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Do not forget your option

By Frank Higginson06 Jul 2010

The actual length of the term of a management rights agreement can be expressed in two very different ways.

Some agreements are simply for a set term (ie ten years from 1 June 2010 to 31 May 2020). If that is the case, the term is set for that period. There is nothing more that you need to do to secure it.

Other agreements are drafted as a term with an option (ie five years from 1 June 2010 to 31 May 2015, with an option for a further five years from 1 June 2015 to 31 May 2020). There are obvious variations to this – it could be a ten year term with three additional five year options, or a three year term with a three year option – the combinations are endless.

What is most important is that if you have an agreement with an option clause, you must know what is needed to exercise it. If you fail to exercise an option, your agreement will come to an end. It is as simple as that.

It is very rare to see an agreement where an option clause is exercisable subject to the approval of the body corporate. It is normally exercisable solely at the discretion of the resident manager. Normally an option clause will simply provide that if you give notice to your body corporate by a certain date then the option will come into existence. In this case, there is no further approval needed from the body corporate or the committee.

Making sure you physically exercise the option by the date required is critical. Normally no one will remind you. If you forget to exercise an option it can leave you in a very difficult position with your body corporate, as it is more than likely that the only way to then deal with the issue is at general meeting with the approval of owners.

Moral of the story? If you are not sure, get your agreements out and have a look at them. If you are still not sure, ask us!