The covid-19 pandemic has presented challenges for many industries and businesses. One of the hardest hit industries is hospitality and tourism, which includes many serviced apartment businesses.
Serviced apartment businesses
Serviced apartment businesses provide accommodation suitable for families as well as business people travelling for leisure or business, or in some instances relocating to another city for a period of time.
Generally, the structure of these businesses is that each apartment is owned by a different lot owner and there are leases in place between the lot owners and the operator of the serviced apartment business all in the same terms.
The serviced apartment business operator will often also enter into a lease or licence with the owners corporation in respect of parts of the common property areas of the building. This lease or licence gives the operator rights to use and/or occupy parts of the common property for reception, office use and/or storage of linen and other necessary items.
The utility problem
Usually, the operator will pay for all the operating costs of the building, such as electricity, gas and water as well as Council rates. As these buildings are generally purpose built as serviced apartment buildings and the apartments are sold (often off-the-plan) to investors at the time of the build, a single meter is installed to measure each of the electricity, gas or water usage (as the case may be).
When the cost is being paid for by a single operator, this structure works fine. However, as many serviced apartment operators are closing their doors as a result of cobid-19 destroying their businesses, and other operators are not coming along to fill the gap, lot owners and owners corporations face a dilemma.
Ultimately, these utility costs must be paid by each lot owner in respect of their own lot’s usage. However, in the absence of the meters for each lot, measuring the usage and allocating the cost is very difficult.
The options are:
- install the necessary meters. However, the cost can be prohibitive;
- agree to share the cost between the lot owners on some basis. This could be done on an equal or proportionate to lot liability or some other basis. However, such agreement may be difficult to achieve because low users will be subsidising the heavy users; or
- install an embedded network.
What is an embedded network?
Embedded electricity networks are privately owned and managed electricity networks that often supply all premises within a specific area or building. Embedded networks generally buy electricity, gas or water (as the case may be) in bulk and then on-sell it to customers inside their network.
Usually the embedded network provider pays the installation cost and owns the infrastructure. This removes a significant hurdle to addressing the utility problem described above. However, it does commit the owners corporation to an infrastructure which belongs to someone else. This can make it difficult for the owners corporation to readily exit an embedded network agreement.
The decision to install an embedded network must be made by the owners corporation because it controls the common property into which the embedded network will be installed.
Approving the network
As this is not a service typically provided by owners corporations, in order for the services to be provided the owners corporation must pass a special resolution pursuant to section 12 of the Owners Corporations Act 2006 (the OC Act) authorising it to do so. If passed, such a resolution authorises the owners corporation to provide the additional service, being the supply of the relevant utility to lot owners.
Further, the nature of the embedded network will also require the network provider to have access to all the common property in the owners corporation. Usually, this will be a term of the agreement entered into by the owners corporation with the network provider.
As this is in the nature of a licence being given by the owners corporation to the network provider to access common property, a special resolution is required pursuant to section 14 of the OC Act authorising the grant of the licence.
The Agreement
The purpose of the Agreement is to enable the owners corporation to appoint the network provider to provide the utility and to act as the owners corporation’s agent to purchase the gas, electricity and/or water (as the case may be) and sell the utility to occupiers of the lots.
In a sense, the owners corporation is the ‘middleman’. However, the terms of the Agreement can place significant responsibilities and/or obligations on the owners corporation and, as such, must take care when entering into these agreements as well as seek legal advice.
Watch-out issues
Provided below is a list of issues that often find their way into the Agreements:
- The owners corporation can be obliged to ensure that its other service providers provide all reasonable assistance and cooperation as required by the network provider. This is outside the control of the owners corporation.
- The extent of the licence given by the owners corporation to the network provider in respect of the common property may inadvertently give the network provider ‘free rein’. Limitations on the licence are important so as to ensure that lot owners use and enjoyment rights of the common property are not impeded.
- The network provider may be released from complying with the owners corporation rules. It is important to ensure that there is a positive obligation on the network provider to abide by the owners corporation rules as amended from time to time.
- It is important to clearly define the costs (if any) that the owners corporation will be liable for (as opposed to those costs which will be charged to the occupiers).
- The network provider may also seek to charge the owners corporation a fee for the provision of the utility service (in addition to the usage costs charged to the occupiers). Consideration must be given to the reasonableness of such a fee.
- It is important to ensure that the network provider indemnifies the owners corporation for any damage caused by it to the common property or losses incurred by the owners corporation by reason of the negligence of the network provider.
- It is also important to ensure that the owners corporation is not indemnifying the provider for any losses, claims, liabilities and/or costs in respect of matters which are outside the owners corporation’s control. Indeed, it is preferable that the owners corporation provides no indemnities to the provider at all.
- The network provider may seek to require the owners corporation to provide personal information about occupiers and/or lot owners to the provider. Owners corporations must be careful in respect of these matters and obtain the necessary authority from the lot owners and/or occupiers to provide such information to the provider. There is a risk of breaching the Privacy Act 1988.
- The Agreement may also give the network provider the right to assign the agreement to a third party. Should this occur, the licence approved by the special resolution would no longer be effective. As such, the owners corporation would need to seek to pass a new special resolution.
- The Agreement is likely to also state who is the owner of the installed equipment. If it is to remain the property of the provider, it may be desirable to have a clause which gives the owners corporation the option to require the provider to remove the equipment at the end of the Agreement or that the equipment becomes the property of the owners corporation at the end of the Agreement. This will help overcome one of the difficulties of exiting an embedded network agreement, namely the removal of the equipment in anticipation of a new provider coming in to the property.
Conclusion
Embedded networks can provide a cost-effective solution to owners corporations and lot owners faced with the dilemma of what to do once the serviced apartment operator has eased operations in their building.
Lot owners can be freed from the shackles of being committed to a serviced apartment model and can lease and/or sell their apartment in the residential market. This may greatly enhance the value of their apartment.
However, care must be taken to ensure that the embedded network agreements protect the interests of the owners corporation and are properly approved and entered into.
More information
For more information or advice on embedded network agreements, please contact Anton Block, Principal Lawyer and Head of Owners Corporation, on (03) 8600 8833 or ablock@kcllaw.com.au.
This Owners Corporation update was authored by Anton Block, Principal Lawyer.
Note: This update is a guide only and is not intended to constitute legal advice.