NSW Strata Report

Caretaking and letting agreement essentials – part 3

This month, we continue our examination of various clauses within caretaking and letting agreements and the important considerations to be mindful of when considering the rights and obligations of the manager and owners corporation.

The first two articles in this series looked at specialist duties and financier deeds. This month, I will be examining the all important assignment provisions.

It is generally true that an assignment clause will only be used once in any manager’s tenure at a particular complex (twice if you count the acquisition of management rights). However, this is not always the case, as will become apparent in the discussion at the end of this article in relation to ‘deemed’ assignments.

The relative infrequency with which the assignment clause is used should not be taken as an indicator of the significance or importance of the clause. Given the relatively high turnover of management rights, particularly in holiday complexes, both managers and owners corporations may need to have regard to the assignment provisions of the agreements on a regular basis.

Moreover, a poorly drafted assignment clause that does not fairly balance the rights and obligations of the manager and owners corporation, can have a significant adverse impact on the manager’s business and the value of the management rights. Agreements that can’t be assigned or include unreasonable prohibitions on assignment are not worth much if they can’t be transferred to a buyer!

Unlike Queensland, where the consent to assignment may be given at committee level, the Strata Schemes Management Act 1996 provides that the assignment of a caretaker agreement must be approved at a general meeting of the owners corporation. Accordingly, any clause that purports to confer authority on the executive committee to approve the assignment is void and the consent of the owners corporation at general meeting should always be obtained.

Apart from the type of resolution required for the transfer of a caretaker agreement, the assignment of management rights is not regulated by the New South Wales legislation. Accordingly, the caretaking and letting agreements should contain provisions to ensure the assignment process is not frustrated by the owners corporation. Most importantly, a good assignment clause will include provisions to ensure the owners corporation:
• cannot unreasonably withhold its consent to an assignment;
• cannot require or receive a fee for approving the assignment (other than reimbursement for legal and administrative costs reasonably incurred); and
• must make a decision on a proposed assignment within a certain timeframe.

In Queensland, these requirements are enshrined in the legislation.

The timeframe for an owners corporation to make a decision on a proposed assignment is usually 30 days. This period commences from when the owners corporation receives all of the information reasonably necessary to make a decision. Sometimes, what information is ‘reasonably necessary’ will be specifically set out in the assignment clause. If not, we usually find that the owners corporation will (as a minimum) require the following information in relation to the assignee:
• A resume;
• At least two business references;
• At least two personal references;
• A business plan;
• A police check;
• Evidence they hold all necessary licences; and
• Evidence of financial standing.

It should be noted that, where the assignee is a company, the above information will usually be required in relation to the principal or working directors and, occasionally, the principal shareholders, of the company. Of course, in addition to the above information, the owners corporation will invariably require an interview with the proposed assignee (or its directors/ shareholders).

Sometimes the agreements will also require information about the manager’s principal staff. Where such staff are not the principal directors or shareholders of the manger, the agreements will often require the manager to obtain the approval of the owners corporation to the appointment of such persons. This requirement is often separate from the assignment clause and should be carefully considered by the manager anytime staff are introduced or replaced in the business.

In relation to financial standing, the owners corporation will often request a statement of financial position (such as asset and liability statement). If an incoming manager does not wish to disclose details of their assets and liabilities for personal or privacy reasons, the owners corporation will usually be satisfied with a copy of the letter of offer from the assignee’s financier (where they are obtaining funds from a financial institution to complete the purchase). The owners corporation will check to ensure that the funds are being provided on usual commercial terms and will generally rely on the bank’s assessment of the financial standing of the assignee.

A good assignment clause will specifically set out the relevant factors and considerations which the owners corporation may have regard in considering their consent. In Queensland, the legislation details the specific matters that the body corporate may have regard. These are:
• The character of the assignee;
• The financial standing of the assignee;
• The proposed terms of the transfer;
• The competence, qualifications and experience of the assignee;
• The extent to which the assignee is likely to receive training; and
• Any matters set out in the agreements.

It is often the case that assignment clauses in New South Wales will expressly detail the above considerations to reflect the position in Queensland. Where the assignment clause does not include such detail, the matters included in the Queensland legislation provide useful guidance about what the owners corporation should have regard to in making their decision.

Another important aspect to assignment clauses are any guarantee provisions. In most cases (but not always), the agreements will require guarantees to be given by the directors and/or shareholders of a corporate caretaker as a condition of the assignment. A reasonable clause should limit such guarantees to the principal directors/shareholders of the manager. Issues may arise in situations where parties with only a minor interest in the management company, or who are not involved in the day-to-day operation of the business, are requested to provide guarantees.

It is also preferable that the assignment clause expressly provide for the outgoing manager (and any guarantors who guaranteed the performance of the outgoing manager’s obligations under the agreements) to be released by the owners corporation. Whilst such release will usually be drafted into the assignment documentation (regardless of what is actually provided for under the agreements), the position is unclear as to whether the owners corporation can refuse to grant such release where not specifically provided for. To the extent that the assignment clause provides that the owners corporation cannot unreasonably refuse consent to an assignment, we consider the better view is that the release must be given. Nonetheless, it is preferable that it is spelled out in the agreements to avoid any dispute.

Finally, managers should take heed of clauses that deem a change in shareholding or directors of a corporate manager to be an assignment. Such clauses will usually deem any change of shareholders or directors which alter the ‘effective control’ of the manager to be an assignment. Where such clauses are triggered, the manager will usually be required to comply with all of the requirements of the agreements in relation to assignment, including obtaining the prior written consent of the owners corporation (executive committee level would suffice in this instance).

Managers need to carefully bear such deeming clauses in mind if they intend to make any changes to the structure of their company. This is particularly so given the termination provisions of most caretaking and letting agreements include a clause allowing the owners corporation to terminate the agreements if the manager assigns their interest in the agreements without the consent of the owners corporation. If consent is required but not obtained, it could be grounds for early termination of the agreements. If you are in any doubt about the requirements of your agreements, seek advice from your solicitor before making any changes to your company.

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