Stuck with an embedded network? Looking for a way out?

Posted 15 May 2019

Category: Strata

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.

Although these arrangements most commonly involve electricity, they can involve a wide range of other services, 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.

The trap involves a third party installing and owning infrastructure, which would otherwise have been provided by the developer and form part of common property, then seeking to have the owners corporation enter into an agreement (or ratify an earlier agreement with the developer) giving the third part rights such as:

Ownership of the infrastructure. Operation of the infrastructure as an embedded network or management of the owner’s corporation’s use of the infrastructure as an embedded network. Management of supplies of utilities and services to the owners corporation by other suppliers. Network use charges and/or management fees. Option to sell the infrastructure to the owners corporation for a specified price on termination of the arrangements. If the agreement involves passing on the cost of providing infrastructure by inflated charges over time, the developer may be breaching its fiduciary duty and be liable to the owners corporation on this basis or under the law relating to secret commissions.

There is a possibility that, whatever the agreement says, the third party does not actually own the infrastructure and that it has vested in the owners corporation as common property. The agreement may infringe prohibitions on transactions during the initial period.

So far as supplies to the scheme by external suppliers are concerned (i.e. this does not extend to supply of electricity though an embedded network), pending reforms expected to commence later this year will cap terms to 10 years for existing agreements, to the end of the FAGM for agreements signed before the FAGM and 3 years for agreements signed at or after the FAGM.

So far as supplies of electricity through an embedded network are concerned: You may have rights under the National Electricity Law and the National Electricity Rules, e.g. to require cooperation regarding use of an alternate retailer and appointment of an embedded network manager “to address technical issues presenting barriers to retail competition”.You may be able to make a complaint to the Energy and Water Ombudsman NSW.

We have considerable experience and expertise in this area and can help you.

***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.