A valid and current Caretaking Agreement and Letting Agreement (“Agreement”) with a healthy term remaining is one of the most valuable assets in a management rights business. This is recognised by anyone with an interest in the business, including banks and potential purchasers.
It is therefore imperative that Service Contractors and Letting Agents (“Building Managers”) understand the process that is involved in both exercising an option and adding an option to the term of their current Agreement.
Exercising an Option to Renew
The effect of not exercising an option can be disastrous. If a Building Manager does not exercise an option within the required time frame, there is no obligation on the Body Corporate to either re-engage or re-authorise the Building Manager as a Service Contractor or Letting Agent. If an option is not correctly exercised, then the Building Manager has the potential to lose the heart of their business.
Building Managers should:-
- Check the current term of their Agreement and when it ends;
- Verify whether there are any current options to renew;
- Carefully read the option clause and any other clauses affecting the option to see how and by when an option must be exercised; and
- Diarise so that the option is exercised in accordance with the Agreement before the period to exercise the option has expired.
Adding an Option to Renew
Adding an option to an agreement sounds a simple task. However, failure to follow the correct procedure can end in disaster.
Although there are ways to refresh the term of the agreement up to ten or twenty-five years (depending on which module of regulations applies to the Scheme), the maximum length of an option is the lesser of either:
- Five years; or
- Until ten or twenty five years (depending on the module) from the date of the General Meeting approving the motion to add an option.
All motions seeking to add an option must be presented with the correct forms, and can be passed by ordinary resolution in a General Meeting of the owners by secret ballot where no votes are exercised by proxy. There are important timing requirements as to when the motion must be lodged, and how often such a motion can be considered. Suffice to say that Building Managers who attempt the process, without the assistance of a lawyer skilled in management rights, usually get it wrong.
Even though a healthy term looks great on paper, paperwork itself does not earn the vote of the owners, and it is up to the Building Manager to develop a good working relationship with the Body Corporate so that there is incentive for the Body Corporate’s lot owners to approve the addition of an option in future years.
Building Managers should favour a rollover, or reverse option, provision in their Agreements. This provides for a continuous 5 year automatic rollover of the term , to allow for a total term of 10 years, in the case of a scheme governed by the Standard Module regulations, or 25 years, in the case of a scheme governed by the Accommodation Module regulations. In this case, the Body Corporate would have the option of terminating the rollover of the Building Manager has been in serious breach of the Agreement at any time. However, many lot owners are opposed to such rollover provisions. For psychological reasons, they like to have power over the extension process.
Building Managers have to realise that the politics of dealing with Body Corporate members is very much the art of the possible. Building Managers face the dilemma of, settling for options that are almost certain to be agreed to, or pushing the boundaries, which may lead to a rejection of what is being sought, and having to wait another year before, once again, being able to put an option motion on the agenda.