The Law Relating to Management Rights in New South Wales

14 January 11

This article looks at restrictions on developers setting up management rights in New South Wales, where it is estimated that there are approximately 200 management rights complexes currently established.


Restrictions relating to Developer Control Periods
The relevant Act governing management rights in NSW is the Strata Schemes Management Act 1996 (Strata Act)
• Under the Strata Act, the “initial period” commences on registration of the Strata Plan and ends when ⅓ of the aggregate unit entitlement has changed hands (i.e. settled) from the Developer.
• The Strata Act restricts an Owners Corporation, during the initial period, from:
 incurring a debt for an amount that exceeds the amount then available for repayment of the debt from its administrative fund or its sinking fund, and
 appointing a Strata Managing Agent or a Caretaker or other person to assist in the management or control of use of the common property, or the maintenance or repair of the common property, for a period extending beyond the holding of the first annual general meeting of the Owners Corporation, and
 changing or cancelling the by-laws or making extra by-laws that do not give a right or obligation to all owners of all lots, and
 altering common property (except under a development contract), and
 selling any common property, and
 borrowing money or giving securities.
• The original owner must hold the First AGM within two (2) months of the end of the initial period. Fourteen (14) clear days’ notice is required for this meeting, whereas all other AGM’s or EGM only require seven (7) clear days notice.
• At the AGM, if the original owner still owns half or more of the total unit entitlement, and a vote by poll or special resolution is called, the value of the original owner’s vote is reduced to ⅓ of the original owner’s unit entitlement, ignoring any fraction. If the motion is to elect the Executive Committee and the original owner still owns half or more of the lots, the original owner’s vote is reduced to one vote for every three lots owned, ignoring any fraction.
• There is a statutory agenda for the holding of the First AGM. One of the agenda items is whether a Caretaker is to be appointed. As the New South Wales legislation does not specifically recognise the authorisation of an on site letting agent, the authorisation or appointment must be passed at another general meeting (in practice, usually an EGM which immediately follows the first AGM).


Community Title Schemes under the Community Land Management Act 1989 (Community Act)
• The Community Act provides that a Community Association, Precinct Association or Neighbourhood Association may agree with the proprietor or occupier of a development lot, neighbourhood lot or strata lot within the community, precinct or neighbourhood scheme to provide amenities or services to the lot or to the proprietors or occupiers.
• The Community Act provides that, if during the initial period for a scheme, an Association enters into a Caretaking Agreement, the agreement terminates at the end of the first annual general meeting of the Association unless:
 its effect was disclosed in the Association’s Management Statement before the transfer of any lots in the scheme, or
 it is ratified at the meeting.
• In other words, a Caretaking Agreement or Letting Agreement can be entered into by a Community Association during its initial period provided that the “effect” of the agreement was disclosed in the Community Management Statement before any lots in the scheme were transferred. Alternatively, the agreement can be ratified at the first annual general meeting of the Association.
• Recent cases have made it clear that disclosure of the “effect” of such an agreement in the CMS must be quite specific to be effective. For example, clauses in a Community Management Statement to the effect that the Community Association may enter into a Caretaking Agreement and the term of the agreement may be for a period of ten (10) years and may be with a commencing remuneration of $# have been held not to be sufficient disclosure for the purposes of this section. The CMS disclosure must state exactly what the term will be and what the remuneration will be etc. Otherwise, the Caretaking Agreement (or Letting Agreement) will come to an end at the first annual general meeting – unless ratified.


Legislation re Term of Agreements
Strata Schemes Management Act 1996 (Strata Act)
• In New South Wales, there are two types of Caretaker Agreements – those entered into prior to 10 February 2003 and those entered into on and from 10 February 2003. The 10 February 2003 was the date that the New South Wales Government introduced the “Caretaker” provisions into the Strata Act.
• The Strata Act defines a Caretaker as a person who is entitled to exclusive possession (whether or not jointly with another person or other persons) of a lot or common property and assist in exercising any one or more of the following functions of the Owners Corporation for the strata plan concerned:
 managing common property,
 controlling the use of common property by persons other than the owners and occupiers of lots,
 maintaining and repairing common property.
Consequently, you will see that there are two limbs to this definition and you have to satisfy both limbs to be a “Caretaker” under the legislation.
• If you fit within the definition of a Caretaker then Section 40B provides that any agreement appointing a Caretaker must be in writing and entered into under the authority of a resolution (ordinary) passed at a General Meeting of the Owners Corporation.
• The Strata Act also provides that unless the agreement expires or otherwise ceases to have effect earlier, a Caretaker Agreement (including any additional term under any option to renew it) expires:
 at the conclusion of the first annual general meeting of the Owners Corporation if the agreement was executed by the original owner, or
 when ten (10) years have expired after it commenced to authorise the Caretaker to act under it.
• On-site letting agents are not recognised under the Act and accordingly, there is no term limitation in respect to any Letting Agreement. The key points to understand in respect to Letting Agreements in New South Wales are:
 the entering into of the Letting Agreement should be firstly empowered by a by-law authorising the Owners Corporation to enter into such an agreement,
 by-laws have no effect until they are registered,
 unless restricted by the terms of the empowering by-law, the agreement can be for any term,
• It is possible in New South Wales to have a Caretaking Agreement with a maximum term of ten years and a corresponding Letting Agreement with a term of, say, 15 or 25 years. In this scenario, you should ensure that the agreements are not linked so that default or expiration of one agreement does not automatically trigger the default or expiration of the other agreement.
 

Community Land Management Act 1989 (Community Act)
• There is currently no term limitation on Caretaking and/or Letting Agreements under the Community Act. Consequently, a Community Association can enter into a 20 or 25 year Caretaking or Letting Agreement whereby the Community Association contracts with a Caretaker and/or letting agent to provide services to the Community Association and/or subsidiary associations if allowed for in the CMS.
• I believe that this anomaly will be changed some time in the next year so that the term of Caretaking Agreements under the Community Act will mirror the 10 year term limitation under the Strata Act.
 

The ability to Top Up Agreements
Strata Schemes Management Act 1996 (Strata Act)
• Caretaking Agreements entered into prior to 10 February 2003 do not have a term limitation, and accordingly, the term of the agreements can be topped up at any time by way of a variation of the agreement. Likewise, there is no restriction on the top up period. You must ensure however that you do not effect a “re-engagement” of the agreement because if this occurs, the 10 year term limitation will then apply.
• Agreements entered into from 10 February 2003 can be topped up to a term (including options) of no more than 10 years. However, because of the wording of the relevant section, a “top up” can only be effected by way of re-engagement. This is because the clause states that a Caretaker Agreement expires “when ten years have expired after it commenced to authorise the Caretaker to act under it”. Consequently, a variation of an existing agreement will not work.


Community Land Management Act 1989 (Community Act)
• As there is no term limitation currently applying under the Community Act, a Caretaking or Letting Agreement can be topped up by way of variation.


Financiers' Rights
Strata Schemes Management Act 1996 (Strata Act)
• There is nothing in the Strata Act that compels an Owners Corporation to enter into a Financier’s Deed. Consequently, an Owners Corporation can reject outright any request by a financier of a Caretaker to enter into such a Deed.
• However, from a contractual point of view, some Caretaking Agreements do have provisions in them which require Owners Corporations to enter into agreements with Caretakers’ financiers. In practice however, I find that the contractual terms are generally limited in their detail and it is becoming increasingly more difficult to negotiate the terms of these agreements to a position where they are acceptable to both the financier and the Owners Corporation’s solicitors.
• In an ideal situation, financiers’ rights in relation to Caretaker and Letting Agreements should be incorporated in detail in both the Caretaking and Letting Agreements as well as the by-laws.
 

Community Land Management Act 1989 (Community Act)
• There is likewise no provision in the Community Act to compel a Community Association to enter into such agreements and accordingly, the same situation applies as under the Strata Act.

 

Legislation relating to use of Proxies by Developers and Caretakers when entering into or extending Agreements


Strata Schemes Management Act 1996 (Strata Act)
• Amendments to the Strata Act which came into effect from 1 August 2008 now prohibit Developers of strata lots from being able to use a contract for sale to obtain proxy voting appointments from purchasers. Any contractual provisions obliging a purchaser to make such an appointment is unenforceable.
• Likewise, any person connected with the Developer or Caretaker is ineligible to be appointed to the Executive Committee unless they disclose their connection beforehand. Relevantly “connected” people include family, employees and executives of Developer companies.
• Also, a vote by proxy who is a Caretaker, an on-site residential property manager or a strata managing agent is invalid if it would obtain or assist in obtaining a pecuniary interest for, or confer or assist in conferring any other material benefit on, the proxy.
“Material benefits” are defined as including, but not limited to, the following:
 an extension of the term or an additional term of appointment of the proxy as Caretaker, on-site residential property manager or strata managing agent,
 an increase in the remuneration of the proxy,
 a decision by the Owners Corporation not to proceed with, to withdraw, to delay, to compromise or to settle litigation or other legal proceedings relating to the proxy,
 any other decision of the Owners Corporation that affects litigation or other legal proceedings relating to the proxy.


Community Land Management Act 1989 (Community Act)

• There are no restrictions in the Community Act similar to those contained in the Strata Act which limit Caretakers’ or on-site residential property managers’ or strata managing agents’ use of proxies in circumstances where the use of the proxy by a Caretaker will assist in conferring a pecuniary or material benefit to the Caretaker. Accordingly, a Caretaker can obtain proxies and use the proxies to vote on any extension of the Caretaking Agreement.
 

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