Management Rights – The Developer’s Role

Lawyers acting for buyers of Management Rights are often faced with the task of trying to explain to their clients problems which they may face as a result of badly worded Caretaking and Letting Agreements.  Much of this could be avoided if developers and their advisers took more care in preparing these agreements.

Developers have a golden opportunity to set up Management Rights in a way that will not create difficulties for building managers. The developer is in complete control of the Body Corporate at the time the original Caretaking and Letting Agreements are put in place.  Unfortunately where the developer’s lawyers are not management rights specialists, important aspects of the agreements will commonly be overlooked.

I have acted for many people buying units from developers and I have never found the content of these agreements to be an important factor in deciding whether or not to buy in a particular development.

Of course the agreements must be fair and reasonable to the Body Corporate; in fact the  Body Corporate and Community Management Act requires this.  However too often a potential buyer of the Management Rights will find that the content of the agreements makes the decision of whether or not to buy a difficult one. In many cases the content creates potential problems for the buyer because of ignorance of the law relating to Management Rights on the part of the developers and their lawyers or a lack of consideration for the potential building managers commercial interests.

It is important for the future smooth operation of the new complex that the management rights agreements strike an appropriate balance between the body corporate and the manager.  Achieving such a balance makes it more likely that a complex will attract a quality manager, and thereby serves the interest of the body corporate also.

In some cases the content of the Caretaking and Letting Agreements indicates a failure on the part of those preparing them to appreciate that a Body Corporate’s powers are limited by the Body Corporate and Community Management Legislation. Some agreements:-

• contain duties which require the building manager to carry out work which the Body Corporate has no power to pay for, for example duties relating to individual lots or even outside of the complex;

• include the delegation of Body Corporate powers to the building manager which the Body Corporate has no power to delegate.

In such cases prospective buyers of Management Rights are faced with the possibility that some time in the future their agreements could be unenforceable against the Body Corporate.

The following are some examples drawn from actual agreements which illustrate a failure on the part of those preparing the Caretaking and Letting Agreements to properly consider the commercial interests of the building manager:-

• duties that are so broadly worded they are bound to cause confusion between the Body Corporate and the building manager as to the extent of the work the building manager has to carry out to perform the duties;

• a Body Corporate being given the power to set the hours during which the building managers office must be staffed;

• a Body Corporate being given the power to force a building manager to transfer the managers unit and the Management Rights Business to someone else when the Caretaking and Letting Agreements come to an end. This seriously compromises the building managers negotiating position when seeking extensions of agreements;

• complicated duties in the Letting Agreement when all that is required is an authorisation to allow the manager to operate an onsite letting agency;

• failure to give the building manager control over areas required for the proper conduct of the Management Rights Business by freehold title;

• allowing the Body Corporate to terminate the Agreements if the building manager goes bankrupt, or if a company, is liquidated or put into administration.  Because of the Gallery Vie decision, such provisions may make it difficult or even impossible to obtain financing for management rights purchase. 
  Also, such a provision is not contained in the legislative provisions allowing for termination.

Developers and their legal and body corporate advisers must make sure the content of Caretaking and Letting Agreements is right before the selling of lots in the development starts. Developers are obliged to provide to buyers of lots copies of the proposed Caretaking and Letting Agreements. Any subsequent changes to the proposed agreements must be notified to contracted buyers each of whom may have the right to cancel a purchase if they will be materially affected by any of the changes.