Strata 10 year maintenance plans are creating lots of discussion (and work). Here are 15 key observations about what we do and don’t know so far.

1. No Regulations yet – 10 year maintenance plans

2. Overriding Legislative Obligations

3. New strata companies – the first plan

4. New strata companies – the next plan

5. Existing strata companies the first plan – the transition challenge

6. Which strata companies need 10 Year maintenance plans?

7. Who can produce 10 year maintenance plans

8. Maintenance Plan Vs Sinking Funds

9.     10 Year maintenance plans – the key elements

10       Reserve fund contributions Vs maintenance plan funding

11       Inspecting individual Lots to prepare a 10 year Plan?

12       Determining Future Costs – the assumptions

13       The Positives

14       Don’t forget the Negatives

15       The Strategic Divide

Conclusion

1       No Regulations yet – 10 year maintenance plans

The 2018 Legislative changes refer to Regulations which have not yet been issued. We have seen the draft and many organisations submitted papers in response. As yet we do not have clarity on what the Regulations will or will not contain. We suspect there will not be any radical changes from the draft, but you never know. The following must be read with the current uncertainty.

 

2       Overriding Legislative Obligations

What is important to remember is the Legislation requires that a strata company shall —

(a) enforce the by-laws; and

(b) control and manage the common property for the benefit of all the proprietors; and

(c) keep in good and serviceable repair, properly maintain and, where necessary, renew and replace—

(i) the common property, including the fittings, fixtures and lifts used in connection with the common property; and

(ii) any personal property vested in the strata company, and to do so whether damage or deterioration arises from fair wear and tear, inherent defect or any other cause;

Essentially these requirements have not changed substantially however the key addition has been that a designated strata company must ensure that there is a 10 year maintenance plan. So in essence the overall intent has not changed but the requirements to actually plan and demonstrate compliance has been substantively increased.

 

3       New strata companies – the first plan

The draft regulations require the first 10 year plan to be submitted for approval at the first annual general meeting of the strata company. The first annual general meeting must be conducted within 3 months after the registration of the strata/survey-strata plan.

One of the most beneficial aspects to the changes of the Legislation is the requirement that:

(3) An original proprietor shall deliver to the strata company at its first annual general meeting — (a) all plans, specifications, drawings showing water pipes, electric cables, drainage pipes, ventilation ducts or air-conditioning systems, certificates (other than certificates of title for lots), diagrams (including lift wiring diagrams) and other documents (including policies of insurance) obtained or received by him and relating to the parcel or building; and

From a building defect and maintenance perspective these documents are absolutely critical.  However, in WA it is sad to note that the vast majority of existing strata companies are not in possession of these critical documents. So going forward at least this is a substantial benefit.

The sceptics about the strata industry would suggest that many initial strata budgets are kept artificially low to ensure that the strata levies do not scare off prospective Lot buyers. If this view is accepted there would be some concerns that the initial 10 year maintenance plan for new strata companies may also be similarly underfunded.

 

4       New strata companies – the next plan

The 10 year plan must be revised at least once in each 5 years and that, when revised, the plan is extended to cover the 10 years following the revision. Bottom line, 10 year plans need to be reproduced every 5 years.

 

5       Existing strata companies the first plan – the transition challenge

What the proposed regulations do not provide adequate guidance on:

 

• When will the first 10 year maintenance plans for existing designated strata companies need to be implemented?
• Where a strata company has invested a substantial sum in preparing a 5 – 10 year maintenance plan in say the last 3 years, will they be given some leeway during the transition period or will they need to produce compliant 10 year maintenance plans within the required period of (a) above?
• What is the capacity within WA suppliers of 10 year maintenance plans to produce a large volume of quality compliant 10 year maintenance plans during the transition period?

The above are critical questions that need to be answered as soon as possible.

 

6       Which strata companies need 10 Year maintenance plans?

Legislation requires all designated strata companies prepare 10 year plans.  The legislation and draft Regulation define a designated strata company as a start company with 10 or more Lots or a strata company where the strata scheme has a scheme building replacement cost of more than $5 000 000 or in relation to a survey strata scheme if the replacement cost of the improvements on the common property is more than $5 000 000.

The regulations define the replacement cost of a thing is the reasonable cost of rebuilding, replacing or repairing the thing to a condition which is equivalent to or substantially the same as (but not better or more extensive than) when it was new.

 

7       Who can produce 10 year maintenance plans

Anybody, maybe. This is an interesting approach by the Government in that there are no requirements as to who can prepare a 10 year plan. No qualifications, experience or registrations are required – or are they?

If we consider a single tier 10 Lot strata scheme where the lot boundaries are the external walls and or boundaries of the individual Lot property, the common property subject to the plan could be relatively minor and preparing a plan might not be much more than general maintenance plan.

In contrast, preparing a 10 year plan for an 80 lot 12 level modern building worth a hundred million dollars is a different scenario. So the responsibility comes back to the strata company to ensure that the person or company preparing the plans has the necessary skills set.

There is also an interesting twist, the plan only relates to condition of the covered items and the anticipated maintenance, repair, renewal or replacement requirements of the covered items in the period covered by the plan. So the interesting question is that to determine if an item is to be included or excluded from the plan, the item will need to be inspected and tested. In relation to plant, equipment, electrical, plumbing or gas in the main, only licenced contractors can test these items. So, by default there will be some qualifications required for some of the items in the plan.

The second issue is that many strata companies already engaged quality and competent contractors to manage and service specific elements on a strata company common or personal property. Examples include, electrical contractors, lift contractors, pool contractors, electrical contractors, plumbing contractors and security contractors.  Given that many strata companies are already paying these contractors to maintain an intimate knowledge about the buildings plant and equipment, it seems appropriate that these organisations are able to contribute to the 10 year plans as opposed to the strata company having to engage yet additional contractors to form the same or similar views.

Net position is it is likely that there will need to be multiple parties who will need to contribute to the production of the 10 year maintenance plan.

 

8       Maintenance Plan Vs Sinking Funds

Maintenance plans as defined in the draft Regulations are not sinking funds. The two are notinterchangeable, they are substantially different and achieve different things.

Sinking funds are essentially the theoretical amortisation of all strata assets over extended periods of time which can extend out to 10, 20 or even 50 years. They largely represent a list of every strata asset, its expected life and its replacement, abnormal maintenance, refurbishment or update costs. Sinking funds are excellent at amortising the depreciation of an asset over the extended period of time.  In large strata properties that can be an excellent tool to ensure that all Lot owners equitably contribute to the diminishing asset values.  Sinking funds are required in some States in Australia such as NSW.

Maintenance plans as proposed by the draft regulations are very different.  They do not include all assets. The maintenance plan is to refer to items of common property, and personal property of the strata company, that the strata company anticipates will require maintenance, repair, renewal or replacement (other than of a routine nature) in the period covered by the plan (the covered items). It is quite possible that a range of strata company assets will be excluded from maintenance plans but would otherwise be included in sinking funds.

Important to note that just because a strata company asset is excluded from the maintenance plan does not mean it was not or does not need to be inspected. Where an asset has been excluded it could mean that the asset was inspected and no maintenance, repair, renewal or replacement is considered necessary during the maintenance period or, it simply was not inspected as the strata company excluded it form the scope of the inspection.

 

9       10 Year maintenance plans – the key elements

The following list the key elements as we currently understand:

 

1. Prepare a Plan

A designated strata company must ensure that there is a 10 year plan that sets out

 

1. the common property and the personal property of the strata company that is anticipated to require maintenance, repair, renewal or replacement (other than of a routine nature) in the period covered by the plan; and
   1. the estimated costs for the maintenance, repairs, renewal or replacement; and
   1. other information required to be included by the regulations; and that the 10 year plan is revised at least once in each 5 years and that, when revised, the plan is extended to cover the 10 years following the revision.

Comment: The plan essentially estimates the cost of all strata common and personal property that will require maintenance, repair, renewal or replacement (other than of a routine nature) in the period covered by the plan. It does not cover every asset and is not a sinking fund. The plan has to be revised every 5 years.

 

• Regulatory inclusions

The following data must be included within the plan:

 

• the name of the strata company and the address of the strata titles scheme;
• the name and address of the person or persons who prepared the plan;
• if the strata company employs or engages a person to prepare the plan, the qualifications (if any) of the person or if the person is a body corporate, the principal of the body corporate;
• the period covered by the plan;
• a list of the items of common property, and personal property of the strata company, that the strata company anticipates will require maintenance, repair, renewal or replacement (other than of a routine nature) in the period covered by the plan (the covered items);
• a report about the condition of the covered items and the anticipated maintenance, repair, renewal or replacement requirements of the covered items in the period covered by the plan (a condition report);
• the method by which the estimated costs for the maintenance, repair, renewal or replacement of the covered items, as set out in the 10-year plan, were determined, including any assumptions underlying that determination;
• a plan or recommendation for the funding of the estimated costs for the maintenance, repairs, renewal or replacement of the covered items.

 

• List of Covered items

The list of covered items dealt with by the plan must include such of the following items as form part of the common property or the personal property of the strata company and that the strata company anticipates will require maintenance, repair, renewal or replacement (other than of a routine nature) in the period covered by the plan —

(a) roofs and gutters;

(b) walls;

(c) floors;

(d) ceilings;

(e) windows, eaves, flashings and window sills;

(f) downpipes;

(g) foundations of buildings;

(h) driveways;

(i) footpaths;

(j) steps;

(k) stairs and stair railings;

(l) doors and doorways (including fire doors);

(m) lighting;

(n) storage or plant rooms;

(o) fencing and gates;

(p) balconies, railings and balustrades;

(q) lifts;

(r) ventilation;

(s) fire services, fire alarms and fire hoses;

(t) air conditioning systems;

(u) building and ancillary structures;

(v) utility conduits and services;

(w) garbage disposal;

(x) hot water systems;

(y) electrical systems;

(z) post boxes;

(za) security components;

(zb) swimming pools, spas and pumps or filters;

(zc) water bores;

(zd) solar and other sustainability infrastructure;

(ze) disability access facilities

Comment: Given that all common and personal property that will require maintenance, repair, renewal or replacement (other than of a routine nature) in the period must be covered by the plan it is curious that the above items are specifically listed. Notwithstanding, if the above exists the strata company must include the item in the 10 year plan if maintenance, repair, renewal or replacement is required. Important to note that many of the above items will not exist in many strata companies common or personal property inventory and hence can be excluded.

 

• The covered items may be itemised separately or grouped together in any way that the strata company considers appropriate.

Comment: It will be possible to group items within a 10 year plan. For example, the external walls of the strata can be grouped together or the walls can be listed individually. 

 

• A condition report may relate to a single covered item or a group of covered items.

Comment: Once again it will be possible to group multiple, covered items within a 10 year plan and comment on their condition collectively or individually. For example, it might be possible to comment on condition of all external building elements collectively or individually. The benefits of this approach is that it may reduce costs considerably but may make the interpretation of the plan more complex. 

 

• A condition report must include such of the following information about a covered item or items as the strata company considers appropriate, having regard to the design, age and overall condition of the strata scheme —
• the date of installation, construction or acquisition (if known);
• the present condition or operating state (including whether working or not);
• the date on which an inspection was last undertaken
• details of any maintenance, repair, renewal or replacement (other than of a routine nature) that is anticipated to be required in the period of the plan;
• the date or dates on which it is estimated that maintenance, repair, renewal or replacement is likely to be required in the period of the plan;
• details of the estimated cost of maintenance, repair, renewal or replacement;
• the estimated lifespan of the covered item or items once maintained, repaired, renewed or replaced.

Comment: Collecting and providing some of the above data may be administratively challenging for many strata companies. Much of the above will be reliant on extensive assumptions given the extended period of the plan and the number of variables that will be in plan. The second issue is the above data requirements only extends to the covered items within the plan and not all items of common or personal property.

 

10     Reserve fund contributions Vs maintenance plan funding

The legislation requires the strata must establish a fund (a reserve fund) for the purpose of accumulating funds to meet contingent expenses, other than those of a routine nature, and other major expenses of the strata company likely to arise in the future; and (b) determine the amounts to be raised for payment into the reserve fund.

The proposed regulations require a plan or recommendation for the funding of the estimated costs for the maintenance, repairs, renewal or replacement of the covered items.

But, there is no nexus between the recommendations on how to fund the maintenance plan and the contributions to the reserve.  There is a clear argument to suggest that the considerations on reserve fund contributions can ignore the maintenance plan?

Given the existing issues associated with initial operational budgets for new strata companies (and their impacts on unit’s sales) it will be interesting to see the level of contributions set for funding initial maintenance plans. Further, given that many strata companies are already substantially underfunded and under-maintained without a formal nexus between the 10 year maintenance plan and the reserve fund contributions, the value of the investment in these 10 year plans may never be realised.

 

11     Inspecting individual Lots to prepare a 10 year Plan?

The draft regulations require the wall, floors, ceilings, windows and doors to be inspected of the common property to be inspected.

Where the Lot boundaries are the external surfaces of the walls and roof then these items associated with individual Lots would be excluded.

However, where the Lot boundaries are the internal surface of the perimeter walls, floors and ceilings then everything outward from surface is common property. Defects or maintenance items below the surface should be incorporated into the 10 year maintenance plans. Similarly the roof space above the upper floor units should also be inspected.

Inspecting every unit within a strata company can be expensive and a logistical challenge. Notwithstanding, how would the strata company know if there are issues with common property which is only visible within a strata Lot if the Lot is not inspected?

 

12     Determining Future Costs – the assumptions

Estimating future costs is more an art than a science.  Estimating the cost of an item today or next year is possible, but determining what that item will cost in say 8 years’ time is problematical. Estimates can be provided but Strata Companies need to determine how those estimates have been derived.

Appropriately the Regulations require that the method by which the estimated costs for the maintenance, repair, renewal or replacement of the covered items, as set out in the 10-year plan, were determined, including any assumptions underlying that determination.

 

13     The Positives

As indicated above the common and personal property associated with many designated strata properties could be valued at many millions to hundreds of millions of dollars. While there are some excellent examples of well-maintained strata properties in WA with extensive maintenance plans there are similarly many examples of poorly maintained strata properties.

There is a strong argument that the new requirements will bring much needed focus and transparency to the effective maintenance of strata properties so that these properties are managed and maintained for all Lot Owners.  The preparation of effective 10 year maintenance plans should provide much greater transparency to the current condition of the strata property and the future maintenance requirements.

 

14     Don’t forget the Negatives

With positive come the negatives.

The legislation and proposed regulations require a substantial amount of detail to be gathered, analysed and incorporated into 10 year financial plans. This will cost, a situation that Lot owners need to understand.

There will be a number of strata companies where the lack of maintenance over extended periods will become visible to key stakeholder groups. Where a 10 year maintenance plan identifies substantial unfunded liabilities, the strata company may need to give consideration to communication and engagement strategies. Key stakeholder groups who may want to see these plans include:

 

• Lot owners
• Strata company insurers
• Prospective Lot purchasers
• Bankers/Brokers/Advisers to prospective Lot purchasers or existing Lot owners
• Property Valuers

 

15       The Strategic Divide

Many strata companies face a strategic divide between Lot owner occupants who want a high level of maintenance to be maintained and Lot owner investors who are focused on cash flow generated by their Lot investment, potentially at the expense of discretionary or proactive maintenance. The new Legislation and proposed Regulations will do little to change the strategic divide.

 

Conclusion

10 year maintenance plans will bring much transparency to the status or maintenance management within WA strata properties. There is potentially a solid value position to stakeholders. There will be a range of transition challenges particularly where some strata companies are faced with considerable unfunded liabilities.

During any periods of change, engagement and communication with key stakeholders will be key.

The above is meant as a general comment and observation only. Strata managers and strata companies should seek independent legal advice as appropriate.

Houspect conduct s a large number of strata building inspections including for strata companies including:

 

• Pre Hand Over – Strata Common Property Practical Completion Inspections
• Post-Handover defect liability inspections
• Maintenance period inspections
• Statutory liability period inspections
• WA Building Commission Reports
• State Administrative Tribunal Reports
• Tribunal Attendance (WABC and SAT)
• Investigation inspections
• Stage construction/maintenance work inspections
• 10 year maintenance plans

November 2019

strata@houspectwa.con.au

P 9240 8855