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Conditioning management rights assignments

By Frank Higginson08 Jun 2016

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Bodies corporate are becoming increasingly empowered when considering management rights assignments.

We have seen more refusals of assignments of management rights agreements in the last six months than we have seen in the last 10 years.  That is good for the management rights industry.  No one needs non-performers in their ranks (lawyers included).  Sustainable long term business is about everyone playing their part and doing the right thing. 

The big difference between the decisions we make as individuals and those that are made by a body corporate is that while we individually can be as unreasonable as we like, a body corporate cannot.  It must act reasonably, and that is a concept we won’t ever lack material to write about.

What we have seen a lot more of recently is bodies corporate conditioning assignments for events both before and after the assignment itself.  Conditioning a management rights assignment with conditions could be reasonable.  It also might not be.  It all depends on the circumstances. 

What happened?

Our clients had owned the management rights to Pulse since the day the scheme registered in June 2009.  In October 2014 they had been there long enough, and they signed a contract to sell their business. 

After getting the contract to unconditional, the assignment process was relatively tortuous and eventually culminated with a conditional body corporate approval to the assignment. 

The conditions of that approval were:

Provision of statutory declaration

A body corporate is entitled to evidence of a buyer’s financial soundness as part of an assignment.  The only true way to prove this is a statement of assets and liabilities.

The buyer provided this (along with a plethora of other financial information) but for reasons unknown the body corporate took issue with it.  What it required as a condition of the assignment was for that statement to be in the form a statutory declaration with a rider, which was:

“{we] acknowledge that the Body Corporate is relying upon this declaration in lieu of independently verified financial information to the Body Corporate and [we] agree that in the event that there is any material inaccuracy in the information provided to the Body Corporate or in any statement … that this will constitute gross misconduct justifying termination of the caretaking and letting agreements.”

The buyer (as you would expect) strenuously objected to that, as did the buyer’s financier.  Which bank would accept a management rights agreement as security with that purported right to terminate hanging over it?

The buyer was willing to provide the statutory declaration (and in fact did so) without the additional condition allowing the body corporate to terminate the agreements if there was some error in the information.

Completion of horticultural course

The requirement to complete education or training courses post-settlement is something that is relatively new in management rights.  While education and training are all important, one of the conditions here was that the buyer had to complete a Certificate course in Horticultural Landscaping Maintenance.  This course came at a significant time and cost impost.

The buyer again resisted but had agreed to accept this as a condition to get the deal done.

Termination of contract

Due to the body corporate’s refusal to accept the statutory declaration without the additional condition relating to the statement of assets and liabilities, the buyer elected to terminate the contract. That was in March 2015.

Our clients resold the business later that month.

Ready for the inevitable barrage from the body corporate, the buyer came to the assignment process meeting prepared and ready for when the information request came.  Surprisingly enough, the body corporate didn’t seek those same conditions for the assignment this time. 

We had something come out of left field instead. 

Bulk electricity is becoming increasingly common in strata schemes.  A body corporate can negotiate to purchase electricity on a lower tariff than owners could otherwise get it, and then resupply it internally at the same tariff. 

What comes with these arrangements is meter reading and invoicing.  These services are now mostly supplied by specialist industry providers but from the registration of this scheme through to just under four years later our clients had read the individual lot meters and provided usage details to the bulk supplier to invoice residents. This was performed for a service fee.  The body corporate engaged another provider for that service in 2013, which our clients obviously accepted.

Who knows what triggered it, but the allegation was that our clients had never been engaged to provide those services and despite having provided them (and been paid for them) for nearly four years, the body corporate wanted the service fees back.  The quantum for this was around $19,000.

We obviously resisted, but with our clients at their end of their tether and just wanting out, we negotiated a settlement of $12,000 plus GST and paid that out of the sale proceeds.

What happened next?

What the body corporate didn’t know was that on the eve of settlement we filed two applications in the Commissioner’s Office contesting the lawfulness of all of the conditions imposed as conditions of assignment.

It is not often you go two from two in matters of this nature, but our clients won hands down, and the body corporate’s conduct across both assignments was pilloried.

Generally, we don’t quote verbatim from judgements, but by the same token, there is no reason to reinvent the wheel when the decisions make definitive statements about the concepts in dispute so eloquently.

In relation to the requirement for the statutory declaration:

‘The body corporate had all the relevant and necessary information to be satisfied [as to] financial soundness. The information provided was far beyond what is ordinarily required to be provided to a body corporate to obtain the body corporates’ consent to an assignment. The body corporate’s requirement for the termination clause was at all times oppressive and unconscionable by attempting to bind [the buyer] and the guarantors to unreasonable terms.’

‘…it was also unreasonable to expect the assignees to declare that should any financial information be found to be inaccurate that this would amount to “gross misconduct” which would justify termination of their agreements.’

‘…  while the body corporate is entitled to be provided with the necessary financial information to be satisfied that the assignees had the financial standing to be considered for the transfer, at what point does the request for financial information by the body corporate be deemed unreasonable. To what level of investigation should the body corporate undertake to be satisfied as to the financial soundness of the assignees, and how far is too far? I find that the termination clause demanded by the body corporate was too far and unnecessary and unreasonable and that the link between “any inaccuracy in the information provided” and constituting gross misconduct” to justify termination of the letting and management agreements, unfair and unreasonable in the circumstances.

In relation to the horticultural course condition:

‘The requirement to undertake a horticulture course also appears to be an unreasonable condition. The caretaking agreement entered into by the applicant … did not at any time include a requirement that the applicant undertakes a horticulture course to carry out their duties. The evidence suggests that the caretaker is engaged to only undertake the most minor of gardening duties of mowing lawns and maintaining garden beds in exclusive use common areas.’

‘There was no evidence of any significant change of circumstances that had occurred at the scheme that would warrant the inclusion that future caretakers would be required to undertake a horticulture course before they could undertake their caretaking duties. It is difficult to understand why the body corporate sought to impose such a condition for the completion of a horticulture course on the assignees when the evidence suggests that the applicant was not required to be horticulturally qualified.’

In relation to the repayment of the meter reading fees:

‘The power the body corporate held, was in my view, abused by it by knowing that unless the applicant agreed to repay the debt, consent would not be provided to the transfer and that such action of the body corporate was unfair, and taking advantage of their superior position of power.’

‘I find that the body corporate breached the Code of Conduct and failed to act honestly and fairly. In light of the fact the body corporate were satisfied that the potential assignee met the criteria set out in the Accommodation Module, the imposition of a condition to repay a debt identified in 2012, knowingly held the applicant to ransom, as without the payment the consent would not be given to the transfer. The conduct and decision of the Body Corporate was unfair, and not acting honestly, and unreasonable in all the circumstances.’

‘The conduct by the Body Corporate … was unreasonable in the extreme.’

None of those require any further explanation.

But that’s not all.

We think there are two other key things arise from these decisions.  The first is with respect to the ability of a body corporate to assess a buyer’s financial soundness.  A body corporate is entitled to do this under the assignment provisions of the Module.  How far a body corporate can reasonably go in considering this has been a source of some contention in management rights assignments for some time. 

After all, is a committee better placed than a bank to assess a buyer’s financial position?  In the run up to the GFC, credit was a lot looser than it is now.  In fact, you can open any newspaper at the moment on almost any day to see the result of APRA bearing down on bank lending.

We now have some considered reasoning as this issue was considered at some length in the decision.  The adjudicator found:-

The assignees provided evidence that their financier had undergone stringent financial interrogation and were satisfied as to the assignees ability to financially manage the purchase. In this case, the body corporate have been pedantic to the extreme, and it is not their role to judge the financial viability of the assignee or to refuse to approve the transfer of the management rights, to an unreasonable level, when that is the role and function of the assignees financier.’

‘.. while the body corporate is entitled to understand the assignees financial standing they are not entitled to test the veracity of their evidence and financial standing, when the assignees bank had tested their financial capacity … I fail to understand the entrenched position taken by the body corporate that if the financial statement of the assignees was inaccurate that would amount to reasons to terminate. The issue would be whether the managers or letting agents were doing their job and complying with the terms and conditions of the agreements.

‘The fact that the body corporate pays the purchaser the caretaking remuneration, the context of financial soundness is a moot point … Any concerns regarding the cash flow of the purchaser to service any finances is a matter for the purchaser, and if there was a cash flow problem and issue servicing loans and eventual receivership issues, that then is a matter for the financier. The fact the financier has assessed and examined the financial position of the purchaser, they are far better placed to have determined the viability of the purchaser of the management rights business. I am satisfied that as [the bank] found it able to advance funds, based on their review of the purchasers statements of assets and liabilities, then the body corporate should not take any issue with looking further into the financial standing of the purchaser and accept the statement of assets and liabilities the purchaser confirmed that they stood by.

The other issue was the body corporate’s legal costs, which by the time the second assignment were considered (and again argued) were substantial.

A body corporate is entitled to engage lawyers to provide legal advice in an assignment of management rights.  The costs for that are recoverable from the parties to the assignment, because, but for the assignment, the body corporate would not have to incur them.  This is only fair.

The caveat is that those costs have to be reasonable.

The kicker with the first sale (which had a body corporate legal bill of circa $15,000) was that our client also received an order for the refund of the costs it had paid after the date the body corporate imposed the unreasonable conditions.   That was circa $10,000.  That’s not to say the body corporate lawyers didn’t get paid.  They did.  It is just the body corporate had to fund part of it as opposed to recovering it all from our client.

‘As a body corporate does not have carte blanche to seek reimbursement of any and all fees that have been incurred when considering whether to approve a transfer or not, it must also act reasonably and only pass on those costs that were reasonably incurred.’

‘While I can accept that the solicitors for the body corporate were thorough in requiring voluminous evidence as to the financial character of the assignee, there comes a point where reasonableness must become apparent. The request for the further information from the assignee by the body corporate solicitor … requested further evidence including but not limited to, details of all bank accounts held and copies of 6 months bank statements, copies of real estate licenses, name and details of accountant, copies of tax returns for last 3 financial years, details of proposed borrowings, evidence of competence and qualifications and experience of the assignee, which I find was rather oppressive and unreasonable.

And just for good measure, the adjudicator also ordered that the committee must pay back our client the negotiated settlement of $12,000 that the body corporate unreasonably (and never should have) forced upon our client as a condition of the assignment.

Summary

These are landmark decisions in a management rights context.  Yes, we acted for the resident manager in pursuing them and quite happily did so.  But you know what?  We have advised hundreds of bodies corporate on management rights assignments and have yet to have allegations of unreasonableness levelled against our body corporate clients in any of these contexts. 

If we had a body corporate client asking for these things we would tell them they were not reasonable and should not be asked for.  That’s our job.  We are not afraid to deliver news anyone doesn’t want to hear, as unpalatable as it may be for clients to hear it at times.

Plenty of lessons there for all concerned.  

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Comments
Bill Lapthorn w
Posted about 8 months ago
Another damned fine article, and well done on a good win.It's great to kick the butts of some of these Body Corp members who think they can make life miserable for a Manager.
Hynes Legal w
Posted about a year ago
I hear you Jennifer, but the moment they raise the bar they will lose a lot of committee members….
jennifer silver w
Posted about a year ago
Frank, thank you for sharing. a most interesting read indeed. Begs the question, is there a need for proof of competence for election to the Body Corporate? Regards Jennifer
Garry Maynard w
Posted about a year ago
Would be very interested to find out who the legal advisers for the body corporate were and if they had other "help"
Gary Williams w
Posted about a year ago
A very interesting email. As committee chairman for Timbertop Terraces I together with our solicitor ensured that the committee acted reasonably in the recent sale of the Management Rights of our complex. I believe it is essential that both committee and caretaker act in a reasonable manner at all times to ensure an harmonius relationship in the running of a body corporate complex.
Ian Solomon w
Posted about a year ago
A very informative piece that demonstrates committees must act reasonably. Sure a body corp is entitled to ensure an in-coming manager can do the job, and in fact is duty bound to be satisfied they can. This excellent article and the reasoning shows this committee went power-mad. I wonder who was responsible for this and hope the broader constituency of owners will bother seeing the persons responsible purged from the committee and kept-away from unit-owner funds?
john Hayden, village strata w
Posted about a year ago
Think some body on the committee is as my dad would say" educated beyond the capacity to think":Reasonableness is a foundation stone of body corporate and not hard to understand. John H.