Investing in properties that are part of a body corporate can be an easier first step onto the property investment ladder than buying a stand-alone investment property. However, it means you will not be making decisions on your own as you are buying into a group of co-owners.

All too often body corporate matters become mired in legal proceedings. If you want to avoid going down that path, there are a few critical things to look out for when investing in a body corporate arrangement.

Body Corporate Dynamic

When you purchase a unit in a body corporate you are buying into a community of owners. So, first up, always review the body corporate minutes; what do they suggest the dynamics are like within the complex?

There can often be different factions within a building, such as commercial versus residential in a mixed-use building, or investors versus owner-occupiers. They may have different views on maintenance expenditure.

Do the minutes show that while issues may crop up they are resolved, or are there intractable differences? Are the differences handled professionally, or is there appalling behaviour? Fractious body corporates can slow down decision making and increase overall costs, which impacts on your investment return.

If you are buying into a development where there may be a lot of units leased or managed by a single operator, there may be a “power block” of votes. That’s where votes at AGMs may be proxy farmed. This can make it hard to make decisions which are against the interests of that party. An example of a situation where this can happen is in some serviced apartment hotels.

By reviewing the minutes before buying you can be aware of whether there are negative dynamics which may impact on the financial performance of your investment.

Remediation Projects

Some complexes may have remediation issues arising from poor construction or systems reaching end of life and needing replacement. Remediation projects not only involve cost, but they also tend to impact on the occupation of a building.

For example, tenants may have to vacate the building, or the noise and process might impact on tenants’ quiet enjoyment, and they may seek rental concessions during the period. Such matters need to be assessed and their impacts evaluated.

Some body corporates may also issue claims against parties if the remediation arises from negligence or breach of contract. If this occurs, an owner may be required to fund the litigation costs as well as the repair costs.

An assessment may need to be made as to whether an owner who buys after the need for repair arising (i.e. buying with knowledge) and who is called upon to pay levies to fund litigation is able to benefit from any pay-out for unit property repairs. The sale and purchase agreement should address responsibility for litigation costs and who benefits from any pay-out.

You should be able to find out whether there is an issue by reviewing minutes, disclosure statements, and obtaining a builder’s report. There may also be a section 74 scheme registered on the supplementary record sheet of the record of title which would alert you to a project being underway.

Vendors also need to disclose litigation under standard warranties in sale and purchase agreements.

Repairs & Maintenance

Always ask for a copy of a body corporates’ long-term maintenance plan and review it. Then consider the following questions:

Who was it prepared by and were they a properly qualified person? Is the plan for 10 years or longer? Is the body corporate carrying out repairs as they fall due? Are there some expensive works coming up that you as an owner will have to pay your share of? Does the body corporate have a long-term maintenance fund, or does it just issue special levies when it is time for big items in the plan to be carried out?

‘By reviewing the minutes before buying you can be aware of whether there are negative dynamics which may impact on the performance of your investment’

It pays to know that if the body corporate doesn’t fund its long-term maintenance plan on an annual basis there can be periods within a building’s life when there may be a lot of repairs carried out at the same time. If that happens then it will only be the owners at that time who will fund those repairs.

When making any investment a purchaser has an eye on the net return that they will make, so matters like the amount of annual body corporate levies are important. However, less is not always more. That’s why it is important to find out if the building is being adequately maintained and whether there is a good long-term maintenance fund which is being systematically funded and implemented over time.

If maintenance isn’t being carried out regularly, this can lead to the property becoming run down which will depress rents. It can also lead to more expensive major repairs and maintenance needing to be carried out because the building isn’t being maintained well on an ongoing basis.

Some other questions to explore are whether the body corporate has a debtor problem – for example, do other co-owners pay their levies on time? If there is a debtor problem, it can affect body corporate cash flow. It means other solvent owners may be levied those defaulting owners’ shares of costs while the body corporate is chasing payment.

Leases, Rules & OP-Ex

It is critical to understand what the body corporate operational rules say. Do they limit the use of the unit, and are those limitations lawful limitations? Will the rules be flexible enough if you have a retail unit and want to change the business use for a new tenant? If it is a residential unit, does it prohibit Airbnb and is that prohibition lawful? Is smoking allowed or pets?

With any tenancy or leasing agreement you enter into you need to ensure that the lease agreement reflects the operational rules so that it is consistent with them. For example, if the rules prohibit a use, the lease should prohibit that use also. If pets are prohibited, the tenancy agreement should prohibit them too.

With commercial leases, an important point to remember is that not all body corporate levies can be passed onto tenants as costs. For example, if longterm maintenance fund contributions relate to capital works replacement matters they will not be able to be on-charged as landlords are usually responsible for the cost of capital repairs.

So you will need to go through a body corporate’s annual budget and look at the line items to see whether some of these items need to be removed before on-charging to any tenants.

Non Unit Title Act

The Unit Titles Act 2010 can be quite rigid as to how matters are dealt with and we often see arrangements entered into which do not follow the Act. That might involve adjusting levies to a fairer share, agreements that lock a building manager in for a significant term (such as 10x10x10) or licences issued for common property areas where the proper special and designated resolution process has been followed or not.

‘Look out for embedded networks: they might limit you or your tenant’s freedom to purchase services from whomever you want’

If proper processes have not been followed, there may be enforcement issues, and other owners may challenge these arrangements at a later date.

Look into whether there is a building manager or not, and what the state of the relationship with any manager is. Find out if the body corporate is happy with their performance or, alternatively, if there are issues to be resolved. It’s also good to know if a building manager been locked in for a significant term and whether that breaches the Act (as has been held by the courts in the past). Additionally, do they have exclusive letting rights which are not enforceable and impact on your ability to use a property manager of your choice? Understanding how the building management arrangement impacts your investment is crucial.

Finally, look out for issues like embedded networks (for things like electricity or water) or other agreements. They might limit you or your tenant’s freedom to purchase services from whomever you want. Identify whether these arrangements have been properly entered into and whether they are lawful. Sometimes these arrangements have been set up by developers to have a future income stream rather than benefitting the body corporate.

Final Word

Buying into a well-run body corporate can be an excellent investment, because a lot of the property management issues are outsourced to professionals. But investors need to be aware of some of the potential issues involved so they don’t run into any nasty surprises when it is too late.