Understanding Body Corporates - a Q+A with Crockers
When it comes to the "mystery and enigma" of body corporates, Crockers CEO Helen O'Sullivan knows more than most. Ockham's Joss Lewis asked Helen about body corporate basics – what they are, how they're formed, how they set their fees. More than a few misconceptions are cleared up along the way.
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It’s very often the first question a first-time apartment buyer asks Ockham's Joss Lewis. "They listen carefully and then go very quiet," Joss says. "Then softly, almost shyly, they'll ask: "What's a body corporate?' A string of related questions then follows."
- What does a body corporate do?
- How do they set their fees?
- Who goes on the committee?
When it comes to body corporates, few know more than Crockers, New Zealand’s largest independent body corporate service provider. Their 60-strong body corporate team look after almost 1,100 body corporates – everything from two units to 2,500 units. All up, they manage more than 22,000 units within New Zealand.
In their 49 years in the game, they've build up an unrivalled degree of expertise, experience and know-how. They were the only independent body corporate service provider invited by the government to be part of their external reference group during consultation for the Unit Titles Act 2010.
And so when we wanted someone to explain "the mystery and enigma" of body corporates in simple plain English, we straight to the top – to Crocker’s CEO, Helen O'Sullivan.
In this video chat with Joss Lewis, Helen covers it all – all in 13 minutes. A transcript of the interview, lightly edited for clarity, follows.
What is a body corporate?
A body corporate (BC) is a very special legal entity that comes into existence when you have a unit title property. The apartments that Ockham are selling are unit titled and that means that each unit is part of a larger property or complex. And within that complex there'll be what's called common property. These are areas which are common to all of the units in the development and so everybody owns a little piece of them. In an apartment building, that would be the lobby and the lifts and the stairs, as well the outer envelope of the building. In your gorgeous development in Hobsonville Point, Bernoulli Gardens, the communal property also includes the garden and the lounge.
The body corporate is the entity that owns all of that common property. It exists to raise all the funds necessary to run all of that. And you, as an owner of a unit within a unit title complex, automatically become part of that body corporate when you become an owner. You automatically and compulsorily become part of it – you can’t opt in or out. You – as the owners – are the Body Corporate.
How do you go about setting the budget?
The body corporate will have a whole bunch of expenses that it's going to incur in any given year. In a new development, the developer will generally put together the first budget for that body corporate and estimate the cost the BC is going to incur once it starts operating. So when the body corporate comes into existence (when titles are issued in a unit title development) a general meeting is held. There’s only one owner – the developer – at that moment and so they'll approve or pass the budget and then the fees are allocated to each of the units within the building.
And how are the individual fees set for each individual apartment owner?
That’s done on the basis of what is called (a) utility interest for operating costs and, (b) ownership interest for capital costs. The one you’ll hear most about is utility interest – that’s basically the pro-rata allocation. An example? Let's say Unit A is valued at $400,000 as part of a bigger complex which is worth $10 million. So the utility interest becomes $400,000 divided by $10 million. That’s the total budget for the body corporate for the year and is allocated to each of the units based on their pro-rata value of the totality of the complex. Those become the BC fees for the year.
Once you’re a formed BC, you’ll have a committee and you as a body corporate – as owners – will meet once a year to determine what your budget will be for the year. And that happens every year for the life of the development.
How do I know if a body corporate fees are reasonable or comprehensive? Sometimes I get people come in and comment that they seem really high. Conversely other people think the fees seem really reasonable...
What you need to do is get a copy of the budget and analyse it. Consider it in the context of the development itself. What you’re looking for is that there's a line in the budget for each element of the building. If, for example, you've got a pool, you'd expect to see pool cleaning and maintenance costs in the budget being provided for. You’d expect to see chemical costs. If you have a large apartment building with a lift you’d be expecting to see a lift maintenance contract. It’s about analysing the budget and comparing it to the building and making sure everything is provided for. One of the key things you have to bear in mind, though, is that you’re seeing all your costs in one place and in one go.
Whereas you don't see the costs upfront in a standalone property...
If you buy a standalone property, you will have insurance costs. You will have maintenance costs. You will have bills that're going to have pay during the year. You will be mentally be providing for depreciation and the long-term costs that you have to bear into the future. In a body corporate, because of the formalised structure, you’re seeing all of that at once so it can look a bit daunting. But if you’re looking to buy an apartment, it pays to also look at a standalone building and ask: 'What would the costs be of that standalone building compared to this unit title building?' And if I put all of the costs from a standalone home – all the costs – how would it compare to this?
A body coporate also includes funds for long-term maintenance...
Yes. It's worth remembering that a BC makes provision for a long-term maintenance plan. You’re putting a bit aside every year into your big capital future expenses fund so that when the time comes in 15 or 20 years and you need to do a big piece of work like a major refit of a lift or something, you’ve got some money put away for it rather than getting socked with the whole bill all at one go. And, again, that’s the difference with a standalone home: you’ve got to take that long-term value into the equation as well.
Another thing people want to know is whether the fees are fixed or whether they’re likely to increase. They're concerned that fees might start to go up and make them unaffordable.
The key thing to remember... it’s you and your fellow owners who will determine that budget. First of course, you need to make sure that the first-year budget is reasonable because you sometimes see developments where the budget is seriously undercooked. And it's going to increase because they might have only allocated, say, $10 per unit in the long-term maintenance fund. That’s obviously not going to be adequate going into the future. But if the budget is sensible, if it's been set right to start with, then there will be incremental increases for inflation etc, but nothing that will come as a horrible shock.
Ultimately you, as the owners of the BC, determine what, collectively, you as a community are going to spend on your complex.
What happens if somebody doesn’t pay their fees?
It can be a challenge because if you have 10 units and two of them don’t pay their bills the other eight have to take up the slack. We, as body corporate managers, have a lot of processes in place for dealing with this. The debt collection processes begin relatively early after payment is due. People get a reminder, then they get chased up. They can be charged interest and they are charged debt collection fees for late payments. Ultimately the Tenancy Tribunal is the body to whom we take debt collection disputes when we’re trying to collect the fees.
In the absolute worst case scenario, there are mechanisms by which the body corporate can get paid when the sale of the property is effected. And in the really, really unfortunate circumstances, body corporates can actually work through the processes of getting an administrator appointed to effect the sale of a unit. The reality is that it doesn’t get to that worst-case scenario very often. But those mechanisms do exist should they become necessary.
How involved do you need to be with the body corporate? Do you need to go to meetings?
First and foremost you have to be a member. We do occasionally get a note from people saying they don’t want to be part of our club anymore – that’s not part how a body corporate works. But here’s the thing. When you buy into a unit title development, you’re buying into a community. With Ockham developments in particular, there’s a lot of thought and care put into creating community spaces. You as an owner… the more involved you become in that community, the more valuable the community is going to be. The more you’re going to get back.
The body corporate is an official-sounding name for your local community...
I encourage people to get involved in the body corporate. You’ve got to have a committee, you’ve got to have a chair. How good those people are and how involved they are has a lot to do with the vibe around the complex. Getting involved and being supportive of initiatives being run by your committee is really, really important. It’s like living in a neighbourhood and never looking out the window. Why would you do that? Why would you buy into a community and not be part of it. Of course, you don’t have to – you can pay your fees and say nothing. But it’s like society and community in general. The more you put in, the more you get back.
If anybody wants to know more about body corporates where would you direct them?
If you’ve got questions about body corporates in general, there are some really good resources on the Ministry of Business, Innovation and Employment’s Tenancy Services site which explains all of the legalese and the jargon and the background. If you become part of a community that we're the community manager for, we run regular sessions for our clients to take them through some of the basics of body corporate living.
The Ministry of Business, Innovation and Employment has a wealth of body corporate information on their website. This includes:
- About unit titles and body corporate. What is a body corporate? What is the Unit Titles Act 2010? What you need to know before you buy. How to resolve a dispute.
- Body corporate: how it works. Electing the chair and committee. Setting the operational rules. Making decisions.
- Unit owner's rights and responsibilities.
- A Short Guide to Unit Titles: What you need to know. An 11-page downloadable PDF.
- Other forms and resources.
You'll find other useful summaries online. Settled, the government website, has an excellent primer, What is a body corporate? Stuff's What is a body corporate, and what does it do? has some helpful tips from body corporate 'old hands'. Finally, Crockers has a fairly substantial body corporate section on their website.