Friday, 5 January 2007

Myth #2 - Conflicts of Interest and Neutrality

Most people assume that the key player in any en-bloc sale is the Sales Committee. The Sales Committee (SC) is formed to act on the behalf of the owners of the development, to engage marketing agents, to hire the solicitors needed for the collective sale, to keep all owners abreast of the ongoing sale, and to act as representatives to the Strata Title Board.

Typically, there should be no less than 3 members in the SC, and the committee is formed through election during an extraordinary meeting (EOGM) with all owners. The motivation to be in the SC is without a doubt to effect the sale of the development as quickly as possible.

However, one must ask who comprises the SC and whether there are issues of conflicts of interest between them and all the owners of the development (not just those keen to sell).

Most of the time, the starting point of any en-bloc sale is when marketing agents contact the development to express interest in representing them, or when the development contacts marketing agents to see if there is an interest in the property. But in both cases, it is largely the property's Management Committee (MC) that does the initial probe. The MC consists of owners, both residents (ie people staying there) and investors (ie people renting the property out). The responsibility of the MC is to monitor the funds collected by the managing agent of the property, to engage the agent to make repairs, upgrades, maintenance of the property, on behalf of all owners.

But here lies the conflict: The mandate of the MC is to maintain or update/upgrade the development whereas the mandate of the SC is to sell off the development in whatever condition it is in, as quickly as possible.

Why is this a problem? Because most of the time, the MC becomes the SC. Because they are the initiators of any potential en-bloc sale, the MC holds the EOGM in their capacity as a pro-tem SC. Most of them have, at this stage, audited a number of marketing agents to see what value the property is worth and which of them are the best for the en-bloc sale. By the time the EOGM is held, the MC/pro-tem SC has already chosen a strategy to pitch to the owners, the marketing agent, the method of apportionment, the reserve price of the property. Of course all these are subject to change and more importantly, subject to election into the official SC.

But most owners would view the pro-tem SC members as proactive and best able to represent the sales of the property. Plus the larger the property, the less likely people will know one another, and a person in the MC is as good as a person in the SC; election becomes arbitrary.

Why should this be a problem? Because of the conflict of interest. The members of the SC, while they are in it, are still members of the MC. Unlike politicians who assume office and are required to resign from any career positions that might be a conflict of interest, there is no such regulation for SC members.

The consequence?

  1. Because the MC (who is in most cases effectively the SC) is in charge of the maintenance fund of the condominium, they have a say in whether to use it to maintain the property or even to upgrade/update it. But because they are the SC, there is no incentive to maintain, to paint the exteriors, to make repairs, when their primary purpose is to sell the place off. Why waste that money if the buildings are going to be torn down? Effect - the place gets run down.
  2. Because the place gets run down, the SC will tell owners of the downsides if the sale does not go through - increasing maintenance funds required to upkeep the place (which if they had maintained in the first place, would not have been a major issue), place getting more decrepit driving rental and property value down.
  3. Because the MC is typically the first group to become aware of en-bloc potential for the development, they typically freeze any repairs, maintenance etc to push owners into selling. So they know that once the 10 year age mark is reached for the property, they need only 80% agreement for the sale to go through. In effect, they stop the upkeep of the property except for the bare minimum (eg security, electricity, sports facilities). Forget painting the exterior or interior, forget updating or upgrading the place, even if the MC has the sinking fund to do so.
Why do I know this? Because I was the only member of my property's SC that is not a member of the MC and became privy to the unethical behaviour that SC members will do to force, compel, push owners to agree to the collective sale. This was confirmed by colleagues who had been or are involved in enblocs, and they said the same thing - most of the time, the members of the MC becomes members of the SC, with consequences like those numbered above.

Letting the place run down, because of a potential sale, is ethically and legally wrong. Of course it's hard to prove legal evidence of the MC mismanaging the property, and unless there is a strong consensus against the sale, most owners would not care what happens to the property beyond the potential windfall they'll get.

I believe that any member of the Sales Committee cannot be a member of the Management Committee, to prevent conflicts of interest and to ensure fairplay in the collective sale.

The Land Titles (Strata) (Amendment) Act 1999 has a clause - Section 84A(9) - that defines the issue of 'good faith' which is supposed to capture the neutrality of the sale process. It states that the Strata Title Board (which mediates the enbloc sale) cannot approve an application for the collective sale if it "is satisfied that (a) the transaction is not in good faith after taking into account the following factors: (i) the sale price for the lots and common property in the strata title plan, (ii) the method of distributing the proceeds of the sale, (iii) the relationship of the purchaser to any of the subsidiary proprietors or (b) the sale and purchase agreement would require any subsidiary proprietor who has not agreed in writing to the sale to be a party to any arrangement for the development of the lots and the common property in the strata title plan".

The reason for this clause is to ensure the sale process has been executed fairly and objectively, "in good faith". But when the SC knowingly engages in tactics that impels owners to sell the property, by telling them "the place is running down", "costs of maintenance will go up", or by simply refusing to continue to maintain the property, then the sale process no longer becomes fair or neutral, that is, it is "not in good faith" especially to ALL owners including the minority.

Anybody who has been through an enbloc and is in the minority camp of not wishing to sell their property will know of these tactics I refer to. Unfortunately, the law does not provide for the condition that members of the Sales Committee cannot be the managers of the property funds.

Moral of the Story: If you are suddenly thrown into the madness of enbloc but do not wish to sell your property for whatever reason, ensure that during the EOGM you point out that you think the SC members should not be in charge of your condo's funds, so that irregardless of the sale process or however long it takes for any sale to succeed, your property will still be well-maintained and even updated/upgraded given sufficient funds. Point out that the MC is obliged to look after the interests of ALL owners, and to ensure your home reflects its best residential potential.

[Examples of great MCs are those that upgraded their property, eg Botanic Gardens View/Mansions went through an aggressive renovation to improve their exterior, interior & lifts, some condos have implemented ERP technology for their carparks or improved their security systems, or upgraded their sports facilities etc.]

I can only hope someday this will change.


Anonymous said...

"Typically, there should be no less than 3 members in the SC, and the committee is formed through election during an extraordinary meeting (EOGM) with all owners"

In my condo, the SC was self appointed. The ProTem SC become the SC. Is this legal?

Dr Minority said...

Unfortunately it is absolutely legal under current legislation. That does not mean you shouldn't query them and kick up a ruckus about it either. After all, you're potentially handing over the decision over thousands or millions of dollars to a group of strangers. You have every right to know (a) they're most qualified (b) they have the interest of the collective rather than their own (c) they are elected by the owners of the estate. If they are not, how can they be said to represent everyone. After all, another group of protem SC can be set up to compete against the current one etc.

Kick up a fuss. Send letters to people asking them to think about the validity of this current SC, especially if they were not voted in during any general meeting of the estate. A serious error since it assumes they're out for a fast sale irregardless of concerns of owners and they do not consider you as mature rational adults (because they've excluded you in their decision making processes, what's to stop them from doing so in the future?).