CONQUERING COMPLIANCE: THE OBSTACLES FOR SELF-MANAGED STRATA SCHEMES

Recently, I was asked to assist a small (six lot), self-managed strata scheme that had been operating for the past 45 years. Initially I was invited to the Annual General Meeting (AGM) and was provided with: the AGM notice; a one-page document with a series of bullet point discussion notes; and an income and expenses table. After some preliminary discussions with the committee, it became evident that regulatory compliance was significantly lacking. Aside from the vast procedural irregularities, two significant issues stood out: the scheme was underinsured; and no attempt had been made to determine the repair and maintenance requirements for the building. In a nutshell, the body corporate had failed in its regulatory obligations.

The lot owners had limited, or no experience in a strata scheme before purchasing and the committee had simply followed the procedures inherited from the previous committee. There was a lot of ‘but that’s how we have always done it’ conversations. Although very few studies have probed into the workings of self-managed schemes, I am confident that this body corporate likely represents the norm not the exception.

The regulatory obligations imposed on bodies corporate are varied and complex. I had assumed, incorrectly, that simple guides and templates would be available online for a self-managed scheme to download and reference.

There are multiple challenges for self-managed schemes to meet all their regulatory obligations without assistance.1 This became evident during the process of developing a structure for the body corporate to follow. The prescriptive nature of many procedural requirements particularly around the convening and holding of meetings would overwhelm even the most astute committee.

Arguably, there has been a misalignment hindering regulatory effectiveness. Strata legislation, in varying degrees across all Australian states and territories, encourages self-management. However, at odds with this is the complexity and prescriptive nature of countless regulatory obligations, and inexperienced lot owners left to navigate a complex legal landscape without meaningful resources.

The cure for regulatory non-compliance is not a simple fix. The misalignment is not necessarily corrected by the engagement of professional managers. There are many schemes under professional management that ignore their legal obligations. The first step is to gain a better understanding of how people behave in this environment when confronted with legal obligations then consideration should be given to the most appropriate regulatory model.

1 Note: Although it is difficult to accurately determine the number of strata schemes in Australia that are self-managed, it is estimated that 69% (230,000) schemes contain six lots or less1 and a significant proportion of those schemes are self-managed.

So, why do people comply or not comply with legal obligations?

Parker and Neilsen conceptualised a holistic compliance model to understand how various motivations, characteristics and business models interact and influence perceptions of regulatory obligations, enforcement and compliance.2 The model posed 14 questions related to: spontaneous compliance dimensions (motives, characteristics and capacities of members) and enforced compliance dimensions (deterrence).3 As I reviewed this model, a number of factors stood out as potential reasons why non-compliance may be higher in self-managed strata schemes.

1. Social and economic costs and benefits – the cost of compliance (time, money, and effort) may be too high;
2. Existence of non-official influence over compliance – limited external influence from other groups or organisations to facilitate compliance;
3. Knowledge of the rules – although difficult to determine whether lot owners / committee members are aware of their regulatory obligations (no requirement in most states to interact with a government agency), the complexity of the regulations may mean that they are incomprehensible to many;
4. Capacity to comply – a lack of time (volunteer nature of committees), education and expertise may be barriers for many to implement management systems to ensure compliance;
5. Respect for the regulator – it is plausible that many lot owners and committee members are unaware of the regulator and it is highly likely that no relationship exists;
6. Risk of inspection – there is limited to no risk that the regulator would inspect the records of the scheme;
7. Risk and severity of sanctions – the risk of being sanctioned is relatively low and the severity of sanctions is even lower.

Does it matter if small self-managed schemes don’t comply with the regulations?

Regulatory effectiveness is dependent on how people respond. In an environment where non-compliance is high, the effectiveness of the regulation must be questioned. I am reminded of a comment made by Gary Bugden when he originally proposed the small schemes regulation module to the Queensland Government in the mid-1990s:

The small schemes regulation would be about 6 or 8 pages with simple motherhood statements about how the body corporate operates, obligations to merely document decisions however made and with the Commissioner acting as a safety-net if there were problems (i.e. small schemes would be legally able to operate the way they actually operate in practice).4

Although I would agree in principle with Gary’s proposition, it is imperative that there are regulatory safeguards to ensure property rights, financial funds, and the health and safety of residents are protected. These should be the priorities for governments when considering regulatory reform particularly as our building stock ages and more schemes are confronted with complex repairs and maintenance issues.

2 Parker, C and Neilsen, V, (2017) Compliance: 14 Questions, in Drahos, P (ed), Regulatory Theory: Foundations and Applications, ANU Press, Acton, ACT.
3 Ibid.
4 Bugden, G, (2013) Strengths and Weaknesses of a Modular Regulatory Framework, Strata and Community Title in Australia for the 21st Century 2013 Conference, p. 9.

Points for discussion

1. For strata schemes to function well, do we need the complexity of the current regulations?
   a. Does this depend on the size or type of scheme?
   b. Should compliance requirements be prioritised, and penalties proposed and enforced for higher ranked priorities?
2. What evidence exists that the current regulatory regimes lead to effective outcomes?
3. If compliance with current regulations is to be assured, will compliance behaviours only be changed if there is more government oversight? For example, a regime where all schemes must annually lodge compliance documentation (similarly to South Africa5 and NSW).

5 For example, in South Africa all schemes must lodge documentation to an ombud service that regulates, monitors and undertakes quality assurance of all governance documentation. This requirement appears to be more extensive than the mandatory reporting requirement in NSW.

Article contributed by Dr Nicole Johnston, Strata Knowledge