Strata living is increasingly becoming the norm in Australia’s major cities.
In greater metropolitan Sydney, more than a quarter of the population already live in strata titled dwellings. This is set to increase significantly as the State and Federal governments pursue higher density development as a key strategy to address population growth and urban sprawl.
There has been much debate about the desirability of increasing higher density development. While discussion about the pros and cons of higher density housing as opposed to low density suburban development is important, it is essential that this does not overshadow discussion about how to get higher density development right. What do we mean by this? In this article we look at just two of the fundamental issues that need to be addressed when considering the effective governance of strata schemes – regulation and representation. It’s important to consider how we might deal with the problems relating to regulation and representation that can plague strata developments and impact upon the lives of the people living, working, and investing, in them.
In NSW, each strata development is managed by the strata owners of the building through an elected executive committee. The owners corporation, made up of all owners in a strata scheme, is formally constituted as the legal entity that manages the property in the interests of all the strata lot owners in the scheme. It therefore acts as a mini-council, with powers to set by-laws for the building, fix services charges and other levies, manage the maintenance and repair requirements for the building, and enforce compliance. Governance through small associations like owners corporations is legitimised through a market-based approach to governance with a focus on public choice and local autonomy, which is at the same time managed under a legislative framework controlled by the States.
However, owners corporations are only one of many stakeholder groups involved in strata developments – strata managers, building managers, real estate agents, maintenance and repairs companies, developers, local and state governments and many more are also involved, not to mention the tenants who live in strata properties. Negotiating relationships between all of these stakeholders is complex as they all have different needs and interests. For example, investor owners and owner occupiers often have different priorities regarding building maintenance and upgrades, leading to disputes. If informal methods of dispute resolution (e.g. talking with neighbours about the problem) fail, there are formal regulations and processes in place at the state government level to mediate and conciliate such disputes (e.g. through the Strata Schemes Management Act and through the CTTT).
The issues that can arise in strata schemes are compounded by the fact that the members of an executive committee who are responsible for running a strata scheme are all volunteers and often have limited skills and few resources with which to manage their strata development. The competence of the owners corporations’ officers is therefore a major issue, especially as schemes get progressively larger and more complex, often including commercial elements. But even owners corporations that include specialists or hire strata managers and building managers can run into problems. For example, despite the fact that strata managers in NSW are required to be licensed, the returns on this business can sometimes be low and not all strata manages have the professional skills needed to perform their duties.
A significant amount of control over the governance of strata schemes is placed in the hands of private individuals and organisations and the networks between them, while still being regulated by legislation. However, it is difficult for the legislation to keep up with the pace of change in that is occurring in the strata sector, and to adapt accordingly to ensure that there are regulations in place to protect the interests of those individuals and organisations who may not hold the balance of power in a marketdominated environment. Furthermore, the interactions and negotiations that have taken place between the government and other stakeholders in strata title developments have resulted in a multitude of necessary amendments to the strata title legislation, which have complicated the legislation and have made governance more difficult.
The day to day administration of a strata scheme is carried out by the executive committee of the owners corporation (often liaising with a professional strata managing agent). This executive committee is made up of representatives of the owners corporation who are elected at each annual general meeting (AGM). All strata owners have a vote at the AGM. However, not all strata owners have equal weight within the owners corporation.
The measure of their weight is called their ‘unit entitlement’ and is based upon the relative value of their strata lot. The unit entitlement regulates both the voting rights of each unit owner and the levies that they must pay to the owners corporation for insuring, maintaining, repairing and managing the common property. In other words, the extent to which individuals are represented in their strata scheme is dependent upon their market share in the strata ‘club’.
However, it is questionable to what extent the organisations created to govern strata title developments are actually participatory in any real sense of the term, even within their own structures. The issue of representation within strata developments is beginning to receive increasing attention in Sydney. While it could be argued that the governance of strata schemes should be a negotiated governance within a ‘club’ – and this certainly seems to be what the NSW strata title legislation is trying to achieve – the reality in many schemes is that because their governance is based on market principles, the stakeholders within a strata title scheme do not have equal rights to participate. Sometimes they do not even have rights proportional to their market share of a scheme because of the practice of forfeiting proxy votes.
Furthermore, while owners in a strata scheme usually hold some power based on their market share, renters living within a strata scheme have no right to participate in the representative structures in place in their scheme (they have no vote) and have power only to the extent that they are able to influence the position of the owner of their unit (or in the rare occasion that the owner has given them their proxy vote). Given that the majority of renters rent through a real estate agent, the potential to influence decisions affecting their building is small.
What does this mean for the future?
The implications of existing governance arrangements in strata schemes are unique when compared to private corporations or other club realms because people live in strata developments. Strata schemes in NSW are governed in large part through negotiation between multiple stakeholders. Power is distributed unevenly among the different stakeholders and depends in part on their relative market power (how many unit entitlements they hold) as well as the power vested in representative government to legislate strata.
The potential for significant social conflict exists at the local scale within blocks and deteriorating and poorly managed blocks can be a problem. In the future we are likely to see an escalation of problems surrounding the governance of strata schemes, especially if regulation around major repairs remains ineffective and as more blocks age and incentives to maintain properties are not improved.
Less apparent, but of even greater importance, is the consequence that as the strata sector grows, an increasing proportion of players in the strata system (e.g. strata owners) may be new entrants who would not only lack the knowledge required to be successful lobbyists in a system based on governance through negotiation, but also the wealth required to have influence in a system where ‘citizenship’ is based on purchasing power. Indeed, the drive for urban consolidation will mean not only that a large proportion of the population may face problems associated with the governance of strata schemes, but also that the growth in the sector itself might aggravate these problems by increasing the proportion of entrants who have little knowledge of the system. If the supply of skilled strata professionals (e.g. strata managing agents, building managers) does not keep pace with demand, problems relating to regulation and representation in strata schemes are likely to increase. Similarly, if effective legislative protections for new entrants are not implemented in tandem with these changes, inequity within the sector may well intensify.
This article has so far painted a gloomy picture of the future. It is not our intent to criticise strata developments or the strata system, but rather to draw attention to some of the underlying issues facing the governance of strata schemes and to warn of some serious consequences for the future if these issues are not properly addressed.
There are good examples of the development of good practice and collaborative arrangements to address the lack of knowledge among stakeholders in NSW currently. For example, the Owners corporation Network and Institute of Strata Title Management run education programs and seminars for executive committee members and owners, NSW Fair Trading provides excellent information for residents and owners of strata properties, and legislative reform has continued to respond to the rapid changes in this sector. There are also many examples of well run strata schemes and highly professional strata managing agents as well as increasing professionalization in the strata management sector. Such good practice must be encouraged.
It’s especially important to get this right in Sydney. In Sydney alone, this issue affects the daily lives of over a million people. But around the world, tens, if not hundreds of millions more are living and working in strata developments governed by legislation based on that of NSW. The NSW Conveyancing (Strata Titles) Act (1961) has formed the basis of the strata title legislation in many other countries, including Canada, Singapore, South Africa, New Zealand, Indonesia, Malaysia and Brunei. The Australian experience of urban consolidation, within the framework of relatively advanced legislation and management practices for strata living, is also likely to be informative for those countries that have (or are planning) extensive higher-density developments, but less developed legislative and management structures, such as China and India. Indeed, it’s not an overexaggeration to say that he eyes of the world are on NSW when it comes to strata legislationindustry practice and resident experience. – See more at: http://www.stratavoice.com.au/blog/living/27-governing-the-compact-city-th/#sthash.ai8RB8aj.dpuf