Is it possible to terminate a management rights agreement?
15 May 2017
Click here for a PDF version.
In theory, the answer is yes.
But we don’t live in a theoretical world. We live in a real one where there are lots of moving parts. In practice, it is very difficult to terminate a management rights agreement and the judicial system is filled (in a relative sense) with failed attempts of bodies corporate to do so.
We wrote about the first decision involving The Reserve here. This was where the body corporate had attempted to terminate the management rights agreements because the directors of the management company were changed without the body corporate’s approval. This was a black and white breach of the management rights agreements that included a deemed assignment provision.
The body corporate lost in that first decision and appealed. Appeals can only be based on questions of law – not fact. What was determined as fact in the previous litigation cannot be revisited. What can be reviewed is any matters of law.
Anyway, the appeal has now been heard.
We haven’t written about ‘reasonableness’ for a while, but this whole dispute hinges on that magic word again.
The body corporate lost again.
In the matter which was being appealed, QCAT had held that the body corporate did not act reasonably when it decided to terminate the management agreements. Even though the breach by changing directors without approval was obvious, it was technical, it had been rectified and the body corporate had suffered no loss.
The question of law the body corporate was appealing on was that while a body corporate has an obligation to act reasonably with respect to its ‘functions’ (as referred to in section 94), that obligation did not apply to its powers under section 95 (such as the ability to enter into contracts like management rights agreements). If a body corporate’s powers were not fettered by the obligation to act reasonably, then its decision to terminate could not be overturned as being unreasonable.
The appeal tribunal called that distinction artificial. It held that a body corporate’s powers must be exercised reasonably and on that basis the previous decision which said that the decision to terminate was unreasonable was correct.
There were some interesting passages from the decision. The first relates to any decision to terminate management rights agreements:-
‘It might be said, for example, that a decision to terminate a contract on a technicality, where the caretaking duties were being carried out appropriately, which resulted in an erosion of the body corporate assets through litigation, might not be a reasonable decision.’
The ‘erosion of body corporate assets through litigation’ is a polite way to refer to spending on legal fees.
One of our best read (and favourite) articles covered this very point way back in 2011.
Another interesting passage related to who it is that actually has to act reasonably:-
‘The decision of the lot owners at the meeting which considers the (termination) resolution is not subject to the requirement of reasonableness but the body corporate decision to initiate the termination, to issue notices, and to place the resolution before the lot owners is’
This puts the onus squarely back on committees to act reasonably.
Two other points of note we took from the decision are:-
- any decision made by a body corporate can be sound at law (such as exercising a right to terminate for an admitted breach) but be unreasonable. Just because a decision may be legally correct does not make it reasonable.
We think it must follow that a decision which is not sound at law (i.e. in breach of the Act) is almost always going to be unreasonable.
- a body corporate has an obligation to act reasonably that is not imposed on other strata parties. A third party can act unreasonably (which may or may not be a breach of their contract with the body corporate) but that does not allow the body corporate to act unreasonably in return.
That’s a lot of law that has come from a simple administrative decision to change directors.
So what are our take aways?
For resident managers it is to read your agreements.
One of our most erudite management rights clients (yes that’s you Ollie) had one simple mantra. Read your agreement, then read your agreement, then do it one more time. Then put it away for a week and repeat until you know it backwards and forwards.
The consequences that have flowed at the Reserve from changing directors without checking the agreements first are enormous.
For bodies corporate it is also simple. If you are going to try to terminate management rights agreements it needs to be for something relatively large. Seek termination for a technical breach at your peril.
Click here for the appeal decision itself.
As always, we welcome feedback and comments.