Top Ten Sectional Title Management Issues: Part One – By Prof. Graham Paddock

In this two-part series, I will discuss what I consider to be the ten most critical issues in sectional title scheme management. In this first part, I will focus on five key areas: Financial Management, Maintenance and Repairs, Trustees’ Responsibilities, General Meetings, and the Role of Managing Agents. These issues are central to the effective governance of a sectional title scheme, and I will outline practical measures that trustees, with the support of their managing agents, can implement to address or remediate these challenges.

1. Financial Management and Budgeting

The single most important issue is ensuring the body corporate has sufficient administrative funds to cover operational expenses and sufficient reserve funds to carry out the long-term maintenance on key scheme infrastructure. This is the regular test for a scheme’s financial health that trustees must apply. Failure to do so can lead to an inability to pay debts, incurring punitive interest charges, litigation costs, neglected maintenance, the imposition of special levies, and ultimately, to financial distress. Here’s what I consider may be effective measures for this purpose:

• Realistic Budgeting: Trustees must ensure the scheme’s administrative fund budget accurately reflects the scheme’s properly projected operational costs and the reserve fund budget covers the planned costs for key scheme infrastructure. The budget should account for inflation, potential increases in costs, and unpaid levies. If the scheme historically has substantial levy arrears and circumstances have not changed, you need to budget for a levy income shortfall, to ensure that you will have the money you really need to spend when you need it. Trustees are not responsible for the budget the owners approve, but they all have a fiduciary duty to propose a workable budget that they  understand and can defend against criticism.
• Proactive Levy Collection: Timely raising, billing and collection of levies is essential. Trustees, in conjunction with managing agents, should implement written procedures for issuing levy statements, following up on arrears, and initiating legal action against persistent defaulters. Managing agents usually have specialised software to monitor payments and generate reports. Trustees must read them and apply the financial health test.
• Building a Robust Reserve Fund: The Sectional Titles Schemes Management Act of 2011(STSMA) regulations and prescribed rules require regular body corporate approval of Maintenance, Repair and Replacement Plan referred to below. If these are not kept up to date, the reserve fund budgets will not be realistic.

2. Maintenance and Repairs

The body corporate is legally obliged to maintain all the common property and to keep it in a state of good and serviceable repair. Neglect in this area not only diminishes property values but can also lead to legal disputes among owners. Here are some suggestions:

• 10-Year Maintenance Plan: Trustees must implement a formal 10-year maintenance plan as required by the STSMA. This plan only applies to maintenance, repairs and replacements of key infrastructure. The trustees must ensure the plan realistically estimates costs, provides a timeline for each item and that it is regularly updated, approved and implemented. Regular recorded condition surveys are recommended.
• Proactive Maintenance: Minor repairs should be addressed promptly to prevent escalation of costs. Trustees can oversee regular inspections, while managing agents usually assist with scheduling contractors and obtaining competitive quotes.
• Transparency with Owners: Keeping owners informed of upcoming maintenance and associated expenditure promotes transparency and trust. Clear communication is key to avoiding unnecessary disputes or resistance to proposed works.

3. The Role and Responsibilities of Trustees

Trustees have fiduciary responsibilities to the body corporate and are legally obliged to act in its best interests. A lack of understanding of their duties can lead to poor management decisions and potential liability. Here’s what you can do:

• Training and Education: Trustees should receive initial training and periodic updates on sectional title law, financial management, and dispute resolution. This equips them to make informed decisions and fulfil their duties responsibly.
• Seeking Professional Advice: Where trustees lack the necessary expertise, they must seek guidance from professionals, such as accountants, engineers or  lawyers, depending on the issue at hand.
• Transparency and Disclosure: Trustees must be transparent in all decision-making processes, disclosing any conflicts of interest and documenting their decisions clearly. This practice not only complies with the law but also strengthens trust among owners.

4. General Meetings and Decision-Making

General meetings are a key forum for owners to participate in decision-making. Procedural errors, lack of clarity in resolutions, or misunderstanding of voting rights can lead to disputes or even legal challenges. Here’s what you need to know:

• Clear Notices and Agendas: Proper notice of meetings is vital. Notices must include the agenda, proposed resolutions and contracts to be considered, so that owners can prepare to engage meaningfully.
• Accurate Record-Keeping: Minutes of meetings must accurately reflect motions, decisions and voting outcomes. These records are essential for transparency and legal compliance.
• Compliance with Legislation: Trustees and managing agents must ensure that meetings are conducted in accordance with the STSMA and scheme rules, particularly regarding quorum requirements, voting procedures, and types of resolutions.

5. Managing Agents and Their Role

Managing agents are very often integral to the effective operation of a scheme. However, trustees must exercise due diligence in selecting an agent and maintain ongoing oversight to ensure performance and accountability. Here are some suggested effective steps:

• Diligent Selection Process: Trustees should conduct a rigorous selection process when appointing a managing agent. Considerations should include the managing agency’s and the portfolio manager’s experience, qualifications, and confirmation they hold professional indemnity insurance.
• Clearly Defined Service Agreement: A written service agreement is essential to outline the managing agent’s responsibilities, performance standards, and reporting requirements. Any body corporate duties delegated to a managing agent must be recorded in writing and in detail. This is a legal requirement and it ensures clarity and accountability.
• Regular Monitoring and Evaluation: Trustees should regularly review the managing agent’s performance, particularly regarding financial management, maintenance oversight, and communication with owners. Any issues should be addressed promptly.

Effective sectional title management is both an art and a science. It requires trustees to act proactively, maintain clear communication, and adhere to legal requirements. With the support of capable managing agents, trustees can ensure the smooth functioning of their schemes, safeguarding the interests of all owners.

Don’t miss Part 2 of this series in the next Paddocks Press in which Professor Graham Paddock will discuss  further key issues, including dispute resolution, the enforcement of scheme rules, and compliance with regulatory requirements.

Article reference: Paddocks Press: Volume 19, Issue 10.

This article is published under the Creative Commons Attribution license.