This guest post from my good friend and fellow economist Dr Stephen Thornton is on the costly rort that is strata management rights in Queensland. Views are Stephen’s and should not necessarily be attributed to me. GT

The front page of the Australian Financial Review on the weekend carried the headline ‘Apartment Turmoil’. The paywalled article was largely about Management Rights (MRs), a significant strata issue I wrote about in 2017 as being one of the policy priorities on which the new Queensland state government should focus its attention (see Pets, Airbnb and Management Rights: Strata policy challenges for the incoming Queensland Government).

Most people will be unaware, or will have forgotten, that the Bligh Government in 2012 did indeed commence a management rights review which progressed to the public consultation stage before being abandoned by the LNP later that same year after it won government. The new Attorney-General Jarrod Bleijie (a former MRs lawyer) took the view that  ‘… caretakers need to have secure, long term contracts’  and subsequently announced a general property law review which included strata (by-laws, scheme terminations, etc.), but excluded a review of MRs.

According the 2012 review discussion paper, many lot owners:

… are of the view that long term contracts for services may be sub-standard, overpriced, or inappropriate for many schemes. There are also claims that there is an increasing corporatisation of the management rights sector and that this, together with rapid turn-over in ownership and a significant increase in the value of management rights contracts in the past decade, has led to predatory and unconscionable conduct.

I wrote to the Office of Regulatory Policy in the Department of Justice and Attorney-General a little while back to find out why the review had been ceased and had not been picked back up by the Palaszczuk Government when Labor regained power in 2015. The response acknowledged the cessation of the 2012 review and confirmed that the Attorney-General’s current priorities are the matters considered as part of the LNP’s QUT property law review which commenced in 2013 (which is still not completed). In other words, MRs are not on the agenda.

As I have written previously, MRs are usually sold by the developer to caretaking companies (some as large as Jones Lang LaSalle), for millions of dollars, with a maximum 25-year contract locked in for bodies corporate from the get-go. The fixed ‘salary’ for caretaking and management duties is often over $300,000/year in the large strata complexes with mandatory CPI increases or better.

They also typically come with ‘exclusive’ letting rights of apartments in the building, meaning that while investor owners are able to let their apartment with an outside real estate agent, no-one else can set up a letting service in the building. The vast majority of investor owners put their business with the onsite manager. MRs are periodically ‘topped up’ to the original maximum contract term at AGMs by uninformed lot owners as the contract runs down and on-sold every three to five years via industry brokers.

These high contract prices charged by developers for the larger complexes create a barrier to entry to the industry for potentially very good managers who are unable to stump up the money to obtain bank finance to make the MRs purchase. Obviously, the price of a 25-year contract as opposed to say a 3-year or 5-year contract is significantly higher.

The nature of having such a long contract term also makes it impossible for the body corporate to periodically test the market for gardening, cleaning and maintenance services meaning these long-term contracts stifle competition, which is the best way to ensure value for money for services is achieved.

MRs are notoriously difficult for bodies corporate to terminate. John Mahoney of Mahoneys, an experienced Queensland-based law firm which acts for current and prospective caretaking companies, has seen only a ‘tiny number’ of successful terminations as he explains in this excellent podcast hosted by barrister and strata law expert Marc Mercier (starting at 20:35). While I believe this represents a weakness in the legislation, I do agree that they should only be able to be terminated on proper grounds and not simply because the committee has had a ‘falling out’ with the onsite manager.

Disputes between bodies corporate and holders of the MRs for the complex (the resident manager or ‘caretaker’) are not uncommon and can be costly. These often end up in QCAT (Queensland Civil and Administrative Tribunal). Frank Higginson, of Hynes Lawyers, has neatly summarised a recent case where a clearly annoyed body corporate, The Grange, a large 302-lot complex in Brendale in Brisbane’s north, was locked into a 25-year contract at nearly $500,000/year in onsite management fees to what they believed to be an underperforming MRs company.

A letter sent by the chairperson to owners prior to the AGM to attempt to terminate the contract included the following:

We need to rid ourselves of this blood-sucking dysfunctional and truly unfair caretaker’s contract. It’s bleeding us absolutely dry! We have for the past 13-14 years paid in excess of $7,000,000 and will have to pay – by contract – another $10,000,000 or more – currently to the year 2033! Yes – the year 2033!

According to Higginson, the hearing ran over 10 days in which the body corporate spent $427,000 plus GST and the manager $472,000. The body corporate lost and had a costs order made against it of just over $300,000. Mind you, it would seem the owner of the MRs came out of this financially worse given the effective cost to each lot owner was around $2,500 with the MRs owner still close to $200,000 out of pocket. A win for the lawyers (see ‘The latest management rights termination battle’).

There is little doubt that larger complexes require onsite management and the current model has some positive aspects. Still, a comprehensive review is required to bring about much needed reform in this space starting with new MRs contracts being for an initial period of no longer than five years with rigorous criteria for ‘top-ups’ for existing contracts which should not be allowed to lock in future apartment and townhouse owners for decades. The government should cast its mind back to 2012 and complete the job that was started.

Dr. Stephen Thornton is principal economist at BG Economics. Disclosure: Stephen owns a strata investment property with Management Rights in Brisbane.