This article has been taken from he commissioner for the Body Corporate and Community Management Act and looks at spending limits in a body corporate – both committee spending limits and major spending limits.
Management rights: Industry Jargon
Management rights can be complicated. And when things get complicated, technical terms and jargon arise. Sometimes this jargon is thrown into an email or even a document. So, the team at BCsystems have put their heads together and produced a list of the most common management rights related jargon with a plain-English summary of what those words mean in this context.
This refers to the actual agreement document between the body corporate and the caretaker. These are the core documents that create the management rights at the building. Even if the management rights are assigned to someone else, the terms from the original agreement still apply.
This is the process of one caretaker transferring or “assigning” their rights in the caretaking agreement to another caretaker. This process is undertaken any time a management rights business or bought or sold, and importantly it requires the body corporate’s consent.
The body corporate is the legal entity which collective word for the lot owners. The body corporate decisions are generally made on behalf of all owners by the elected committee, but depending on the magnitude of the decision sometimes requires owners vote at an annual general meeting (AGM) or extraordinary general meeting (EGM).
The agreements contain certain duties and clauses which set out who does what, and how the relationship between the caretaker and the body corporate operates.
If either party does not comply with one or more of the terms of the agreements, that is a breach of the agreement.
There are separate mechanisms or processes to deal with a breach of the agreement.
Caretaking service contract
This is a specific type of contractor under the body corporate legislation. Any person who has a contract with the body corporate for a period of 12 months or more is a ‘service contractor’ (e.g. the lift maintenance company), however, if the person provides caretaking services they become a ‘caretaking service contractor’. There are special rights and restrictions which apply to a caretaking service contractor.
The caretaker might be one or more individuals, or the caretaker might be a company or trust. The person or entity named in the caretaking agreement is the caretaker.
Referred to also as manager, on-site manager, letting agent.
Most agreements allow for the appointment of one or more representatives if the caretaker is a company, and often the committee has a role to interview the person and give their consent.
The idea here is that whilst the company may be experienced in caretaking work, if the company employs someone to do the work, that person also needs to be experienced and skilled.
The original agreement is not physically changed when a deed is entered into, but the documents must be kept together as the deeds become a necessary part of reading and understanding the agreements.
There are two common types of deed set out below, but a deed can really include any type, number or magnitude of changes to the agreements.
DOA – Deed of assignment
This information is documented in a deed of assignment. The body corporate committee is typically asked to consent to the assignment to the new caretaker, and to sign off on the deed of assignment, making that transfer official.
In a deed of assignment, generally, nothing about the agreement is changed at all, aside from the person or company who is the caretaker.
DOV – Deed of variation
Really any aspect of the original agreement can be changed by a deed of variation, as long as both of the parties agree.
Common deed of variation actions include:
- Changing the duties (what the caretaker must do)
- Changing the remuneration (what the caretaker is paid)
- Whether the caretaker must live on-site
- Whether the caretaker must own a lot in the body corporate
- Changing some legal clauses based on recent case law
- Extending the contract by adding another term – see extension
The duties are different in each agreement, but generally provide for:
- Garden maintenance
- Pool care
- Handyman maintenance
- Arranging quotes and contracts
- Monitoring by-laws
- Reporting to the committee
The performance of the duties is arguably the most important aspect of the agreement, as the duties are visible to all owners, and if not performed well, often generate complaints and disputes.
Exercise of option
If you had a 10-year agreement with a 15-year option, there would generally be a clause requiring you to write to the body corporate between 3 and 6 months before the end of your first 10 year period, to exercise or activate the 15 year period.
If the caretaker forgets to exercise their option, then the agreement just ends at the expiry date and the option period is never activated.
Most option exercising is done by a letter from the caretaker’s solicitor to the body corporate, and generally, the clauses are worded so that a letter is sufficient. The body corporate generally does not have a choice about whether an option can be exercised.
Some agreements have a protection that the caretaker must not be in breach of the agreement at the time of exercising their option, which gives some protection to the body corporate if the caretaker is not performing well.
The law sets out the maximum duration of agreements, and that duration is always taken from the current day. If the caretaker had an original 25 year agreement, after 5 years the agreement will only have 20 years left. At that time, the caretaker has an opportunity to add a new 5 year option to the end of the agreement, to bring the total remaining term back up to 25 years.
This is done to keep the agreement as close as possible to the maximum contract length permitted by law, as that increases the value of the caretaker’s business.
Banks will lend against the caretaking agreement, and will take the caretaking agreement as security (similar to a mortgage). This structure is how a person can take out a secured business loan to buy the management rights business and become the caretaker.
If this is the case, the bank or lender is a financier, and under the law the financier has certain rights. Generally the financier has a right to be told about any breaches by the caretaker, so that the financier can step in and resolve those breaches before the body corporate takes any termination action which would jeopardise the financier’s value in the agreement, though not all caretakers will have a financier.
Following this case, most financiers on behalf of the caretaker initiated motions for deed of variation – “Gallery vie” which were designed to locate and close any similar loopholes in existing caretaking agreements.
The financier or bank has a vested interest in making the caretaking agreements more secure for the caretaker, as they lend against the agreements for business loans – see financier.
Part of this process is for the committee members to interview the proposed new caretaker, and ask questions to understand whether the proposed caretaker will do a good job in the role. This is generally similar to a job interview and is a good opportunity for the committee to convey their expectations for the property.
Refer to caretaker
Letting authorisation agreement
The letting authorisation agreement is a contract between the body corporate and the caretaker which generally provides an exclusive right for the caretaker to promote rental services within the body corporate development, and to manage those rental properties on behalf of owners from within the body corporate.
The body corporate does not pay for this service, it is available to investor owners if they choose to take up the services from the caretaker.
Sometimes the letting authorisation agreement is a separate document, and sometimes it is contained as a part of the caretaking agreement (making it a single caretaking and letting agreement).
Even if the caretaking agreement and letting agreement are physically separate documents, they are generally tied together by their terms, so that they cannot be assigned independently. This is to ensure that the one person or entity remains as the caretaker and letting agent, for the convenience of owners.
If a building has 100 units and 50 are owner-occupied, there are 50 rental lots. Out of those 50 rental lots, 15 owners may choose to use outside rental agent services.
The caretaker in that building would have a letting pool of 35, referring to the number of rentals that they manage within the building.
Refer to caretaker
This has the same meaning as a caretaking service contract. Different solicitors preparing these agreements may give them different names, however the classification between a caretaking service contract and letting authorisation agreement remain the same, regardless of the title of the document itself.
This term bundles together the caretaking and letting component and is often used to reduce the complexity of language involved in these arrangements.
Often you will hear people refer to themselves as “owner of management rights” or “management rights operator” which indicates the person is the caretaker and letting agent for one or more body corporate contracts.
Notice of financed contract
This is the document that puts the body corporate on notice that a financier is involved, and it activates certain rights that the financier has in relation to the agreement between the caretaker and the body corporate.
Lawyers will often give advice that “this decision must be made by ordinary resolution” which means that the body corporate must call an AGM or EGM and give all owners the opportunity to vote on the motion.
An option effectively means the caretaker may extend the term for a further period at their discretion. Most option clauses require the caretaker to notify the body corporate within a specific time period – see option exercise period below, whilst others are worded so that the option is automatically exercised.
Many caretaking agreements are set up to automatically include options from the outset. Even if an agreement doesn’t have any options in it, the caretaker will generally always propose a deed of variation for extension or top up to add an option to the end of their current term, to allow the contract to remain close to its maximum permitted length.
Option exercise period
Timing is critical when it comes to exercising options.
OSM – On site manager
Refer to caretaker
Many decisions relating to management rights require a secret ballot and a returning officer.
Remedial action notice
There are certain restrictions about remedial action notices and they are very technical – it is always advisable that the remedial action notice be issued by a solicitor.
If the body corporate issues a remedial action notice (RAN), it must provide a copy to the financier if applicable.
The body corporate is generally required to pay the remuneration monthly either in advance or in arrears, depending on the agreement wording.
This is a type of voting process at an AGM or EGM which is conducted in secret. The law requires that most motions relating to a deed of variation for a caretaking agreement must be considered by the owners in a secret process, to prevent the caretaker from exercising influence over the owners.
The body corporate will be asked to consent to the assignment. Often the two caretakers will have agreed on a settlement date for the finalisation of the business sale, and this settlement date is used as leverage to try to speed up the committee’s decision-making process.
It is important to note that the settlement date between the outgoing and incoming caretaker has no bearing on the committee’s timeframe. The committee has 30 days to decide whether to approve a transfer – to provide sufficient time for the committee to consider.
If the settlement date is too soon, the caretakers will be required to delay it while they wait for the body corporate’s decision about whether or not to consent.
Terms are often just set periods (e.g. 25 years), however sometimes terms are a shorter period with options built in (e.g. 15 year term + 5 year option + 5 year option).
The remaining term of the agreement (from today’s date) is one of the biggest factors in its value for the caretaker. An agreement with 23 years remaining is a much more valuable asset than an agreement with only 3 years left before expiry.
Refer to extension – these are interchangeable terms with the same meaning.
Sometimes deed of variation is abbreviated to just variation for short.
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