16 July 15

This month, we continue our examination of various clauses within caretaking and letting agreements and the important considerations to be mindful of when considering the rights and obligations of the manager and owners corporation. Given the recent decision in Gallery Vie, which has rocked the Queensland Management Rights industry, I thought it an opportune time to examine issues around dispute resolution and termination rights.

In part 2 of this series of articles back in October last year, I outlined the position in relation to financier’s rights. As outlined in that article, the Strata Schemes Management Act 1996 (‘SSMA’) does not recognise the role of financiers. Accordingly, banks in New South Wales generally require security over the caretaking and letting agreements. This security is in the form of a finance deed (referred by many different names, including ‘Right of Entry Deed’ and ‘Deed of Consent’). Such deeds permit the bank to ‘step-in’ and exercise the rights of the manager in the event of a default to preserve their security. Contrast the position in Queensland where, in 2003, the rights of financiers were built into the legislation.

In Gallery Vie, the Queensland Civil and Administrative Tribunal had to interpret the financier provisions in the Queensland legislation. It had previously been commonly accepted that a body corporate could not exercise rights of termination where a financier had exercised their rights to step-in unless there was a subsequent breach of the agreements by the financier. However, due to what appears to be inadvertent drafting of the legislation, it was determined that agreements could be terminated by a body corporate for any breach of the agreements subsequent to the financier stepping-in – even for actions by a third party outside the control of the financier (in that case, the placement of the management company into liquidation).

The Gallery Vie decision has caused a significant stir amongst lenders in Queensland, with some banks placing a hold on lending altogether and others taking a more pragmatic approach and seeking to require amendments to the termination provisions of agreements before agreeing to lend. Industry bodies such as ARAMA have been on the front foot in lobbying government to make some simple changes to the legislation to overcome the issue. With strong support from industry bodies, it is more than likely just a matter of time before appropriate amendments are enacted.

So that brings us to what impact the Gallery Vie decision has on banks’ security position in New South Wales. Essentially, there should be little or no impact. As outlined above, the bank’s security is governed by the terms of the finance deed and, accordingly, the Queensland legislative provisions are irrelevant (unless, of course, the terms of the finance deed have adopted the wording used in the Queensland legislation which, in my experience, is uncommon). Nonetheless, finance deeds are an important consideration to bring to the fore in any consideration of the dispute and termination provisions of caretaking and letting agreements. A finance deed will generally include terms -

• requiring the owners corporation to provide notice of any default under the agreements to the bank at the same time as notice is provided to the manager;
• allowing the bank to appoint a receiver to perform the obligations of the manager in the event of default;
• preventing the owners corporation from terminating the agreements whilst the receiver is performing the obligations of the manager (provided there is no breach by the receiver).

I am constantly amazed at how often the provisions of the finance deed are overlooked in disputes arising between managers and owners corporations. The majority of disputes are resolved commercially and so the effect of not complying with the requirements of the finance deed is usually a moot point. However, should a matter wind up in court on the back of terminated agreements and the owners corporation has not complied with its obligations under the finance deed, there is little scope for any outcome other than the termination being ruled invalid.

Putting the requirements of the finance deed to one side, the rights of an owners corporation to terminate a caretaking or letting agreement will be set out in the agreement. Unlike Queensland, which has statutory provisions for termination (which are usually coupled with additional rights under the agreements), the only rights of termination under a caretaking or letting agreement in New South Wales will be included in the agreement itself.
It is important that managers familiarise themselves with the termination provisions of their agreements, as each is unique. Nonetheless, there are some very common provisions included in most agreements granting the owners corporation a right of termination where the manager -

• fails to properly carry out its obligations under the agreements after notice (usually 14 or 21 days) provided by the owners corporation requiring the manager to carry out those duties;
• is guilty of gross misconduct or negligence in performing or failing to perform their obligations under the agreements;
• transfers or assigns its interest in the agreements without the consent of the owners corporation;
• (or a principal director or shareholder) is convicted of an offence involving fraud, dishonesty or assault;
• becomes bankrupt or has an administrator, receiver or liquidator appointed.

Where there are separate caretaking and letting agreements, there may be a clause which ‘ties’ the agreements together – i.e. breach or termination of one automatically leads to breach or termination of the other. Accordingly, it is a mistake to assume that a caretaking or letting agreement is protected from termination simply because the default occurs under the other agreement. Regard must be had to the terms of the agreements.

Your solicitor should have carefully reviewed the termination provisions of your agreements when you purchased the management rights to check that they are reasonable. The above is by no means an exhaustive list of what could be considered reasonable but any further rights of termination granted beyond the stated list should be carefully scrutinised to ensure that the agreements do not unfairly allow the owners corporation to terminate. Any unreasonable clauses could be an impediment when you go to sell the business.

One particular aspect of the termination provisions which cannot be overemphasised is the ability of the owners corporation to terminate where the manager assigns their interest without consent. Whilst this won’t usually present a problem with your typical sale / purchase arrangement, corporate managers can easily get caught out where there is a ‘deeming clause’ in the agreements. These clauses will usually provide that any change in directors or shareholding which ‘alters the effective control’ of the manager is deemed to be an assignment, requiring the prior approval of the owners corporation. You should bear this in mind if you intend to make any changes to your company. If such consent is not obtained, it could be grounds for termination of the agreements.

In any dispute between a manager and owners corporation, regard should be had not just to the termination provisions of the caretaking and letting agreements, but also any clauses which deal with dispute resolution. Depending on the nature of the alleged breach, the agreements may include a condition that the parties seek to have the dispute resolved by an independent person (e.g. mediator or expert) before taking further action under the termination provisions or commencing action in a court or tribunal. Whilst the validity of such clauses is doubtful (as parties to a contract cannot ‘oust the jurisdiction of a court’), they nonetheless provide a useful tool for the parties to consider as part of the dispute resolution process.

If you are managing an issue with the owners corporation that has the potential to escalate into a more serious issue, it pays to engage your solicitor early in the piece. There is a common perception that lawyers will unnecessarily inflame any situation. In my experience, this is generally not the case. Provided the tone of communications is appropriate, amicable and conciliatory, lawyers can often remove the people from the problem and suggest mutually beneficial outcomes for both parties. Even if it is considered more appropriate to leave the communications direct at that point in time, obtaining advice early in the piece will allow you to know exactly where you stand from a legal point of view to ensure you don’t take any action which may jeopardise your interests.

As a final point, it is worth noting that the SSMA requires any termination of a caretaker agreement to be approved by a (majority) resolution at a general meeting of the owners corporation. Accordingly, whilst the executive committee can issue breach notices on behalf of the owners corporation, they cannot terminate a caretaker agreement. This is just another example of the importance of ensuring you have a good relationship with your owners!

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Disclaimer – This article is provided for information purposes only and should not be regarded as legal advice.


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