A letting agreement or a by-law?

AccomNews Sunday, February 16, 2014

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The facts (well, at least according to me!) are:
• Management rights were originally established to provide on-site caretaking and letting for buildings predominately owned by investors.

• Management rights comprise two forms of income – caretaking and letting.

• Caretaking remuneration should always have a profit margin (who wants to take on a job without any profit?) – but not excessive profit.

• The real profit in management rights is derived from the letting.

• An on-site manager who:

(a) lives in the same building as the tenants he puts in; and

(b) operates a letting business from a foyer reception for a majority of owners is a much better option for the harmony of a building than having numerous outside agents letting out units without any supervision of the tenants.

• Anyone who operates a business in Australia does so with a view to building the business and one day selling the business at a profit. Management rights business owners are no different.

• Security of tenure and a continuity of income are critical to creating goodwill. Businesses are sold on a multiplier of sustainable income – “sticky money” as [management rights lawyer] Michael Teys calls it.

• “Certainty (of income) equals value” according to leading valuer, Chris Kennedy.

If you accept my proposition that the key income driver or management rights businesses comes from letting, how important is a letting agreement with the owners corporation?

The letting agreement

• A letting agreement (sometimes included as part of the caretaking or management agreement) simply grants the manager exclusivity to operate a letting business from an on-site office or unit.

• No money is paid by the owners corporation to the manager to perform the letting duties. The courts prohibit this as an owners corporation cannot pay a letting agent for services that some but not all owners may require.

• Letting agreements are unregulated by legislation in New South Wales (unlike caretaking agreements). Consequently, there is no term limitation applying to letting agreements. As long as the owners corporation is empowered to enter into the agreement (usually by way of by-law), the owners corporation can grant on-site exclusivity to a manager for any term.

• It is not unusual to see a caretaking agreement for 10 years while a concurrent letting agreement runs for much longer term.

By-laws

• You will often see by-laws that not only empower an owners corporation to enter into a letting agreement but also provide that the manager is the only person who can conduct an on-site letting business from a lot or from the common property.
This type of by law does not prohibit owners from renting units themselves or giving their units to outside agents to let.

• However, there are two types of by-laws in New South Wales:

(i) By-laws made under section 47 of the Strata Schemes Management Act. This by-law requires a special resolution (effectively a 75% majority of those that vote) to be passed. These by-laws can be created for the purpose of the control, management, administration, use or enjoyment of lots or common property in the strata scheme. A by-law granted under this section can provide that only an appointed manager can carry out onsite letting in the complex. This type of by-law however can be repealed by way of a special resolution.
(ii) By-laws made under section 51 of the SSMA. This by-law again must be passed by way of a special resolution and can confer on the “owner of a lot” special privileges in respect of the whole or any specified part of the common property (eg – on-site exclusive letting rights). However, the key difference with a by-law made under this section is that while the rights attaching to the lot can also be repealed by way of a special resolution, it can only happen with the written consent of the owner of the lot concerned.

• Consequently, you can see that letting exclusivity granted to a manager under a section 51 by-law continues, irrespective of whether the manager has a letting agreement with the owners corporation. The by-law can only be repealed with the written consent of the owner of the manager’s lot.

Conclusion

Quite often, managers have the benefit of a by-law as well as a letting agreement with an owners corporation. However, if I was made to choose one or the other, I would take a by-law attaching to a manager’s lot made under section 51 every time, before I took a letting agreement supported by a by-law under section 47.

Owners corporations sometimes hesitate about entering into a letting agreement. I do not know why. If they have a letting agreement with a manager, they can include terms and conditions that benefit the owners corporation. For example, the agreement can dictate opening hours for the office or require the manager to provide copies of trust account audits. This right only comes from the agreement with the manager.

In the absence of a letting agreement and, on the basis that the manager has the benefit of a by-law made under section 51, a caretaking agreement can end but the manager can still continue to operate a profitable on site letting business pursuant to the rights granted under the by-law. These rights cannot be taken away from the manager by the owners corporation.