Avoiding nasty surprises with an owners corporation

What would you do if you found out that your pet is not allowed to live in your home?

 

What would you do if a special levy of $10,000, payable in four instalments over four years landed in your inbox?

 

Buying a property is not without risk. In Victoria we’ve seen an improvement to disclosure requirements through the mandatory provision of the due diligence checklist in every contract of sale. The checklist can be a helpful tool in improving awareness around potential risks of purchasing a property (if a buyer bothers to read it, or even knows where to locate it!), but it does little to mitigate the numerous fragments of knowledge most buyers lack when entering into a property transaction. Importantly, if a property has an owners corporation there are additional steps a purchaser should take when working through their due diligence.

Owners corporations (also previously known as body corporates) can be as basic as a shared insurance policy for the driveway through to high density blocks with long term maintenance plans, licence agreements, steep sinking funds and a long list of owners with different opinions on how the block should be run and maintained. For small subdivisions the property may have an inactive owners corporation (OC) which doesn’t facilitate meetings and isn’t run with any fixed fees or strata insurances policies in place (despite the legal requirement for one). Small subdivisions may have one owner collecting insurance payments without the need for annual meetings and for all intents and purposes the body corporate could be considered ‘inactive’.

For properties with an active owners corporation in place, an up-to-date owners corporation certificate must be provided and accompanied by the body corporate rules and a copy of all resolutions made at the last annual general meeting (AGM). A thorough conveyancer/solicitor will read the minutes and highlight any concerns to their client, but where the disclosure process breaks down is if the last AGM was held some time ago and maintenance requests or owner concerns have been raised since, and therefore not captured in the (now outdated) minutes.

As part of our due diligence process we always make a phone call to the body corporate manager. A few of our recent client briefs highlight the range of scenarios which can be investigated further;  

• Determining ‘worst case scenario’ costs for old sewage pipe replacement through obtaining the plumbers details from the OC manager 
• Obtaining a maintenance plan which was noted in the minutes but not provided in the contract. It showed a planned decrease to the OC fees over the coming years once the major maintenance items had been completed, but in other instances we’ve seen plans for significant planned increases to fees 
• Confirming the specific rules around pet ownership within the complex  
• Gauging the OC’s attitude towards Airbnb/short stay rentals; for example, some blocks have tight scrutiny or heightening sensitivities to Air BnB activity.

        “Victoria to ban short-stay hosts and fine guests under ‘unruly party’ laws”

• Clarifying the arrangement for a courtyard at a villa unit which was not on title nor did it have a licence agreement for exclusive use. Based on the history of the complex and length of time the fences had been established we determined it was a low probability but bothersome risk for the client to lose the private use of the yard and we were able to propose some potential future actions that could enable them to explore a leasehold arrangement of the land
• Discussing previous mention of noise complaints and confirming that the tenant in question had since vacated the block or was not within earshot of the sale property

In MOST instances an OC manager will be happy to answer any questions, but in some cases the manager will refuse to disclose information on the basis of privacy concerns. Our first point of call is to speak with the agent and request that they ask their vendor to provide direct permission for us to speak to the OC. It’s very rare that we work with an agent who won’t facilitate this request, but in situations where the vendor is hesitant to provide permission it can raise alarm bells. 

If we can’t obtain satisfactory answers from an OC manager our last resort is to rely on our building inspection to give us as much information as possible around the condition of the block. There are numerous limitations here as a builder sometimes can’t access all areas of the property, particularly if it has vast common areas or there is no access to the roof, but a building inspection will certainly provide some confidence in the frustrating absence of disclosure. If an OC appears to be quite proactive and is setting aside funds for future works, responding to maintenance issues in a timely manner and keeping the block well presented and in a good state of repair, our confidence is high and our concern diminishes.

Buyers need to understand that any special levies or costs struck by the OC after the date of sale are payable by the buyer, even if they haven’t yet settled. Post-purchase surprises can be eliminated or reduced through proper due diligence before purchase, and it might be as simple as a making a quick phone call.    

It is surprising that some buyers steer away from a few hours of due diligence actions and phone calls when buying a strata property, yet spend time selecting and test driving cars, or shopping for fashion.

This is an expensive asset and deserves a buyer’s full commitment to the task.