What’s The Fuss?

AccomNews Wednesday, June 17, 2015

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Most readers of this publication will have heard at least something about a recent QCAT decision that is having an impact on the lending by banks to the management rights industry.

The issue is one being urgently addressed by ARAMA but the uncertainty created is unfortunately likely to be with us for a period of time before being fully resolved. Like many, I see the banks’ reactions as being a little over the top but nevertheless we just have to deal with the issue.

Background

The Body Corporate and Community Management Act recognises financiers of management rights operators. The act provides that a body corporate with a right to terminate a management rights agreement cannot terminate it unless it has given the financier written notice of its right to do so and 21 days have passed since the notice was given. The body corporate cannot then terminate the agreement if the financier acts in place of the manager or appoints a receiver after first giving the body corporate notice of its intention to do so.

A later section provides that this does not stop the body corporate from terminating the agreement for something done or not done after the financier started to act under the subsection.

It has always been the understanding of the management rights and banking industry that:

The section related to the financier or receiver – so that if post stepping in they did or did not do something under the agreement which entitled a body corporate to terminate it then the body corporate could do so; and
The financier was protected from termination as a consequence of something which the manager or some other person did or did not do pre or post the financier or receiver stepping in.

QCAT decision

In a decision involving the complex Gallery Vie on the Gold Coast, Suncorp as financier appointed a receiver to the manager. Subsequently a creditor successfully applied to have the manager placed into liquidation. Under the management rights agreement the appointment of a liquidator gave the body corporate the right to terminate.

QCAT refused to give the act the meaning Suncorp and the industry understood parliament had clearly intended. It determined that the section did not stop the body corporate from terminating. It found that the section is not limited to the financier’s or receiver’s failure to perform the ordinary duties of the relevant agreement, but can include other events that occur from the acts or inactions of others, even after the financier has stepped in or appointed a receiver.

The decision means that even though the financier has stepped in or appointed a receiver, the body corporate can still exercise a statutory or contractual right to terminate an agreement due to the actions or inactions of another party.

Consequences

Whilst the circumstances of the QCAT decision are quite unique, a number of banks initially decided that their security over management rights agreements is at a much greater risk than they traditionally perceived. All lenders to the industry have reviewed or are reviewing their lending policies. Some stopped lending to potential buyers of management rights and others began requiring changes to certain agreements as a condition of a finance approval.

This will have an obvious short term impact on the industry, particularly sales transactions. The industry is endeavouring to persuade the banks that the position is not as bad as they perceive. Early indications are that at least one major lender accepts that there is little additional risk posed by the decision and it is business as usual. Hopefully others will follow that lead.

ARAMA is urgently formulating a submission to the state government to legislate to fix the problem and expects to receive support in that regard from the banking, legal and property development industries.

It is inconceivable that the government will not take the requisite steps to correct the problem by making the relatively simple legislative changes. The critical issue will be the time it takes to do that – hopefully it will be sooner rather than later.