CARETAKING AND LETTING AGREEMENT ESSENTIALS PART 5: DISPUTE RESOLUTION AND TERMINATION

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!

Liability limited by a scheme approved under Professional Standards Legislation
Disclaimer – This article is provided for information purposes only and should not be regarded as legal advice.

Share

Contact Us Now

Phone:+ 61 7 5552 6666
Fax:+ 61 7 5528 0955
Email:info@smh.net.au
Address:Level 2, 17 Welch St Southport, Qld, 4215
Postal:PO Box 1876
Southport 4215

Search

Search*
Search

Most Popular Articles

Management Rights News

Number of news items returned: 1 to 15 records of 70

Unit Entitlement in NSW

11 February 2013

(6234 views)

The issue of unit entitlement was recently looked at again as part of the Department of Fair Trading’s Discussion Paper ...

The Different Types of Caretaking Agreements

17 November 2014

(6053 views)

 Essentially, there are three types of caretaking agreements in the marketplace: “Do” agreements; “Supervisory” agreements; Hybrid “Do” and “Supervisory” agreements. “Do” Agreements A “Do” agreement ...

What Managers Need to know about the NSW Child Window Safety Devices Act 2013

17 January 2014

(5268 views)

Resident building managers have general obligations under their Caretaking Agreements to assist Owners Corporations with building and compliance issues. Managers ...

Is it Time to Change the Management Rights Model?

13 May 2013

(4990 views)

I think the time is right for the management rights industry to explore the creation of a new model. I ...

The Law Relating to Management Rights in Queensland

14 June 2010

(3856 views)

This article looks at the legislation in Queensland dealing with the constraints and obligations imposed on developers whilst they control ...

Be Careful with your Proxies!

03 October 2013

(3844 views)

In June this year, I wrote an article headed “Proxy Farming”, which set out the relevant restrictions on caretakers using ...

Duty Bound or Duty Free - Do you know what Your Duties Are?

23 September 2013

(3462 views)

The day-to-day care and maintenance of your resort facilities and communal areas is essential to its ongoing performance and success. ...

Owners Corporation Insurance - How do we Stop the Spiraling Costs?

12 August 2013

(3379 views)

In NSW, all strata schemes are required to be insured for the full replacement value, as well as public liability ...

Proxy Farming

10 June 2013

(3168 views)

It is often stated that Strata and Community Schemes represent the “fourth tier of Government” and, as such, voting (either ...

"Legal Action", All those in Favour say "Why"

15 July 2013

(3039 views)

I was recently involved in a New South Wales matter where an Executive Committee had received extensive legal advice from ...

CARETAKING AND LETTING AGREEMENT ESSENTIALS PART 5: DISPUTE RESOLUTION AND TERMINATION

16 July 2015

(2926 views)

This month, we continue our examination of various clauses within caretaking and letting agreements and the important considerations to be ...

Caretaking and Letting Agreement Essentials Part 1

03 September 2014

(2924 views)

We regularly prepare caretaking and letting agreements for new developments. However, it has become increasingly common for us to be ...

For Your Eyes Only!

15 April 2013

(2885 views)

Information is a commodity and for many, information is power. As you would most likely know from personal experience, the right ...

Manged Investment Schemes

15 July 2008

(2830 views)

You may have heard the terms ‘MIA’ or ‘Managed Investments Scheme’ and wondered what it’s all about. If you operate ...

Being Aware of your Rights and Responsibilities

14 January 2013

(2812 views)

Every resident building manager in NSW should have a copy of the booklet issued by the Department of Fair Trading ...