DEVELOPER v OWNERS CORPORATION – WHO IS ENTITLED TO THE MONEY?

I regularly attend Owners Corporation meetings on behalf of Building Managers who are seeking to “top up” the term of their agreements or to obtain a remuneration increase.

It is quite common to hear owners at these meetings claim that the developer has kept what should be “their” money when the management rights were initially set up and sold. And accusations that our client, because they have paid in excess of $1 million for the rights, were somehow in cahoots with the developer all along.

The strange thing is that when I enquire further, I often find that most of these owners were original buyers from the developer and the developer had disclosed in the “off the plan” sale contract that the Owners Corporation would be entering into a long-term caretaking agreement for the complex and the developer would be receiving the sale proceeds.

Although I personally consider it a standard practice that sale proceeds would and should go to the developer in these circumstances, it has become apparent to me that there are a many people who buy into strata complexes who either:-

(a) do not understand that it is the developer who keeps the management rights sales proceeds, or

(b) simply believe that it is unjust for the developer to keep the sale proceeds and not pass the windfall on to the Owners Corporation.

In any event, these people believe that the developer is selling an Owners Corporation “asset” and that these rights are not the developers to sell. The unfortunate spin-off from this line of thinking is that the Building Manager is often perceived by these people to be the “stooge” of the developer. In other words, they believe that the caretaker has paid an inflated amount to obtain these rights and as a consequence the developer has “loaded” the caretaking fee to justify the price to the caretaker.

My answer to these owners invariably follows the following line of thinking:-

(a) Firstly, I explain that developers have always factored the sale of management rights into their projected development profits. I have even seen some instances where developments would not have proceeded if the management rights sale profit was not factored in to the developers profit;

(b) Secondly, I point out that if the developer was prohibited from retaining the proceeds of the sale of the management rights, the cost of the units in the complex would be higher; and

(c) Thirdly, I explain that a big part of the profits from any management rights sale is derived from the developer creating and selling a rent roll. This rent roll has nothing to do with an Owners Corporation. It is something that is created by the developer (by not letting his selling agents take the lettings from the building) and the Owners Corporation pays nothing for the provision of this on site letting service.

And as an aside, I also point out that in NSW, the caretaker’s remuneration can be subject to a review by NCAT at any time under Section 72 of the Strata Schemes Management Act. 2015. If the developer was silly enough to “load” the caretaker’s remuneration just to achieve a higher sale price for the management rights, the Owners Corporation can use this section to seek a remedy.

Notwithstanding these points, I am sure that as long as management rights continue to exist, owners will continue not to read the disclosure documents and the debate will rage on as to who is entitled to receive the proceeds on the initial sale of management rights – the developer or the Owners Corporation.

Article Written by:  Col Myers of Small Myers Hughes

Liability limited by a scheme approved under Professional Standards Legislation

Disclaimer – This article is provided for information purposes only and should not be regarded as legal advice.

 

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