Do COVID-19 clouds have a silver or red lining for vertical villages?

By Dr Janette Corcoran

During the past four months Consumer Affairs Victoria (CAV) has registered nearly 26,000 reduced rent agreements

Now the timeframe for the supporting moratorium has been extended, with the state government announcing that rental increases and evictions (for both residential and commercial tenants) are suspended until December 31, 2020.

However, while this brings relief for many tenants, the Property Council of Australia cautions that this extension “will push many landlords to their limits or beyond”. 

This is of concern to our vertical villages as typically more than half of all apartments are rental properties, which means a significant number of owners may be severely financially impacted. Add to this the financial challenges that owner-occupiers are encountering, and it is unsurprising that apartment owners are asking that if they, too, can have some relief -  such as a discount on their owners’ corporation (OC) fee.  After all, pools, gyms and other facilities are closed. 

The short answer to requests for OC fee discounts is a (qualified) “no”. 

And the reasons for this are:

First, the harsh reality is that while we can’t access our gyms, pools or courts, our vertical villages continue to incur major operational expenses. In fact, closing these facilities yields few, in any, savings. Equipment leases, for instance, still need to be paid and cleaning staff have typically been reassigned to other high-touch areas. Indeed, some buildings will likely have incurred additional costs during COVID-19, such as increased cleaning (including deep cleans), installation of new hand hygiene stations (and their contents) and additional security (with some buildings opting for 24-hour concierge coverage).   

Secondly, regulations do not support “fee discounts”. As we know well, our OCs are not-for-profit entities, with OC fees set at a level to meet the budget. These budgets are presented and voted upon at the annual general meeting (AGM). This means that there is little scope to vary fees as the budgets (upon which OC fees are based) have been passed by resolution at the AGM. 

However, reality trumps all and if finances are tight and there is not enough money to pay for contracted goods and services, then other options need to be considered.  

Here are four.

Negotiate owner’s payment plans - while discounts can’t be given or fees waived, OCs can enter into agreements for scheduled payments. This is a win-win as it decreases owners’ stress and the OC receives some funds (albeit over an extended period).  

Reschedule planned maintenance - to the extent that it is safe to do so, works can be delayed to better match cash flow. However, there may be some impending large expenses (such as cladding removal) that may throw a spanner in these works!

Access external funds - OCs have the power to borrow money (with approval) or access a line of credit which could cover unpaid levies until received. However, this does mean that owners (who pay on time) will contribute to the interest charged for these loans (although penalty interest could be charged solely to the late payer).  

Renegotiate existing agreements – similar to the advice given to residents, OCs need to talk to their suppliers, including insurers, utility providers and management companies, about better offerings. You might recall I reported upon the experience of an inaugural chairperson, Jamie Tarling, who, with the committee, had to deal with contractual arrangements put in place prior to the committee’s formation. This included long-term contracts (up to 90 years’ duration) and some with annual increases three times higher than inflation. This committee was able to negotiate a decrease in their annual fixed costs by $120k without compromising amenity.   

Tom Bacon from Strata Title Lawyers sees great merit in this strategy to renegotiate, making this point strongly at the Docklands Representative Group’s (DTG) June webinar when he noted that many OCs were locked into non-competitive service agreements. 

Mr Bacon said high-rise dwellers would often discover they were caught up in lengthy contracts they did not know existed. His advice was that now was the time to start renegotiating as service providers were primed to engage around financial hardship. 

As regards how to start, here are some steps. 

Form a sub-committee and identify your big-ticket items.

Draw up a renewal schedule for the next 12 months, taking special note of multi-year agreements (any 25 year contacts?). Review contracts falling due, taking particular care to investigate fees and commission payments, including identifying relationships between the organisations receiving these payments (i.e. are they associated with your other suppliers?). 

Talk to your peers (i.e. other OCs) and discuss their experiences. Get quotes, at least three if possible.  Then start to negotiate.  And finally, share your insights with your peers in other vertical villages. 

Who knows, maybe this could be the start of vertical village group procurement! •

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