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How do you separate your lot from your management rights business?

24 Feb 2015

Let’s start with the legalities.

Every management rights business is different. There are no hard and fast rules, but in general terms, these are the legal issues.

By-laws

The by-laws usually provide some form of protection through special usage rights being given to the owner or occupier of the manager’s lot.  These by-laws can all be framed differently.  Some define a specific lot by reference to the lot number.  Some define a lot ‘associated’ with the holder of the management rights agreements. Some allow different lots to be nominated from time to time (sometimes not by the manager).

Whatever the position, it remains critical that if you are looking to be able to use the lot associated with the management rights business independently of the management rights business itself that any special usage rights associated with it are cleared up.

There is no point separating the lot from the business and leaving the special rights associated the lot in place. That could lead to the position where the later owner or occupier of that lot could notionally compete with the owners of the management rights business (be that you or a later purchaser). That is a very real legal due diligence issue.

Changing the by-laws will require a special resolution at general meeting.

The lot itself

Some lots may be capable of being split into two separate lots – being an office lot and a residential lot.  There is a bit in this legally in terms of dealing with the local authority and the body corporate about the subdivision. One of the issues is apportioning the coming up with new lot entitlements for your two ‘new’ lots. 

There are also practical considerations. If your office is the third bedroom or garage of your townhouse, you aren’t much chance of getting it onto a separate title.  If you are in a tower (or low rise) with a distinct office component/area, it is usually more achievable.

This is an idea in the sense that if you manage to split your lot into residential and business real estate, you can retain special rights with the business part and look to be able to do something else entirely with the residential part.

The management rights agreements

This is a bit clearer.  You need to look at what obligations the management rights agreements include about:

  1. Owning a lot; and
  2. Residing onsite.  Remember – the Property Occupations Act does not require you to reside onsite anymore as a condition of your RLA, but that does not mean that the obligations in the management rights agreements to reside onsite have changed

The end game here should be seeking the maximum flexibility you can provide without alienating the body corporate in the process.

Any changes to your management rights agreements will require an ordinary resolution at general meeting.  If the changes do not relate to the term of the agreements, they will not require a secret ballot.

Now to the commercialities. 

It is all well and good to go down a legal path, but there is literally no point even spending a cent if you don’t understand the likely outcome. The old adage of not asking a question you don’t already know the answer to applies very much to the propositions in this newsletter.

Your committee

If your committee is hell bent on you living onsite, you need to make sure you promote the concept of ‘decoupling’ very delicately.  There is a communications process here you need to manage.  Simply getting the legal documents done and lobbing them by email to the body corporate manager on the last day of the body corporate’s financial year for AGM purposes without talking to your committee first is probably not the way to go.

Your bank

You need to engage with your financier (or your chosen finance broker) early in the process. From a bank’s perspective, the obligation to own a lot or reside onsite probably will not  matter that much. When your financier will become more interested is if you do get it all passed and then want to sell your lot or your business as a separate stand alone sale. 

Bank’s lending policies all differ. How much they lend and what they secure it over all depend on their credit policies (which are usually driven by where they have had bad experiences in the past). 

Banks love residential real estate as security. If you (or a subsequent buyer) don’t have that to offer, the bank’s lending ratio might be a bit less than for the standard management rights structure (unit and business). If you are successful in decoupling, what the bank requires you to repay on settlement of one asset or the other will depend on their policy on standalone real estate or management rights businesses.  It is worth at least having a basic understanding of what that might mean if you are looking to sell the unit or business separately.

Voting rights

Not owning a lot means you won’t have the rights to vote at general meetings or submit motions for the AGM. In a sense you become what we are when we act for bodies corporate, which is a third party contractor, (although your connection with the scheme is obviously far tighter).

All at once?

If you have a longer term time frame, it may be better to take this on in bite size pieces over consecutive annual general meetings (i.e. changing the obligation for ownership of lot first then residing onsite second). Having said that, if you think the mood is such that it will all get through first time around, then there is no need to hold back.

As always, we can help with both the legalities and the strategies.