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Posted 16 May 2019
Category: Strata
16 May 2019
Rob Stokes & Kevin Anderson
Policy & Legislation
NSW Planning
BY EMAIL
Dear Sirs,
We are writing to you to identify significant issues which strata owners corporations are experiencing with such networks and to suggest possible legislative solutions.
Embedded networks are becoming more and more common in strata developments and more and more new lot owners are becoming aware too late what an expensive trap these can be. Recent reforms have not adequately dealt with the issue and further reforms are required.
Embedded networks involve installation within a building, during the construction phase, of infrastructure required for delivery of various utilities and services. Using electricity as an example, there would typically be a āparentā or āgateā meter between the infrastructure forming the national electricity grid and the meters of individual occupants. This creates a private network, known as an āembedded networkā, through which an āembedded network service providerā, acquires energy supplied by an authorised retailer and on supplies electricity to āembedded network customersā. However, these arrangements can involve a wide range of services beyond grid electricity, e.g. solar electricity or heating, gas, heating, air conditioning, potable water, hot water, chilled water for cooling, telephone, internet access, storm water and waste removal systems.
These arrangements can be legitimate, involving facilitation of efficient delivery and competitive pricing of services, which have been disclosed in āoff the planā sale contracts. However, they appear more commonly to be a means of passing on development costs and squeezing substantial additional amounts out of owners corporations and occupiers. Australian Energy Market Operator research and our own experience suggests that, in relation to electricity supply, although these arrangements are generally āsoldā on the basis ofĀ bulk buying leading to more competitive pricing, the reality is that embedded network customer prices are at the high end of the spectrum.
The problem scenario typically involves:
The legislative response, though well intentioned, has done little to effectively address this issue. In particular:
However, these measures fail to provide meaningful assistance with embedded network issues. In particular:
In practice, these measures provide little practical assistance to an owners corporation stuck with an uncommercial embedded network. Factors working against owners corporations here include:
The current regulatory framework places owners corporations, strata committees and lot owners at a distinct disadvantage compared to developers and third party service providers. The limited requirements for disclosure and transparency, the complexity of the arrangements (even if disclosed) and the limited remedies after the event enable developers to trap owners corporations into arrangements which are highly beneficial to the developer, but very much adverse to the owners corporationās interests. This unfair playing field needs to be levelled.
In our view, the following legislative measures would present a more effective solution and should be considered:
Section S52A(2)(a) of the CA provides that vendors must attach prescribed documents to the contract for sale, which include those set out in Schedule 1 of the CR.
Section S52A(2)(b) of the CA imposes prescribed implied warranties into the contract for sale, which include those set out in Part 1 of Schedule 3 of the CR.
These involve issues which are rightly considered matters which should be brought to a purchaserās attention before entry into a contract. It is entirely consistent and reasonable that matters concerning embedded network arrangements be brought to a purchaserās attention. Considerations:
Section 184 provides for the issue of certificates by owners corporations, typically by their strata managing agent on their behalf, advising as to various prescribed matters concerning the scheme and lot. These have become important to strata conveyancing practice, enabling prospective purchasers to verify matters disclosed or warranted in sale contracts.
It is consistent and reasonable that the existence of embedded network arrangements and associated supply and management arrangements be disclosed in same way.
This could be effected by adding to the matters to be disclosed in a certificate under Section 184, copies of any agreements with third parties relating to:
This would be relatively straightforward for a strata managing agent to address, with the arrangements (if any) being recorded in the schemeās records and substantially the same information being provided to all applicants.
Without this measure, purchasers would have difficulty verifying the new CA warranty proposed above.
Section 24(2) provides in effect that, on registration of a strata plan:
In our experience, this causes considerable confusion in relation to schemes with embedded networks, because the agreement between the developer and third party operator regarding installation and retention of the embedded network infrastructure is generally not framed as a lease and may or may not beĀ necessaryĀ for providing a service. This leads to doubts:
It would be highly desirable to remove this confusion by amending Section 24(2) to the effect that, except to the extent recorded on title by registered lease or disclosed to all purchasers in their respective contracts for sale, on registration of the strata plan:
Section 132A, when it commences, will cap the term of certain utility supply contracts. However, this does not extend to the supply of electricity through embedded networks.
This mirrors caps on terms of other owners corporation agreements, such as strata managing agent agreements and building management agreements, where there is a legitimate concern about the ability of a developer to lock an owners corporation into uncommercial contracts with third parties. It is consistent with this approach and reasonable that other forms of management agreement be subject to the same safeguards, i.e. agreements for operation or management of embedded networks or management of supply of utilities be subject to the same caps.Ā In fact, given the complexity of the issues involved, there is a strong case for additional safeguards for agreements executed at the first AGM, particularly, a requirement that the validity of such an agreement to be conditional on:
Without this measure, it would be impossible for owners corporations, at this vulnerable period, to avoid being locked into long term uncommercial arrangements by developers.
Section 26 prohibits entry into specified arrangements during the initial period (the period during which owners of lots, other than the original owner, have unit entitlements less than one-third of total unit entitlements), including:
In practice, it can be difficult to enforce these rights, as:
It would be consistent and reasonable to extend these protections to embedded network arrangements, i.e. to prohibit entry into arrangements, during the initial period, relating to operation or management of embedded networks or management of supply of utilities for a term spanning beyond the first AGM.
Without this measure, it would be impossible for owners corporations, at this vulnerable period, to avoid being locked into long term uncommercial arrangements by developers.
If you have any queries please contact me.
Yours faithfully
BANNERMANS
David BannermanĀ
Acc. Spec.
(Prop.)
Principal Contact
Mark PollingerĀ Ā
Special Counsel
Related ArticlesĀ
Embedded Network In Your Strata Scheme ā Things You Need To Know
Embedded Networks ā Government Action Required
Who owns the embedded network infrastructure when it is attached to the common property?
Stuck with an embedded network? Looking for a way out?
***The information contained in this article is general information only and not legal advice. The currency, accuracy and completeness of this article (and its contents) should be checked by obtaining independent legal advice before you take any action or otherwise rely upon its contents in any way.