While protocols are not legally binding, there is an expectation that they will be applied.
On this page:
Protocol
1. It is good practice for residence contracts to have clear definitions of capital/service categories and to clearly explain who pays for the items in each category, and for contracts to be accompanied by an explanatory document that contains illustrative examples of items under each category.
If the residence contract does not have clear definitions, consider creating them (and illustrative examples) in consultation with residents. Once this is in place, it is good practice to consult with residents or the residents’ committee on difficult-to-categorise items.
2. It is good practice to consult with the residents’ committee and the residents (in writing with a follow-up meeting) on proposals to use the service charge or any sinking fund for:
- new capital items you will own, particularly new buildings
- improving capital items you own, beyond their original condition
- refurbishing vacant units
- repairing capital items you own that would be more cost-effective to replace.
3. For substantial works proposals, it is good practice to explain to residents (in writing with a follow-up meeting) the need for the works and the process for awarding the contract (including the choice of contractor) in a way that shows that alternatives have been adequately explored.
4. It is good practice to explain why and how head office expenses are allocated to the village. You may consider using your annual financial statement for this, or the explanatory document.
5. Even if the residence contract allows it, it is good practice to consult with residents (in writing with a follow-up meeting) before using charges for:
- the cost of marketing the village and vacant units
- head office overheads that do not benefit the village
- manager-specific items such as fees for memberships of industrial or professional associations (as distinct from accreditation fees for a scheme that has been developed to benefit the village by promoting good practice).
6. If you are the manager of a loan-licence village without a long-term maintenance plan for major capital items, it is good practice to discuss the need for one with residents, using the Owners Corporation Act 2006 template as a guide.
Issues
- Resident expectations about what is covered by the service charge and what is covered by any capital replacement fund (sometimes called a sinking fund).
- Expectations about whether the resident or the manager is liable for the cost of a particular item.
- Transparency of the process for awarding works contracts.
Rationale
Residents may be on fixed incomes, and issues relating to the service charge and any separate sinking fund charge are therefore of great importance to them.
Residents may be unfamiliar with what their contracts say about these matters. They may rely on their own understanding or expectation about what the service charge covers, what any separate sinking fund charge covers (or should cover) and who is liable for the cost of a particular item.
In particular, residents may not expect the service or sinking fund charges to pay for:
- new capital items that you will own, particularly new buildings
- improving capital items you own, beyond their original condition
- refurbishing vacant units, without their request or consent
- repairing capital items you own that would be more cost-effective to replace
- marketing the village and vacant units
- head office overheads
- manager-specific items such as fees for membership of industrial or professional associations.
Some residence contracts state how different types of works are funded, for example:
- ‘capital improvement’ works by the manager
- ‘capital replacement’/‘capital repairs’/‘capital maintenance’ works from the sinking fund
- ‘general village maintenance’ from the service charge.
However, the allocation of specific works to a category can sometimes seem inconsistent or illogical to residents.
Some residence contracts specify that all works be funded from the service charge, or from a sinking fund, including capital items owned by you, as the manager. Residents may sometimes object to this, saying that they are paying for the enhancement of your equity in the village.
The complexities of the village’s business model, where higher charges are offset by lower ingoing contributions and vice-versa, can be confusing to residents. Residents may not understand that although you own certain assets purchased from the service charge or from the sinking fund, they and future residents will use and benefit from them.
How and why head office expenses are allocated on a village basis can be confusing and residents may think that:
- head office expenses are unrelated to their village
- the allocation process is not equitable
- it would be cheaper if certain expenses were handled at the village level.
It may not be clear that handling items, such as insurance, at an aggregate level can benefit individual villages.
Residents may have greater difficulty with the use of their charges for:
- the cost of marketing the village and vacant units
- head office overheads that do not benefit the village, even indirectly
- manager specific items such as fees for memberships of industrial or professional associations (as distinct from accreditation fees for a scheme that has been developed to benefit the village by promoting good practice).
When substantial works contracts are awarded without consultation, residents may sometimes believe that cheaper or better alternatives were not adequately explored.
This protocol supports transparency about how works are categorised and how works contracts are awarded, to ensure that residents are more comfortable about how their charges are spent and to help reduce disputes over these issues.
Applicable law
The residence contract is the document that governs what matters the service charge covers and what is covered by any (capital) sinking fund. It may also set out who is liable for the cost of a particular item.
The residence contract may also contain provisions about the process for awarding works contracts but this is typically at management’s discretion.
If the village has an owners corporation with fees in excess of $200,000 in a financial year, or more than 100 lots, the Owners Corporation Act 2006 states that you must have a maintenance plan for the common property that sets out:
- major capital items scheduled for repair or replacement over the next 10 years
- the present condition of those items
- when they will need to be repaired or replaced
- the estimated cost of their repair and replacement
- their expected life once repaired or replaced.
A sinking fund must be established to implement the plan.