Gallery Vie, a year on…

It is just over a year since the Queensland Civil and Administrative Tribunal (QCAT) on April 24, 2015 handed down a decision that threw the financing of management rights into turmoil. Some banks just stopped lending to the industry altogether, others would only lend to proven operators and others struggled to come up with any sort of policy at all.

The Body Corporate and Community Management Act
recognises financiers of management rights operators by requiring the body corporate to give a financier 21 days’ notice, of and an opportunity to rectify, a manager’s default. The Act precludes the body corporate from terminating an agreement if the financier acts in place of the manager or appoints a receiver.

The Act then states 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 had always been understood 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.

In Gallery Vie, 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 ruled that the body corporate could terminate. It found that even though a financier has stepped in or appointed a receiver, a body corporate could still exercise a statutory or contractual right to terminate an agreement due to the actions or inactions of another party.

The effect of the decision was that financiers no longer had the protection they, and indeed all of the industry, thought they had. The facts leading to the problem in Gallery Vie were unique and incidentally could have easily been avoided by Suncorp. Personally, I consider the banks to have grossly overreacted to the QCAT decision but unfortunately that is what we have to deal with. That view is probably supported by the fact that the Body Corporate for Gallery Vie did not proceed with the termination but allowed Suncorp to sell the rights to a third-party (with the offending Gallery Vie provisions of the agreements removed at the insistence of the new bank!).

The government’s response

As soon as the consequences of the decision became apparent, ARAMA briefed the government on the adverse consequences of the decision. Despite extensive lobbying and the bureaucrats in the department acknowledging that this was not the intention of the Act, the government has failed to make the very simple amendment to the Act that would easily solve the problem.

While it is possible that the amendment might be part of future changes to the Act as a consequence of the ongoing review of the legislation, that might be a year or two away and the government’s failure to act beforehand is extremely disappointing.

Dealing with the issue

The safest way to overcome the problem, from the banks’ perspective, is to amend the agreement at a general meeting of the body corporate, to remove the body corporate’s right to terminate where the bank was acting in place of the manager or had appointed a receiver, except in the case of default by the bank or the receiver.

That of course requires a general meeting of the body corporate and delays settlement (in the case of a sale) for at least a month. It also requires that owners be convinced of the need to amend the agreements when there is no immediately apparent advantage to them in doing so.
To compound the problem, some of the more difficult body corporate lawyers are advising bodies corporate that they should not agree to the changes.

The issue obviously arises at the time of an assignment or on refinancing. It might also arise at the time of a general review of a manager’s loan facilities.

Mahoneys and two other management rights law firms came up with a solution to address the issue on assignment at committee level. Some banks adopted the solution but regrettably a number of the lawyers acting for bodies corporate will not accept that the problem can be dealt with that way.

Position of buyers

Most lawyers acting for buyers will not insist on changes to the agreements to address the Gallery Vie problems. However, the buyer’s bank may well want the agreements amended and of course the buyer must also recognise that whilst it may not be a problem for them when they buy it may become a problem for them when they sell.

The banks’ positions

As indicated above, different banks adopted different positions on the issue and most have subsequently altered their positions. Sometimes the official position being offered by a bank does not match the position being taken at branch level. The positions being taken include:

1. Ignore Gallery Vie and it is business as usual. No banks have adopted this position officially but a couple are doing just that in the case of proven operators;

2. Raise the issue, seek to have the agreements amended at general meeting, but if not possible require the buyer to attend to that post settlement. Although a common way of dealing with less serious perceived defects in agreements, this is not generally something many banks have been prepared to entertain in relation to this problem;

3. Address the issue in the deed of assignment at committee level. Although in my view this is a relatively safe approach, it is one that only a couple of the banks have been prepared to follow and is also one that many body corporate lawyers oppose; and

4. Insist on the agreements being amended at general meeting before settlement. This is becoming the more common approach and whilst we can generally raise some sound arguments why owners should support such changes there can be difficulties where body corporate lawyers advise their clients not to support such changes.

The future

As a consequence of Gallery Vie, assignments and refinancing have become more complicated and in some cases almost impossible. There are additional delays and expenses with general meetings and body corporate lawyers. I cannot see the position changing for the better any time soon. Indeed, as banks are generally tightening their lending policies it may well get worse before it gets better.

Many managers are sensibly having their agreements amended at AGMs or EGMs now rather than waiting for when they sell or refinance. I certainly encourage all managers to do that.

While I am hopeful that the government will step up to the plate and make the simple legislative change needed to solve the problem, my initial confidence that this would happen has all but evaporated. Regrettably though, until that does happen, more and more sales and re-financings are going to become more difficult, more protracted and more expensive.

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