A group of owners in the new East End redevelopment has questioned how a company which shares a director with developer Iris Capital was awarded a lucrative long-term building management contract shortly before residents settled on the properties and moved in.
Minutes of the East End complex's inaugural building management committee meeting on March 2 show that a representative of Iris and another from strata management service Strata Sense were in attendance and resolved to award a contract to East End Village Building Management Pty Ltd worth at least $2.5 million over 10 years.
Australian Securities and Investments Commission records show that Sam Arnaout is the sole director of both Iris Capital Holdings and East End Village Building Management.
A Strata Sense said Our client cannot vote to resolve or award contracts. They are retained to
provide strata management services and are impartial and unrelated to the developer or builder.
They have no authority to make such decision.
Mr Arnaout denies any wrongdoing and says his building management company is best placed to manage the site and is offering "competitive" rates to do so.
The two people at the March 2 meeting also awarded a three-year strata services contract to Strata Sense worth more than $30,000 a year at the new redevelopment beside the Hunter Street Mall.
The meeting was held in Iris Capital's offices in George Street, Sydney.
Residents started moving in to the East End complex several weeks later.
One resident, Neil Petherbridge, who is chairman of the Property Council's Hunter chapter, said he was concerned that incoming owners had not had the chance to shop around for a building manager for the complex.
"It's a real shame to see this kind of behaviour from the developer after Richard Crookes Constructions delivered such a high-quality product for them and the residents are generally really happy with their new apartments," he said.
"Prior to settlement of the units, the developer had complete control of the building management committee and signed up a company it has ties with on a 10-year contract.
"I've not seen a developer do this in my 30 years in the industry. To undo the contract the owners may well have to go to the Supreme Court."
At the March 2 meeting, the Iris employee was appointed to represent the five individual lots within the development, comprising the King & Perkins, Washington House and Fabric House apartment towers, the Q Hotel now under construction and retail tenancies.
Strata Sense has sent residents an agenda for the inaugural meeting of the Washington House strata committee on Wednesday which includes a motion to appoint East End Village Building Management on a separate 10-year, $52,000-a-year contract as building services manager for that strata scheme.
East End Village Building Management is also seeking to be appointed as building manager for 10 years by the Fabric House and King & Perkins strata committees.
Mr Petherbridge said East End Village Building Management stood to earn a total of almost $5 million in fees over the next 10 years for the complex if it succeeded in also being appointed building manager by the three individual strata committees as well as manager for the overall complex.
"Strata fees can have a real impact on owners, particularly those on fixed incomes," he said.
"We need as many owners as we can to turn up to the AGMs that are being held this week to nominate for committee positions and vote against the motions being put up."
Mr Petherbridge works for engineering firm Northrop, which has launched legal proceedings against Iris over what it alleges are unpaid fees.
Two other East End owners with experience in the building industry told the Newcastle Herald that they were also concerned about how the building management contract had been awarded.
"It's the biggest conflict of interest I've ever seen," one said. "We may have to seek legal advice."
Mr Arnaout said it was "standard practice" for inaugural building management committee meetings to appoint building and strata managers soon after strata schemes were registered.
"This ensures appropriately qualified people are engaged to manage the property during the period between strata registration and the first annual general meeting," he said.
"During this period settlements occur and people start moving in to their properties. The developer bears all of the costs of those appointments up until the first annual general meeting."
He said it was not possible to consult with owners before the inaugural meeting because "at that juncture there is nobody to consult with as settlements have not occurred".
"We did specifically disclose to all purchasers in the contracts for sale that the developer may procure the appointment by the owners corporations and the building management committee of a strata manager and a building manager and that agreements would be entered into giving effect to those appointments.
"None of the purchasers raised any concerns with this disclosure, including Neil Petherbridge."
Asked whether purchasers were informed that a company with ties to the developer could be appointed building manager, Mr Arnaout said: "There was nothing to disclose as the identity of the building manager was not known at that time as no decision had been made."
He said the completed stage one of the East End project was a complex development with three residential strata schemes, a large retail footprint and a hotel.
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He said East End Village Building Management was best placed to manage the buildings "given our intimate knowledge of the site, strong working relationship with the builder and ongoing presence on and around the site".
"We believe there will be efficiencies in having the one building manager.
"We believe that the rates are competitive and proportionate with what it takes to ensure the site continually presents at its best.
"All too often you see developments fall into disrepair, which is a fate we do not wish for East End."
Mr Arnaout said each residential strata scheme would have the opportunity to consider and vote on whether to continue with its existing strata scheme manager and building manager at this week's meetings.
"Put simply, if the residential owners wish to use the services of others, they are free to do so," he said.
The executive officer of advocacy group Owners Corporation Network, Karen Stiles, speaking generally and not about the particular situation at East End, said building management committees were "unregulated".
"This can leave purchasers open to inflated, long-term contracts entered into by the developer which can be very difficult and expensive to get out of," she said.
"Behind the glossy brochures can lie a dark story of developer dominance and inflated costs, especially where a building management committee is involved.
"To add insult to injury, the service providers may be related entities to the developer, lacking incentive to investigate potential building defects."
The Owners Corporation Network called for regulation of building management committees during a recent review of strata laws in NSW.
A NSW Fair Trading spokesperson said the review covered legislation governing building management committees and building managers.
A report on the statutory review would go to Parliament in November.
"Building management committees or strata management committees are established under strata management statements," the spokesperson said.
"These are needed if a building is a part-strata development, meaning some parts of the building have not been subdivided according to strata title or where there is more than one strata scheme within the building.
"This is typical in mixed-used developments with multiple uses, such as residential, commercial and retail.
"The statement manages the relationship between the owners corporations and other title holders in the building, because while the owners corporation and strata managing agents are subject to the Strata Schemes Management Act 2015, the title holders in the non-strata parts of the building are not."
The spokesperson said building management committees were entitled to enter into contracts on behalf of the entire building, including appointing building managers.
Iris bought the East End site from the state government in 2016 and announced plans for a three-stage redevelopment comprising hundreds of apartments along the southern side of the Hunter Street Mall.
It has completed most of the first stage and cleared the site for stage two.
Editor's note: This is an amended version of the story that first appeared on this website.
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