Every so often we experience things that have a huge impact on our lives. 2015 was a year I won’t forget, for two reasons. Firstly, (and, admittedly, most importantly) it was my introduction to motherhood – no amount of study could have prepared me for that! Secondly, when I enthusiastically returned from maternity leave in January 2016, I found my industry had been turned upside down from a surprising tribunal decision that occurred in 2015.
Six years later, after I drop my gorgeous son off to school in the morning, I’m back in the office continuing to deal with the aftermath of that pesky “Gallery Vie” decision. Goodness me, a little tweak of the legislation back then would have saved my clients a lot of wasted time and money!
The body corporate legislation contains provisions which protect a financier, and without those provisions it would be near impossible for a building manager to obtain funding. The special protections allow the financier to step in and take control of the caretaking and letting business in circumstances where the body corporate would otherwise be entitled to terminate the management rights agreements.
The widely accepted interpretation of the legislation before the decision was that if a bank held security and followed the procedural requirements of the legislation, the body corporate wasn’t able to terminate the agreements without first giving the bank:
- the opportunity to fix the breach of the building manager, or
- to take control of the business to keep it running and (most likely) find a buyer.
Where the financier had started acting in place of the building manager, the expectation at the time was that the body corporate only continued to have termination rights for something “done or not done” by the financier.
The Gallery Vie effect
In Gallery Vie, the financier of the building manager appointed a receiver to step into the shoes of the building manager. After that occurred, the building manager (the actual owner of the management rights business) was placed into liquidation by a third party.
The agreements contained a provision entitling the body corporate to terminate them in the event the building manager went into liquidation. So, when the third party pulled the trigger on the liquidation, the body corporate terminated the agreements.
The financier, unsurprisingly, challenged the body corporate’s decision and argued the legislation prohibited the body corporate from terminating the agreements in reliance on that provision because the contravention was not “done or not done” by the financier.
The tribunal found that the protection afforded to financiers in the legislation did not extend to contraventions “done or not done” by third parties.
Naturally, financiers were unnerved by the outcome of the decision. Many of them removed themselves from management rights lending altogether while others temporarily halted funding and capped limits. The immediate impact on the industry was enormous.
To overcome this surprising interpretation and to give financiers the comfort they required in order to lend to buyers in the industry, most agreements required amendment to remove the offending provisions.
The termination clauses in question are limited to termination rights in circumstances where the building manager is bankrupt (where it is an individual) or becomes insolvent (where it is a company), or when there are any actions which may lead to those situations. As every agreement is different, the wording of each termination clause requires its own consideration. Even in the same scheme, the termination provisions in the caretaking agreement may be different to those in the letting agreement.
Agreements that do not contain adequate protection for a financier are at risk of being unsaleable.
Bodies corporate response
Changes to agreements to address the Gallery Vie decision require general meeting approval and are generally uncontentious. Most bodies corporate appreciate that the Gallery Vie decision turned on facts that are very unlikely to arise again.
Even on those rare occasions where there is tension between the body corporate and the building manager, the body corporate is usually happy to approve the amendments to ensure the building manager gives itself the best opportunity to sell the management rights to an enthusiastic replacement.
Three Little Words
It’s silly that after all this time, building managers are still having to spend money to deal with the aftereffects of the Gallery Vie decision.
All of this nonsense could be circumvented by inserting three little words into the legislation so it reads “done or not done by the financier”.
If you have concerns about the impact of the Gallery Vie decision on your agreements, please contact our Management Rights team today.
Think Management Rights, think Nicholsons.