (30 May 2007). Very simply, in that case, the association’s developer effectively sold management rights in relation to the association to a third party and caused the association to enter into a long term contract with that third party. The developer benefited at the expense of the association in circumstances where as the promotor of the scheme they were a fiduciary to the association.

The situation in Arrow is similar to a strata manager (also a fiduciary) engaging a related entity to conduct work for the owners corporation and obtaining a benefit for doing so. As in Arrow, disclosure is key. The question is whether disclosure was made and whether that disclosure was adequate in the circumstances. For instance, is it sufficient to insert a one line sentence disclosing related entities, estimated referral fees or estimated insurance commissions in a 20 page management agreement? Also was adequate disclosure also made at relevant annual general meetings? All too often disclosure is made at an AGM after the event and the disclosure is buried in amongst 100+ pages of material.

His Honour Justice McDougall in Arrow stated:

236 The question thus arises as to what is meant by “adequate disclosure” in the specific context. To my mind, that question is not to be answered either in the abstract …… The first step is to identify those to whom the “proper disclosure” is required to be made. The second is to consider, by reference to the specific duty and the particular facts of the case, what it is that should be disclosed. That exercise is to be undertaken bearing in mind that the question is not whether there is a duty to disclose but, rather, whether such disclosure as has been made negates an existing breach of duty…237 Further, where there is a relevant statutory scheme, an examination of the nature and sufficiency of the disclosure should take into account the statutory scheme, including in particular in this case the requirements of s 24 of the CLM Act.

His Honour considered that where there was an existing breach of the fiduciaries duty, for instance where the fiduciary has obtained a payment from a third party as a result of carrying out their duties, proper disclosure requires informed consent. Informed consent would negate an existing breach of the fiduciaries’ duty. Informed consent would require the disclosure of all relevant information. Paragraphs 242 – 243 of Arrow which discusses the requirements of informed consent:

242 Informed consent would require, at a minimum, the disclosure of all relevant information: Queensland Mines Limited v Hudson (1978) 52 ALJR 399 at 403. I say “at a minimum” because, as the majority pointed out in Maguire at 466, “[w]hat is required for a fully informed consent is a question of fact in all the circumstances of each case and there is no precise formula which will determine in all cases if fully informed consent has been given … .”

243 In Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd and Others [2001] NSWCA 97; (2001) 37 ACSR 672, Spigelman CJ said at 693 [124] that the word “relevant” in this context “imports … an objective standard.” On this approach, disclosure of the premium of $190,000 would be material if, viewed objectively, that information could bear in a rational way on a prospective purchaser’s consideration of the terms of the management agreement.”

What does this disclosure requirement mean?

Where a managing agent has received a benefit or a training service, disclosure must be full and frank for an owners corporation or an association to be able to provide informed consent. As an indication of what full disclosure means in practical terms, in Arrow, full disclosure meant revealing that Arrow had paid the developer a premium of $190,000 for the developer’s services in causing the association to enter into the management agreement. For informed consent, the disclosure by the managing agent when accepting a benefit or training service should be clear. It must also be capable of being understood by the lot owners who are being asked to vote on whether or not to accept the motion for a strata manager accepting a payment or training. Only then, can the disclosure provisions of the SSMA, the Property and Stock Agents Regulation 2022 and common law fiduciary duties be satisfied.

The larger underlying question is that given the lack of understanding of fiduciary duties and issues with disclosure should it ever be acceptable for a managing agent to obtain a benefit or service from a third party in the course of its duties to an owners corporation or association? It is better to outright prohibit this behaviour?

While this would likely increase pricing, it would have the benefit of providing transparency and reducing temptation and for that reason in my view it would be preferred. It would also allow comparisons of strata management pricing. At the moment it would be difficult to compare the pricing of a manger who does accept commissions with a manager that did not.

Note that if you are uncertain about whether or not benefits or training has been received by your managing agent both the Strata Schemes Management Act 2015 (s61) and the Community Lands Management Act 2021 (s65) provide for a procedure to obtain information from the managing agent. Essentially, it requires a written notice to the managing agent under the appropriate section requesting the information and specifying the committee member to whom the information is to be given.

Allison Benson
Kerin Benson Lawyers
E: [email protected]
P: 02 4032 7990

Please note that this is my opinion and is not legal advice. If you have an issue you should seek legal advice specific to your situation.

This post appears in Strata News #693.

Have a question about insurance, commissions and kickbacks or something to add to the article? Leave a comment below.

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This article has been republished with permission from the author and first appeared on the Thoughts from a Strata Lawyer website.

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