5 Some key executive committee responsibilities

5.1 How to manage your financials

Managing the financials of the strata scheme is a key responsibility of the executive committee and specifically the treasurer. In reality most of the functions of the treasurer and the day-to-day accounts, financial recording, reconciling and levy gathering is delegated to the strata manager. However, a good and active treasurer can add enormous value to the scheme, both financially and in the quality of work approved.

5.1.1 Basic financial funds and reports

The accounts you receive from you strata manager, monthly, quarterly or annually will generally be:

  1. Balance Sheetas at the date the report is produced
  2. Income & Expenditure Statementfor the financial year-to-date

Balance Sheet: The balance sheet details how much money the scheme has as at the specified date. On the balance sheet is listed

  1. On one side: Net owners funds: the total owners funds (as at the report date), and
  2. On the other side: Net assets: what those funds comprise

Income & Expenditure Statement: The income and expenditure statement details just that, the income and expenditure of the scheme – over a specified date range. Note: this date range need not be a full year! It is important to understand the period and length of the date range to interpret the spending appropriately and especially to compare it to budget and historic years. The statement lists income and expenditure under two separate funds.

  1. Administrative Fund - is generally used to meet recurrent expenses, such as contract payments to strata and buildings managers, insurance premiums, water & electricity charges as well as ongoing maintenance contracts such as those for lift, pool and gardening
  2. Sinking Fund – is generally used to meet all capital and non recurrent maintenance expenditure on the building which is the subject of the Sinking Fund Forecast ( see below)

For comparative purposes the Income & Expenditure Statement should list the ‘current period’ actual dollars spent, the ‘annual budget’ estimates (important note: the annual budget estimate is for 12 months where as the current period may be for less). As well the prior year actual amounts may be shown.

Under each of these funds will be listed details of the revenue collected and allocated to that fund less the expenses paid out from that fund over the period specified. The revenue less the expenses will show a surplus/deficit for that period. This surplus/deficit plus the opening balance of the period will show that period’s closing balance. The closing balance of the Administrative Fund plus the Sinking Fund will equal the Balance Sheet’s net owners funds total.

The revenue and expenditure is shown in the accounts as totals classified under each category for example:  levies received, strata manager fees paid, painting expenses etc. If you want to drill down to more detail and find out what payments make up these category totals you will need to obtain a detailed Expenses / Income Report (sometime called the General Ledger) which will show every transaction for each of the categories in the accounts. Your strata manager should make this information available to you as an executive committee member. Finally, the most detailed level you can go is to view the actual bank details and invoices themselves. These will be kept by your strata manager in month by month files.

5.1.2 Setting and approving an annual budget

5.1.2.1 Setting the budget

Generally the treasurer works with the strata manager to produce a budget to present to the owners corporation for approval at the annual general meeting. The best way to set a budget is to look at the past two year’s income and expenditure line item by line item. See the budget estimate vs the actual variances and determine which of those items have been similar to the past 2 years. Those items that vary significantly from year to year or from actual to estimate need to be understood with a bit more clarity before putting a budget estimate against the item. Also take into account previous one-off spends such as renovations or major breakdowns. Also be sure to include any upcoming proposed maintenance or known expenditure plans. Examine the 10 year sinking fund forecast for possible upcoming spend items (but do not follow it blindly). It is OK to put an in estimate of the possible dollars needed, and even include some contingency margin. Once the budget is set, then the levy estimates can also be set to ensure adequate funding and brought to owners for approval.

5.1.2.2 The 10 year sinking fund forecast

An owners corporation is obliged to prepare or have prepared every 5 years a forward plan with costings for maintaining its buildings. This is called a Sinking Fund Forecast and lists the amount that can be expected to be spent on each item of maintenance in the coming 10 years. It is a long term maintenance budget and a key part of the process of drawing up the annual sinking fund budget. Don’t just take the sinking fund forecast as gospel, most are cookie cutter approaches with some minor customisation. For example, your current forecast may indicate that your fire stairs need to be re-painted every 7 years, but after 15 years the paint is still pretty pristine. Don’t waste your money re-painting just because there is a line in a report that suggests that you do!

5.1.2.3 Approval of the annual budget and levies

The budget needs to be approved by the owners corporation at the annual general meeting which gives the executive committee the authority to spend. Once approved the default position in NSW is that the executive committee needs to stick to the budget (i.e. they cannot go over 10% on any line item except in an emergency). Most owners corporations vote to waive the 10% rule or else they will get very bogged down in due process especially if spending is slightly out of sync year on year. Even when this rule is waived, there remains an obligation not to spend during the year more than the total expenses budgeted.

Relevant NSW Legislation: Strata Schemes Management Act (1996)

Section 23: What are the functions of the treasurer of an owners corporation?

Section 68: What money can be paid out of the administrative fund?

Section 70: What money is to be paid into the sinking fund?

Section 71: What money can be paid out of the sinking fund?

Section 75 and 75 (3): Estimates to be prepared of contributions to administrative and sinking funds

Section 75A: Owners corporation to prepare 10-year sinking fund plans

Section 76: Owners corporation to set levy for contributions to administrative and sinking funds

Section 78: Manner of levying contributions

Section 79: Interest and discounts on contributions

Section 80A: Limit on spending by executive committees of large strata schemes - are not permitted to spend more than 10% above the budgeted amount for any item (unless the owners corporation lifts the restriction by a resolution)

 

5.1.3 Ways to add value

There are a multitude of ways a treasurer can add value depending on their time available and the level of detail they are willing to manage. Creating a culture of careful and considered spending will permeate the executive committee, strata manager and building manager. A short list of value adding activities a treasurer can do themselves or ensure are done by others:

  • Clearly understand the need, scope and specifications for goods and services required
  • Collect a range (3 minimum) of ‘good’ quotes that meet specifications
  • Adjust specifications as new information comes to light through the quoting process
  • Summarise and present the pros and cons of each quote
  • Monitor proposals for under/over capitalising
  • Negotiate with the providers for a better deal
  • Understand any over-quote amount charges and only pay if satisfied they are appropriate
  • Find opportunities to specify and run market based tenders for key and long term goods and service provision
  • Check quotes versus invoicing especially for larger cost or key services and goods.
  • Where work is done not according to quote, but as per a schedule of rates, ensure that that schedule of rates has been approved and agrees with invoiced charges
  • Develop a good relationship with service providers
  • Ensure that all spending is approved by themselves or the executive committee
  • Record and reconcile payments.
  • Require monthly reports of past spend and estimated future spend from the strata manager and building manager
  • Ensure spare cash is generating interest
  • Ensure that all insurance claims are followed through for recovery
  • Monitor the monthly pro rata administration and sinking fund spend versus plan
  • Present monthly or quarterly budget versus spend report and  Identify budget under or over spending
  • Prepare an annual overview of financial position
  • Create annual budget for owners corporation approval
  • Question the need to spend and the amount of spend on any and every item

5.2 Maintaining the scheme’s by-laws

5.2.1 Why have by-laws?

By-laws are essential for the smooth running and harmony of your strata scheme. They will almost always cover the use of common property, the behaviour of residents plus other aspects. By-laws usually cover:

  • Parking restrictions and use of allocated areas
  • Keeping of pets
  • Garbage disposal
  • Specific building works guidelines
  • Damage to common property.
  • Use and provision of facilities, common property and other services
  • Ownership and maintenance responsibilities of some common property
  • Behaviour of residents and invitees, noise, cleaning, lot appearance, offensive behaviour, etc
  • Security, access and safety measures
  • Architectural and landscaping guidelines
  • Installation and use of floor coverings, air conditioners, pergolas, tv and satellites
  • Matters appropriate to the type of strata scheme concerned.

All residents and owners must follow the by-laws or face action in the NSW Consumer, Trader & Tenancy Tribunal which may result in fines or penalties.

Relevant NSW Legislation: The Strata Schemes Management Regulation (2010)

Sections 41 – 60: By-laws

 

5.2.2 Model By-laws

NSW has sets of standard by-laws for the various types of strata schemes, called Model by-laws. A newly-registered scheme has the choice of adopting the model by-laws, creating its own version or combination of both.

Relevant NSW Legislation: The Strata Schemes Management Regulation (2010)

Schedule 2 Model by-laws for residential strata schemes

Schedule 3 Model by-laws for retirement villages schemes

Schedule 4 Model by-laws for industrial schemes

Schedule 5 Model by-laws for hotel/resort schemes

Schedule 6 Model by-laws for commercial/retail schemes

Schedule 7 Model by-laws for mixed use schemes

 

5.2.3 Amending, adding or repealing by-laws

Once the scheme is running the owners corporation can change existing by-laws and create new ones, for the better enjoyment or management of the strata scheme. Most by-laws can be changed or created by special resolution (75% majority vote) passed at a duly convened general meeting of the owners corporation. If, however, the by-law to be changed or added is designated as a special by-law it requires a unanimous resolution.

Any owner has the power to suggest or recommend changes and additions to the initial by-laws by submitting them as a motion to be voted on in any general meeting. However, in reality it is usually the executive committee that drives any changes.

The actual wording of the by-law is extremely important. It needs to give the powers or restriction as intended, be legally correct and clear and concise. It is strongly advised to have a specialist strata lawyer draft up any new by-laws or existing by-law amendments.

Your strata manager will help you with the procedural steps for proposing, passing and registering by-laws. In NSW this registration is done by the Land and Property Information (LPI) Titling and Registry Services group.

Relevant NSW Legislation: Strata Schemes Management Act (1996)

Division 3 – Amendment or repeal of by-laws, Sections 47 to 56

 

 

5.2.4 Restrictions on By-laws

In NSW the Act specifies some restrictions on the procedural aspects of passing a By-law.

The chicken by-law: For example a by-law could be proposed and approved at a general meeting for all occupiers to flap their wings and cluck like a chicken when they are on common property. The by-law would be sent to for registration and then appear on your by-law list. The only way to remove it would be to get it voted off at another general meeting or appeal to the relevant state Tribunal if that was not successful. There are other by-laws that govern the behaviour on common property and even within the lots themselves – so why not this ‘chicken by-law’?

However, just because a scheme has a registered by-law does not mean it is enforceable. It is surprisingly common to find strata by-laws that are not enforceable (i.e. the legal term is ‘ultra virus’ which means literally, beyond the legal power or authority of a person or official or body, see 3.6.1). Registration does not vet or check by-laws for compliance with legislation. There are two ways a by-law can be beyond powers. Firstly it can conflict with another Act or right granted by state or federal legislation. Secondly, it can be beyond the powers conferred by the relevant state strata act.

Many strata schemes have one or two by-laws that are ‘ultra virus’ but often nobody realises. You would be surprised about the number of by-laws that are currently on your scheme that are probably beyond powers of an owners corporation to enforce. You can make, approve and register any by-law you want – even the chicken by-law (see box), but if you try to enforce anything beyond your powers then you are acting inappropriately and leave yourself open to litigation and damages. What are some By-laws you may have that could be beyond your powers?

A by-law in a large NSW residential and commercial scheme specified that owners were not entitled to lodge objections to development applications that were deemed to be ‘approved business’. This conflicted with the explicit right granted to object to development applications in the NSW Community Land and Development Act (1989) as was so unenforceable. Despite getting legal warnings from the proposers lawyers, owners submitted 100s of objections and the development application for a controversial business activity was refused.

 

Relevant NSW Legislation: Strata Schemes Management Act (1996)

Section 48: What steps must an owners corporation take to make an amendment effective?

  1. To be effective the change of By-Law must be registered and a notification entered on the Certificate of Title for the Common Property
  2. A change of By-Law cannot be lodged for registration more than 2 years after the passing of the resolution.

Section 49: Restrictions on by-laws:

  1.        By-law cannot prevent dealing relating to lot
  2.        By-law resulting from order cannot be changed
  3.        By-law cannot restrict children
  4.        By-law cannot prevent keeping of guide dog

Section 50: Restrictions on by-laws during initial period. An owners corporation cannot change or create a by-law, which confers a benefit or imposes obligations on some, but not all, of the owners during the initial period for the scheme.

Section 52: How does an owners corporation make, amend or repeal by-laws conferring certain rights or privileges? Where a by-law confers exclusive use of common property or allows special privileges in respect of common property the written consent of the owners benefited must be obtained in addition to the special resolution of the Owners Corporation.

 

5.2.5 Enforcing by-laws

Although there is a prescribed process for enforcing by-laws. Interestingly, there is no mandated process that requires the executive committee to address by-law infringements. However, there is an opportunity for an owners corporation to issue a notice to comply on the alleged offender or offenders. This would take the form of a resolution of the executive committee and typically only be invoked after other avenues, such as negotiation and warning letters, had failed to achieve a satisfactory outcome.

A building cleaner took it upon himself to physically restrict a resident from entering a lift with a small dog. There was a by-law which stated that pets were not to be kept without the approval of the executive committee. However, this was not the appropriate way to ensure the by-law was followed. By physically stopping lift entry the cleaner could have left himself and the owners corporation liable to be sued.

This is the only legal process an executive committee can take to enforce by-laws. Note: to implement this process the owners corporation (or the executive committee) must be satisfied that the owner or occupier has contravened that by-law. There must be reasonable evidence and appropriate documented discussion and not just hearsay.

You are not entitled to take matters into you own hands and make up penalties. You cannot create by-laws to impose penalties for non-compliance as this would override the Act’s enforcement process and be beyond power i.e. ultra vires (see 3.6.1).

Often non-compliance of by-laws is due to a simple misunderstanding or ignorance of the by-law being broken. So it is always best to send a polite letter (from either the executive committee or the strata manager that complies with the section of the relevant Act, stating the breach and requesting compliance with the relevant by-law. This is often enough to resolve the issue.

Relevant NSW Legislation: Strata Schemes Management Act (1996)

Section 45: How can an owners corporation enforce the by-laws?

  1. An owners corporation may serve a notice, in a form approved by the Director-General, on the owner or occupier of a lot requiring the owner or occupier to comply with a specified by-law if the owners corporation is satisfied that the owner or occupier has contravened that by-law.
  2. A notice cannot be issued under this section unless a resolution approving the issue of the notice, or the issue of notices for the type of contravention concerned, has first been passed by the owners corporation or the executive committee of the owners corporation.
  3. Subsection (2) does not apply to the issue of a notice under this section by a strata managing agent if that function has been delegated to the strata managing agent in accordance with this Act.

Section 203: Civil penalties for contravention of notice of owners corporation

 

5.3 Dispute Resolution

Disputes in a strata scheme can be many and varied. They can occur because of living close to others, behaviour on common property, by-law breaches, policies and procedures of the building manager or other service providers, disagreements between owners and the executive committee, or between owners and other owners, failure to pay levies and a range of other issues.

The actual disputes that arise are many and varied. Some common ones are:

  • alterations to common property
  • appointment of managing agents
  • repairs to walls, ceilings and bathrooms
  • noise problems
  • validity of meetings
  • keeping pets
  • water penetration problems
  • use of air conditioners
  • parking on common property
  • insurance matters
  • caretakers

How disputes are handled by the executive committee does a lot to set the tone and amenity of the building. Ideally disputes are addressed and resolved before they have a chance to escalate into a full blown war. A face-to-face approach is always the best first step. Try to understand the other parties’ concern and needs first before conveying your side. It may illuminate an easy fix, a misunderstanding, a gap or too tight a restriction in policy, a need for more investigation or to check the legal obligation of both parties. It may just be a difference of opinion that both parties will have to live with.

Pages 34 – 37 he NSW Office of Fair Trading’s booklet Strata living: What you need to know about living in your strata community has an excellent overview of dispute resolution called ‘If things go wrong: A guide to solving disputes’.

If a dispute proves unresolvable a third party intervention may be the only option. In NSW the Department of Fair Trading provides mediation through the NSW Consumer, Trader & Tenancy Tribunal (CTTT). The mediator’s role is to:

  • help the parties identify the issues in dispute
  • assist the parties to raise and consider options and strategies by which the issues may be addressed
  • assist the parties to discuss the issues and options with a view to negotiating a settlement they can all live with.

Mediation is not available in cases of appointment of a compulsory strata managing agent, compensation, allocation of unit entitlements and penalty disputes.

Relevant NSW Legislation: Strata Schemes Management Act (1996)

Chapter 5, Part 4, Division 1, Section 138 General power of Adjudicator to make orders to settle disputes or rectify complaints

Chapter 5: Parts 1 thru 7: Disputes And Orders Of Adjudicators And Tribunal

 

Relevant NSW Legislation: The Strata Schemes Management Regulation (2010)

Part 7: Regulations 21 & 22: Proceedings Of Tribunal

Part 8: Regulations 23 thru 26: Mediation

 

5.3.1 Consumer, Trader & Tenancy Tribunal

If mediation does not work, then an application for adjudication can be made to the NSW Consumer, Trader & Tenancy Tribunal (CTTT). It can issue a notice that the by-laws have been breached and then, if the breach continues, can impose a fine of up to $550 (in NSW). The owner of the property then gets that fine added to their quarterly levies, so they can’t avoid paying it.

Repeated breaches can lead to further fines but will require an ongoing effort by the executive committee and strata manager with further follow up action as ongoing breaches do not automatically generate ongoing fines

When going to the CTTT the overwhelming “rule of thumb” should be to seek appropriate advice, and seek it early and then follow that advice.