Caretaking and letting agreement essentials part 2: finance deeds

In New South Wales, it is important to detail financiers’ rights in the caretaking and letting agreements or the by-laws (or both). I say this because the Strata Schemes Management Act 1996 does not recognise the role of financiers – unlike in Queensland.

Management rights is an industry and for any industry to develop, there must be banks prepared to lend to that industry against the security of the caretaking and letting agreements. However, banks will not lend without entering into a finance deed with the owners corporation.

These finance deeds have different names depending on which bank you are talking to. They are often referred to as “right of entry deeds” and “deeds of consent”.

What are they?
They are essentially a tripartite agreement between the owners corporation, the manager and the bank to ensure that the bank’s security is not jeopardised if the caretakers default under its loan facility with the bank or under the caretaking agreement. The agreements allow the financier to “step in” to the caretakers role, rectify any default and continue to operate the business as a going concern pending a sale. In other words, they give the bank the ability to preserve its security in circumstances where the owners corporation might otherwise be entitled to terminate the agreement.

Negotiating the terms of these finance deeds with owners corporations and their solicitors is becoming increasingly more difficult. Owners corporations do not like these deeds restricting their rights under the caretaking agreement in the event of a default. Consequently, when negotiating and drafting caretaking agreements or by-laws, it is best to agree upfront on the terms that are to go into the finance deed.

The Queensland position
Queensland had the same problem as New South Wales in relation to negotiating the terms of these deeds over 15 years ago. After much consultation between the management rights industry, the banking industry and the unit owner groups, Queensland incorporated section 123 into the Body Corporate and Community Management Act 1997. This section legislates the financiers’ rights and finance deeds were subsequently outlawed.

Unfortunately, similar rights are not included in the NSW Strata Schemes Management Act 1996. Consequently, every deed has to be negotiated, which is adding considerable expense and time to every management rights sale or purchase in New South Wales.

Fair content
When drafting your caretaking and letting agreements or by-laws, in my view, there is no better place than to start with the Queensland legislation. This section was heavily negotiated between industry participants at the time that the section was introduced into the Queensland legislation, with the government considering it a fair balance between the interests of all parties.

One would think that a replication of these terms into a New South Wales finance deed would be the simple and most effective way to proceed. What I have found however is that, for some reason, when financiers lend against management rights in New South Wales, their lawyers expect and demand terms to be incorporated in the deeds that are well in excess of what the banks are entitled to in Queensland.

One difference between the two states however is that in New South Wales, when the “functions” of a caretaker are “transferred”, the owners must consent by way of an ordinary resolution at a general meeting. In other words, an AGM or an EGM must approve such transfer.

Some New South Wales strata lawyers argue that the “transfer” occurs as soon as a receiver or nominee is appointed by the bank. I disagree with this view because it is still the same caretaking entity that holds the management rights and there has been no “transfer” of the caretaker’s “functions” to a third party. If you accepted this argument, every time the manager went on holiday and put in a nominee (approved by the executive committee) you would still have to go to a general meeting of the owners corporation for approval in accordance with the section.

Most certainly, when the bank ultimately finds a buyer for the business and seeks the owners corporation’s consent to the transfer of the caretaking and letting agreement to that buyer, such consent must be obtained at a general meeting of the owners corporation. Section 40B of the act demands this and financiers need to acknowledge that that is the law in New South Wales. However, nearly all caretaking and letting agreements provide that any assignment or transfer of the caretaker’s functions to a third party can only take place if the transferee is a respectable, solvent person capable of properly performing their duties. There is an obligation on the owners corporation to act reasonably when making such a decision at a general meeting.

If the banks are prepared to lend billions of dollars against management rights in Queensland based solely on the rights contained in section 123 of the Body Corporate and Community Management Act, they should seek no more when crossing the border into New South Wales. They must also recognise that any final transfer of the caretaking and letting agreement to a third party has to be approved by the owners corporation at a general meeting and not by the committee – which is the case in Queensland.

Also, a bit of give and take and commonsense is required to be exercised by all parties involved for this process to work.

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