With the size and complexity of Strata Developments increasing in NSW, the strata management industry is seeing more and more Building Management Committee structures being used on new developments in Sydney. It is important for both developers and owners within a BMC to have a sound working understanding of how a BMC works, what decisions a BMC makes and how they operate within the legal framework.
What is a Building Management Committee?
In a 'normal' strata plan, each level of a building is sub-divided level by level across the boundaries of the parcel of land, allocating areas or units for single ownership or common ownership (common property). By contrast, a stratum subdivision (or Air Space subdivision) is essentially a subdivision of height, usually separating usage types. A stratum subdivision provides the flexibility for each usage type to be divided into a Strata Plan. This way, usage types are 'carved out' from within a building (example below):
Why is a Building Management Committee structure used?
A Building Management Committee structure is typically used when different usage types occur within the same building. A essential purpose of this structure is to separate out operational decisions within each respective component use area to ensure that the governance of the entire building is limited to issues / items that impact upon all occupants and owners within the building. This is because different usage modes within a building have different goals and objectives for their group of owners.
For example:
- Commercial and Retail owners aim is to maximise revenue, signage and patronage to their customers to add value to their businesses. Noise is less of an issue than with a residential property
- Residential owners aim is to increase lifestyle, reduce noise and manage costs for owners and do not want to be disturbed noise and crowding by shoppers / hotel guests
- Hotel owners wish to remove all their operations from the other usage types to drive revenue and amenity for their guests. They are less concerned about noise than residential owners in common areas however suites must have maximum amenity to enhance their user experience
- The other critical reason for using a BMC structure is to fairly and accurately allocate costs of any items within the building that service more than one of the component use areas. Some usual examples of this include water, insurance, fire services and lifts.
What is a Strata Management Statement?
A Strata Management Statement (also known as an 'SMS') is the principal governance tool for Building Management Committees. A SMS also contains what is known as the 'Shared Facilities Schedule' which identified and allocates the shared costs within the building. One of the new requirements of the Strata Schemes Development Act 2015 is the requirement to review the allocation of shared costs every five years. Another requirement of the new act is the requirement to ensure a 'fair' allocation of costs.
The Strata Management Statement is a registered document for the owners of the building and as such it is binding on the owners of the scheme, in much the same way as a set of by-laws for owners within a strata scheme.
What must be included in the Strata Management Statement?
Schedule 4 of the Strata Schemes Development Act 2015 outlines that a strata management statement must provide for:
- the establishment and composition of a building management committee and its office holders, and
- the functions of the committee and the office holders in managing the building and its site, and
- the way in which the statement may be amended, and
- the settlement of disputes, or the rectification of complaints, about the management of the building or its site, whether by requiring reference of disputes or complaints to the Secretary or Tribunal or, with the person's consent, to any other person for a recommendation or decision or otherwise, and
- the fair allocation of the costs of shared expenses relating to parts of the building, and
- a review process to ensure that the allocation of those costs remains fair with any such review taking place as soon as practicable after any change in the shared facilities or services (including any change in the use of those shared facilities or services), with at least one such review occurring every 5 years even if no such change has occurred
- the manner in which notices and other documents may be served on the committee
A strata management statement must include details of the method used to apportion the costs of shared expenses referred to in subclause (1) (e).
What are the key requirements for Building Management Committees?
Each building with a Strata Management Statement must form what is known as the Building Management Committee. The SMS will outline the requirements and functions of the Building Management Committee including what decisions they are required to consider.
The BMC will typically have regular meetings (at least annually) and the SMS will set out how the meeting is to be convened and what decisions can be made. Each SMS will set out how voting is to work and the level of decision required on each item to be considered.
It is common for a significant number of contracts to be determined at the BMC level, as the contracts impact more than one member. Typical examples include cleaning, insurance, building management and strata management.
Amendments to a Strata Management Statement can only be made after receiving a Special Resolution from each of the strata schemes within the building and the consent of each owner in the case of any stratum lots that are not strata schemes.
Words for the wise - What should we be looking out for with your BMC management?
The Strata Management Statement is essentially a cost distribution and governance mechanism so that each of the respective entities can make best use of their property. As the Building Management Committee cannot own assets, it is important to remember that every part of a building with an SMS is owned by one of the entities identified on the Strata Management Statement (unless there has been a colossal mistake!).
If the accounting is not properly allocated with running balances being maintained and identified for each member of the BMC, the BMC will not be able to segregate money between entities. This is very difficult to resolve (you will probably need to engage the services of a specialist Strata Accountant like Kelly and Partners or Matthew Faulkner Accountancy).
Make sure that the SMS has a mechanism for Capital Works Fund collection of shared facilities - either in the respective entities direct or by the BMC. Some SMS's provide the requirement to have a Capital Works Fund / Sinking Fund, others do not. We have seen numerous examples of SMS that don't make provision for large capital items like external painting and handrail upgrades which provides difficulty with tendering large remedial works that impact an entire building.
Further to the last point, make sure that all the capital items of your building are covered in either your strata schemes Capital Works Fund Forecast or the BMC capital works fund forecast based on the requirements of the SMS. Without this, you cannot correctly estimate for capital works requirements.
The goal of the BMC structure is to provide a framework for differing usage types to operate within a building / group of buildings with reasonable harmony. It is important that the SMS provides flexibility for each member to improve their amenity, as long is the changes don't impact the other members of the BMC.