Spine-chilling Storeys of Chaos and Disaster

Jacqueline McArthur
Australian Financial Review, 1 February 2003

The humble body corporate is not much help when high-rise living turns to high anxiety, reports Jacqueline McArthur.

Australia’s strata-title system was under pressure this week as the fallout from high-rise living became apparent.

In Sydney, the body corporate of one of the city’s largest apartment complexes was sacked.

The building’s balance sheet was well in the red, leaving the owners of its 653 apartments facing unexpected and expensive catch-up fees.

The saga at Regis Towers in Castlereagh Street was reminiscent of many other disputes among Sydney’s high-rise community.

All have witnessed popular uprisings by occupants, whose complaints have ranged from building defects to incompetence.

For property investors, this is the wake-up call.

How can a community, dependent on volunteers and an independent manager keep its house in order?

As state governments push for higher-density living, the very utility of a body corporate and its relationship with building managers and strata agents should take centre stage.

How will growing numbers of high-rise and estate communities cope with what essentially becomes a fourth tier of government; an often unqualified voluntary group running multimillion budgets to maintain assets worth hundreds of millions of dollars?

When Regis Towers went bust and a sole administrator was appointed by a tribunal last week, it was the worst case of strata disaster witnessed in this country.

Still, it wasn’t the first disaster.

Three years ago investors in a 500-apartment refit of the century-old Goldsborough Mort wool store in Pyrmont mutinied after finding themselves with a building management problem and funding issues caused by being left $800,000 in arrears for levies.

Now the owners’ corporation is in litigation with construction giant Multiplex over alleged defects arising from the 1995 refurbishment. Rectification will allegedly top $12.5 million.

Nonetheless, the building has one of the city’s highest occupancy rates for permanent rentals and serviced apartments and investors have been enjoying returns from 8 to 10 per cent.

The secret of the recent success has been the strong executive committee of the owners’ corporation and highly competent building and strata managers, according to owners’ corporation chairman Stephen Partington.

“When those three elements come together you can have a workable situation, but often it can be left in the hands of a building and strata managers who are left unchecked,” he says.

“A strong owners’ corporation needs to be able to rectify decisions made about who manages their building and make sure they have a building manager who protects their investments.” However, an apathetic owners’ corporation can land up in a nasty and ultimately costly game of pass the parcel .

New owners, who often stretch budgets to buy into expensive developments, can be left with financial and public safety nightmares.

“When I first realised that this place could be a vertical barbecue I knew I had to do something about it,” says the former chairman of the Regis Towers owners’ corporation, Stephen Goddard, referring to a number of fire orders that were issued by Sydney City Council against his building’s developer in 2001.

The developer says it relied on certification by private contractors. It had since rectified the work despite having no legal obligation to do so.

The discovery of several other alleged building defects, now the subject of Supreme Court action, came amid disputes over the competency of the strata and building managers at Regis Towers. Both were chosen by the developer.

After years of acrimony within the complex, it took one unit owner to apply to the Consumer Trader and Tenancy Tribunal to sack the administration on the basis of insolvency and “unsatisfactory management”.

Goddard says: “It has been a three-year struggle that has chewed up our levies, our time and our capital values and spat us out as a defective and dysfunctional organisation.”

He says state governments cannot rely upon a happy coincidence, as at Goldsborough, of motivated building and strata managers and a strong owners’ corporation occurring at every high-rise and estate.

Goddard’s solution for large strata schemes is the institution of a paid board of directors and a strata manager as financial controller.

Crucially, the building manager should be chosen by owners, not developers, he says.

He accuses the development industry of being concerned only with “the highest bid for the sale of the building’s management rights”.

“If it is an owners’ corporation, surely the Corporations Law has application to bring about the accountability and transparency to preserve capital values,” he says.

“You can’t ask voluntary labour to preserve the capital value of a $400 million asset with a $3million annual budget.” The solicitor who took the Regis Towers case to the CTTT, Andrew Quigley, agrees.

“More stringent external supervision of large strata-title schemes is clearly warranted,” he says.

“The level of accountability and audit reporting must be increased so that owners’ financial and personal safety can be adequately supervised.”

Whether an overhaul of strata title brings corporation-like governance or greater external supervision, it’s clear a battle is looming over high-density living.