In the context of body corporates, one commonly asked question is, what happens in the event that a body corporate caretaker wishes to sell its management rights to a new caretaker, and consequently wants the committee to agree to it? In this podcast, OMB Solicitors’ Tom Robinson answers the question.
Dan: Tom, what are management rights, and what does it mean to sell them?
Tom: It’s always a big topic these days, these assignments of management rights. We refer to them as an assignment of management rights, because we’re transferring the ownership of those rights between essentially more than two parties.
Tom: I guess a good starting point, is just with some of the basics. When we refer to management rights, we consider them as that package deal, consisting usually of a care-taking agreement, a letting agreement, and then your caretaker letting agent’s lot. As part of the ownership of those management rights, the caretaker is therefore entitled to sell those rights to another person, or entity, to perform that role of caretaker, or letting agent.
Tom: The legislation regulates these assignments, and to a lesser extent, there will be terms and conditions within the agreements themselves, and that’s governed by the regulation that is contained within that legislation. Essentially, it describes the body corporate’s role in a simple way, which is essentially to provide its consent to the transaction, and that’s it.
Tom: In other words, the body corporate just needs to determine whether, or not it will approve the proposed purchaser as the new caretaker. But, it’s not all that simple to give that consent, and certainly part of a condition of considering that decision, the body corporate must not unreasonably withhold its consent to that transaction. So, there’s quite a bit involved, when a body corporate does need to consider that process, when those management rights are being requested to be transferred.
Dan: Tom, I was gonna say, does it cause much of an upheaval?
Tom: Look, it does these days, because the committees in our bodies corporates, including our lot owners, are much more educated, and this process isn’t that standard rubber stamp type process anymore. Management rights have changed a lot since our current legislation came into effect in 1997. So, gone are the days with that rubber stamp process, and now, it’s a much more due diligence process, that’s required for a committee to be able to make that type of decision.
Tom: I guess the important part to remember is the committee can actually make this decision, on behalf of all of its lot owners. So, you could have a 200 lot scheme. You’ve got your committee of seven, who are making that decision, whether or not to give that consent to that transaction.
Tom: It’s not a must. The committee may discharge, I guess, that obligation to a general meeting if it desired to do so, but it’s interesting that the committee actually has that power to do it. So, those committees, especially these days, are very mindful of that task, and obligation that’s put on them, and want to make sure that they do a proper due diligence of this proposed purchaser.
Dan: So Tom, what is the usual process of selling management rights?
Tom: Good question. From the body corporate’s perspective, usually what occurs initially to start a process is, a notification or a letter is sent to the body corporate, from the current caretaker, or usually their solicitors. Normally, that comes after their current caretaker has secured, and entered into, what essentially is an unconditional contract of sale with a purchaser. The only condition that remains, is the body corporate giving its consent to that transaction.
Tom: So, when that notification comes across, it’s from the current caretaker, to the body corporate, requesting that the body corporate give its consent to the transaction.
Tom: With that notification, you’ll find a number of documents. Usually, the standard documents will be the deed of assignment, the motion for the body corporate to resolve, and any resume, and references of the purchaser.
Tom: When those documents come across, the body corporate will then be required to review those documents, and then determine obviously, if there is any further information that it needs, to make that decision. Certainly these days, and very commonly, more information is almost certainly required.
Tom: That can even lead to obviously carrying out an interview of the purchaser, and I guess one of the main points to focus on at this time, when that notification comes across, requesting the body corporate’s consent, that’s when the legislative 30 day timeframe can be considered to start, because that’s when the information has been received.
Tom: Now, there are conservative views with when that 30 days actually starts, and it can sometimes be said, not until an interview’s occurred, but at that point, when that notification comes across, it’s very important for a body corporate to consider getting that legal representation on their behalf.
Tom: The reason that so important is, not only because the caretaker and the purchaser will both be represented by their respective lawyers, and the documents will be drafted by the purchaser’s lawyers, but the body corporate is entitled to recover its reasonable legal, and administrative costs, in considering this, the transaction.
Tom: So really, there’s no reason why a body corporate wouldn’t want to protect itself, and engage in legal representation to assist them throughout this process.
Dan: It’s a no-brainer, isn’t really, in many respects?
Tom: Yes, it is, and it’s all done on a reasonable basis, so there’s no prejudice to the other parties. It’s just the body corporate is only placed in the position to consider this transaction because the caretaker wants to sell.
Dan: So Tom, what are the main steps for the committee in that case, to then undertake when considering that agreement, or giving its consent?
Tom: I guess the first thing to start with for a committee is, obviously like we say, that they can make that decision. So, the legislation outlines a number of factors that the body corporate, or the committee can have regard to, when they consider that transaction.
Tom: It is quite limited. Whilst it’s limited, it does give some structure for the committee to use as a bit of a guide, though some of those examples of what those factors are, is for instance, the character of the purchaser, their financial standing, the terms of the transfer, and also potentially to competence, and experience of the purchaser.
Tom: The importance of those is, that they will basically form any of the additional documents that the body corporate, the committee might then need, in addition to what they initially received.
Tom: Just to give you some examples of those additional documents for those limited factors, when we think about character, and the character of the purchaser are very subjective, so the most objective way to look at it is obviously police checks. That’s quite a common request, and sometimes, we have been seeing those police checks automatically coming across now.
Tom: Financial standing, usually assets, and liabilities, or even to a lesser extent, a letter from the purchaser’s financier will be enough. If a bank’s going to lend to them, then usually, they must have some sort of financial standing.
Tom: In addition to that, the body corporate could undertake bankruptcy, so just to ensure, but if they haven’t got any disclosable outcomes under their police check, or they’re not bankrupt, and things like that, in those instances, their character, and financial standing are generally going to be satisfied, so the most important factor for the body corporate to consider, is whether or not this purchaser has backed the competence, and the experience to perform that caretaker’s role.
Tom: In that instance, we would share the view that a resume is just not gonna be enough for that, nor are the references, and this is why. And we’re usually that interview process has been implemented, to get that final bit of information, to understand whether or not this purchaser might be able to competently perform that role.
Tom: Just on that, I guess one of the important factors to remember is, it’s a balancing act. What I mean by that is, just because a potential purchaser might have zero experience operating management rights, does not mean that the body corporate can automatically withhold that consent.
Tom: Rather, it’s seeing if the purchaser has obtained, or is going to obtain external training. A longer handover period, where they’re going to be trained by the outgoing caretaker.
Tom: Are they members of industry bodies, who can assist them in bringing them up to speed with what the role is entailing?
Tom: Things like that I guess, they’re factors that the committee consider when they’re looking at competence and the experience attached to that type of role.
Dan: So, can the body corporate engage someone that’s qualified to carry out an interview?
Tom: Yes, certainly, and it’s become certainly a common occurrence these days, because a lot of the purchasers we do see, sometimes are changing their careers, and don’t have any experience, so it’s reasonable to assume that the committee might … who don’t have that expertise, delegate that task to an industry body, to perform that interview.
Tom: Again, it is a bit of a balancing act. There’s a number of companies that perform these interviews at a reasonable cost, and those costs ought to form part of the assignment cost.
Tom: But, the reason we say it’s a balancing act is, because if you have a purchaser who has say, 10 years of management rights operation, and experience, it probably might not be necessarily to actually go through that formal interview process, whereas their competence, and their experience is proven.
Tom: Whereas, someone who has no experience, then in that instance, it might be worthwhile, having an independent party do that interview, who’s there, and capable of asking the right questions of the purchaser. So, when they produce that report from the interview, the committee can see where there might be areas that the purchaser needs to attend to, to mitigate any concerns of lack of experience, for the committee, and the body corporate.
Dan: Now, what are the final steps?
Tom: Yes, the final steps, once all of that information’s considered, and like I said, it’s quite a hefty due diligence process, and usually, there is that 30 day timeframe that’s implemented, but once that part’s all done, and the interview’s occurred, and all that, the motion’s then basically determined. The deeds are signed, and we all get ready to go to settlement.
Tom: Usually at that time, the caretaker first, or the purchaser will generally act as the body corporate’s unpaid agent at settlement, just to collect those assignment dockets on behalf of the body corporate.
Tom: And basically in summary, that’s when the transaction will be finalised, and it’ll settle, just like any other type of transaction settlement. I guess like I said, the most important things are, to remember is just that balancing act of, what is the information that the committee needs, to reasonably consider giving its consent, from our perspective, and OMB, or we obviously act exclusively for bodies corporate, so we’re regular assisting the bodies corporate in these assignment process, so if there’s anyone out there who’d like to come down, and have a chat with OMB Solicitors, and the committees, we are happy to offer a no charge one hour consult, so we can have a discussion about these types of matters, and any other matters that might be affecting your body corporate.
Dan: Tom, thanks for joining me.
Tom: Thank you very much Dan.