Saturday, November 18, 2017

Ranking the importance of your management agreements

The documentation that ‘bubble-wraps’ management rights include a caretaking agreement with the body corporate; a letting agreement with the body corporate; the body corporate by-laws; a letting appointment with each of the owners in your letting pool.

I am frequently asked about the importance of each document. Consequently, I thought it might be worthwhile to rank the commercial importance of each of the documents – as I see it:

Letting appointment with owners

The majority of the profit generated by management rights comes from letting. In Queensland and NSW, the legislation provides that you cannot carry on the business of letting unless you are licensed and you have a written appointment from the owner of each lot. The NSW Property, Stock and Business Agents Act specifies the details of what must be included in a letting appointment. In Queensland, there is a prescribed form – the Property Occupations Act Form 6.

I cannot stress enough the importance of having a compliant letting appointment with each owner in your letting pool. The appointment must clearly set out the services that you will provide and the expenses to be incurred by the owner of the lot. You can/must only charge expenses that are in accordance with the letting appointment. These charges cannot be varied without the agreement of the owner.

In recent years, I have seen increased activity by the Office of Fair Trading when it comes to ensuring that compliant letting appointments are held by managers and charges are made only in accordance with the terms of the written appointment.

Letting appointments in Queensland can be terminated on 30 days’ notice whereas in NSW, they can generally be for any term (although subject to termination on 90 days’ notice if for serviced apartments).

Because of the income generated by these letting appointments, I rank this document the most important!

Caretaking agreement

The caretaking agreement provides for the cleaning and maintenance of common property and sets out a manager’s duties and how often these duties must be performed. In consideration of the manager performing these duties, the manager is paid a set monthly remuneration by the body corporate.

Caretaking agreements are long-term contracts, which are regularly renewed. However, bodies corporate have no obligation to grant extensions to these agreements. The manager requires the support of 51 percent of owners (who vote at a general meeting) to have the duration of these agreements extended.

In New South Wales, the maximum term of these agreements since 10/02/2003 has been 10 years. Pre-2003 agreements often have longer terms. Obviously, the longer the term, the more secure your business. Managers have an expectation that if they do a good job, they will be supported by the owners in ‘topping up’ these agreements.

The revenue generated from caretaking agreements is AAA-rated: it comes in every month from an entity that can never really go broke.

Because of this guaranteed monthly income stream, I rank this agreement the second most important document.

By-laws

In New South Wales, the entering into of a letting agreement with a body corporate should be empowered by a by-law. This is not the case in Queensland, where the letting agreement is empowered by the legislation.

By-laws that restrict on site competition to your business are important. In New South Wales, these special privilege by-laws entrench the manager’s onsite exclusivity in relation to the conduct of caretaking and letting. Banks and valuers place significant importance on these types of by-laws. Effectively, they restrict another owner or occupier from carrying on a competing letting business from another lot or from the common property at the complex.

Special privilege by-laws must be passed by way of a special resolution (effectively a 75 percent majority). A special resolution is also required to rescind such a by-law. However, if the by-law attaches to a lot, it cannot be rescinded without the written consent of the owner of the lot. This is a very important distinction.

Because the benefits of by-laws can remain in force even if the letting agreement has terminated, I rank by-laws the third most important document.

Letting agreement

A letting agreement is effectively an agreement with the body corporate (usually for a term that runs concurrent with the term of the caretaking agreement) that grants the manager onsite exclusivity to conduct a letting (and sometimes sales) service from a designated lot or from the common property within the strata scheme. The agreement does not however prohibit owners from letting units themselves or via external agents.

These agreements often require the manager to keep the office open during set hours and incorporate other directions as to how the letting business must be operated.

Letting agreements (like the caretaking agreements) are contractual in nature and have a start date and end date. The rights conferred by a letting agreement come to an end when the agreement comes to an end.

In my view, by-laws which provide similar exclusivity and restrictions on owners or occupiers competing with the manager are more effective as they do not necessarily come to an end when the letting agreement comes to an end. This is particularly the case with by-laws, which attach to a lot for the reasons previously mentioned.

For this reason, I rank the letting agreement the least important of the four documents – particularly if there are good empowering and restrictive by-laws attaching to a manager’s lot.

When considering the documents that form the foundations of your management rights business, be sure to give appropriate consideration to all the documents noted above. You should never overlook the value of those documents to your business and particularly how those documents are essential to your ability to earn an income.

About Col Myers

One comment

  1. Hi all! Many thanks for articles which have assisted us. We are on-site resident managers and it has been pointed out we need to strike new Letting Agreements. We were just wondering if there may be a standard format for Letting Agreements. We would appreciate any such assistance (over and above the great documents we have just read).

    Yours Sincerely,

    Greg and Jennie Knight
    Capri Apartments NSW 2548

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