Legal Ease

Fair’s fair

There are two issues relating to management rights sales that are at the moment causing concern to buyers and sellers of management rights, and body corporate committees, and their legal advisors.

Recently there seems to be an upsurge in the number of bodies corporate not approving buyers of management rights to take over caretaking and letting agreements. This seems to have coincided with an increase in the number of Asian buyers. Of course, as a result of Australian anti-discrimination laws, race, marital status, age and a number of other factors, cannot be taken into account in making such decisions.

In acting for buyers of management rights, I have been staggered to read pre-committee meeting buyer’s questionnaires running into six pages. These have included requests for the last three years tax returns for the entity buying the management rights, and if it is a company, the same thing for its directors. It may be an urban myth but I have even heard of it being suggested to one body corporate committee, that it ask for a psychological profile of an incoming manager.

Requests for a criminal records report are not uncommon, even though such checks are carried out by the Office of Fair Trading as part of the application process for real estate licensing. One could be forgiven for thinking these questionnaires are designed to thwart any transfer of caretaking and letting agreements.

Under the Body Corporate and Community Management legislation, a body corporate committee is only entitled in deciding whether to approve a transfer (“assignment”) to consider:

• the character of the proposed transferee and related parties such as the directors of the transferee company
• the financial standing of the proposed transferee
• the proposed terms of the transfer
• the qualifications and experience of the proposed transferee and any related persons of the proposed transferee, and the extent to which the transferee and any related persons have received or are likely to receive training
• matters to which under the engagement or authorisation (caretaking and letting agreements) the body corporate may have regard
Also, a body corporate must not unreasonably withhold approval to a transfer.
So what is it reasonable for a body corporate committee to require from a transferee, to consider whether or not to give such approval? Having acted for bodies corporate, sellers and buyers in assignments, in my opinion, the following is adequate:
• traditionally personal and business references are required attesting to the good character and business capabilities of the transferee or, where the transferee is a company, the directors of the company and the person who will be conducting the business
• relevant criminal history will be checked by the Office of Fair Trading as part of the real estate licensing process
• evidence of finance approval by a bank. Is there really any necessity for committee members to be caught up with wading through financial records, when a bank will have satisfied itself as to the financial viability of the transferee and the business, before agreeing to lend substantial funds for the purchase? It is not as if the body corporate will be dependent upon payments by the caretaker to the body corporate.
• resumés of past experience, education and training relevant to the performance of the caretaking duties, and details of what training before and after completion of the purchase by the seller to the buyer. This is usually a week before settlement for training and a week after settlement for assistance with the operation of the business.
• a plan detailing how the transferee, and if the transferee is a company, its directors and employees, plan to operate the business such as staffing
• an interview by the committee with the principals of the buyer, and the person who will be supervising the caretaking

The body corporate’s role in relation to the business of letting units in the scheme, under the BCCM legislation, is limited to authorising the caretaker/letting agent to operate a letting agency on site should the caretaker require this for licensing purposes. In fact, this is not required where the transferee holds a full real estate licence, rather than a residential letting agent’s licence. A body corporate committee therefore has very few obligations in vetting the transferee in relation to the operation of the letting business. However, it would be reasonable to require some evidence that a licence will be obtained, bearing in mind that a residential letting agent’s licence, will not be granted until such time as the evidence of body corporate consent to the transfer, has been obtained, and provided to the licensing authority.

In my opinion, if a body corporate committee requests more than this and rejects approval for transfer because it does not obtain more, it is danger of being found to have acted unreasonably. Damages a seller could claim against a body corporate if there was such a finding would be substantial.

For a number of years now there has been a concern by sellers of management rights in relation to the approach taken by bodies corporate, and their managers and solicitors, to consent to assignment costs charged by body corporate solicitors and body corporate managers and passed on to the seller.

Under the BCCM legislation, the body corporate is entitled to “reimbursement for expenses reasonably incurred by the body corporate in relation to an application for its approval” of an assignment of caretaking and letting agreements. These are often referred to as legal and administrative fees.

Note that the expenses for which the body corporate can seek reimbursement must be reasonable and must relate to the assignment application. If all these criteria are not met, the body corporate may find itself responsible for at least a portion of legal and administrative fees, depending on its instructions to its solicitors and body corporate managers.

Having had experience in acting for both bodies corporate and sellers in the assignment process, in my opinion, some body corporate solicitors and managers are doing more work than is necessary like reviewing and giving opinions on whole agreements, rather than just the assignment process. It has not been uncommon to have legal and administrative expenses passed on to the seller that are up to double what I would have expected them to be.

The seller’s only redress in this situation is to have the reasonableness of the charges determined by the BCCM adjudication/tribunal system, or in the case of the legal fees, by a costs assessor appointed under the legal profession legislation. Unfortunately, these processes are time consuming and may involve the seller having to pay for further legal advice, for which they may not receive full reimbursement, even if they are successful. However, everyone has their limit and my firm has been successful in having legal fees claimed that were probably about four times what they should have been, substantially reduced.

Lawyers need to be careful about the reasonableness of their charges, both in respect of the amount of work they have done being reasonably required and the amount charged being reasonable. The legal profession legislation allows for overcharging to be held to be unprofessional conduct, leading to quasi criminal punishment.

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