Variations, top ups, extensions and options
By Frank Higginson07 Feb 2018
Click here for a PDF version of the article.
These are all words that we use interchangeably in our day-to-day management rights dealings but they mean different things to different people.
The term of a management rights agreement is one of the integral parts of its value. Take this example. Two management rights businesses are side by side that are, for all intents and purposes, identical. The only difference is the term of the agreements: one has two years and the other 25. Without a doubt there would be a difference in their value.
That is as close as we get to giving valuation advice.
Our (unfortunate) experience is that lots of management rights owners are not necessarily aware of the need to top up their agreements (add a new term) or to exercise options in their agreements (bring into existence an already granted term). These are two very different things.
If you know all about that, then great.
If that sounds like complete gobbledygook then you need to read on: the value of your business is at risk.
Here are some management rights basics:
- If you are in the Standard Module you can have an agreement that lasts for up to 10 years
- If you are in the Accommodation Module you can have an agreement that lasts for up to 25 years
- Your agreement can go up to those maximums even if it was previously granted for less than those terms
Let’s talk about options first. These are also sometimes called extensions.
The term of any management rights agreement that has been granted can be broken down into an initial term and any number of options.
Some agreements are simply for a set term (e.g. ten years from 1 June 2018 to 31 May 2028). 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 (e.g. five years from 1 June 2018 to 31 May 2023, with an option for a further five years from 1 June 2023 to 31 May 2028). 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. What you are then left with is a piece of real estate (if you own one) and a bunch of letting appointments and potentially a month-to-month caretaking agreement.
You can keep letting with a full licence, but the value of your business will take a severe hit.
From a banking perspective, as long as the options are exercisable at the discretion of the manager, the bank will count it as term for the purposes of their loan. But what banks usually won’t do is remind you to exercise that option.
That’s where we come in.
If you don’t know when your option is due we can remind you about it. Simply click here to send us your management rights documents or just email us and let us know who your body corporate manager is and we will ask them for the documents.
If you don’t know whether you have an option you must ask. You cannot afford not to.
Then we move onto variations. These are also known as top ups and (confusingly) extensions.
Options are when you bring existing rights into existence.
A variation is when you create a new option term. This has to take place at a general meeting and be approved by ordinary resolution – which is simply more votes for than against the motion of those who choose to vote.
A body corporate must have an AGM once a year and our experience is that the AGM is the best place to consider one of these motions.
Failing to vary your management rights agreements to create a new option term doesn’t have the drastic consequences that failing to exercise an option does, but over time it can. The longer you leave it to top up, the harder it can be.
Our recommendation to clients in the Standard Module is to make sure you get a top up at least every two years and definitely have at least three. That way you never have less than seven years to run.
In the Accommodation Module we suggest when you get to 20 years you add another five.
That all sounds fine in theory and we do know that topping up agreements can be a contested exercise subject to who you have in your body corporate. The starting point is to know when you should do it and then address from there the objections you need to overcome.
If you don’t know when you need to top up your agreements upload your management rights agreements here and we will remind you when you need to do something.
If you don’t know what we are talking about then you need to engage with us now.