The Problem With Deeds Of Consent In New South Wales

26 March 18

Financiers of management rights purchases commonly require the owners corporation to enter into a deed of consent to security (“consent deeds”). The problem is that there is nothing in the NSW strata legislation that requires an owners corporation to agree to enter into such a deed – even on the most reasonable of terms.

 

What are they?


Consent deeds, also commonly called “right of entry deeds”, act as security over the management rights in the event of a default by the caretaker.


The deed allows the financier to ensure its security is not jeopardised if the caretaker is in default of its loan agreement. Essentially, the owners corporation must notify the financier of any defaults by the caretaker under the caretaker agreement. If the default entitles the owners corporation to terminate the agreement, the financier is entitled to “step in” and operate the business.


How do they work?


Usually, the rights conferred under consent deeds include:

 

  1. An obligation on an owners corporation to serve a financier with any notices served on a caretaker (such as default or termination notices issued under the caretaker agreement); and
  2. Within 21 days of receiving a notice of termination, the financier may give notice to the owners corporation of their intention to act in place of the caretaker or appoint a receiver.


The financier may also be required to remedy any breaches by the caretaker or pay the owners corporation reasonable compensation before they can act in place of the caretaker.


Importantly, the rights of termination for breaches of the caretaker agreement (after the financier steps in) are still available to the owners corporation.


Benefits of consent deeds


The benefits of having a consent deed for a financier are obvious. But why would an owners corporation enter into one?
For an owners corporation, a consent deed provides several advantages:

 

  • (a) It acts as a further pressure point for caretakers that are not fulfilling their duties. The financier will be given copies of breach notices at the same time that the caretaker receives them. Therefore, not only will pressure be applied from the owners corporation for the default to be rectified, but also from the financier;
  • (b) The owners corporation will also have the security of knowing a third party will “step in”, if the caretaker does not discharge its duties under the caretaker agreement. This can also be seen as a disadvantage by some owners corporations seeking to retain control especially in the event of termination of the caretaker agreement. This is discussed further below;
  • (c) The financier may be required to rectify any breaches by the caretaker or compensate the owners corporation for the breach before it can step in.


Problems with consent deeds


Consent deeds can become the cause of dispute between the owners corporation, the existing caretaker (who is trying to sell their management rights), a purchaser of the management rights and their financier.


In practice, financiers make the execution of such deeds a condition of advancing funds to purchasers of management rights. The deed is usually entered into at the same time as the caretaker agreement or a transfer of a caretaker agreement.


Without a contractual obligation to enter into a consent deed, the owners corporation may refuse to execute such deeds (even if they are on reasonable terms). This can make it difficult for an existing caretaker to sell their management rights – as most purchasers will require finance and most financiers will require a consent deed.


Why would an owners corporation refuse consent?


Commonly, where an owners corporation refuses to enter into a consent deed, it is because the owners corporation wants to retain control.


They see the consent deed as fettering the owners corporations ability to terminate the caretaker agreement and their control over the appointment of a new caretaker. This includes the ability to “re write” or amend the caretaker agreement.


This loss of control needs to be weighed against the benefits of consent deeds for owners corporations. In addition, if it is impractical for a scheme to operate without an on-site caretaker, a consent deed is a commercial reality.


An owners corporation may also refuse its consent because the terms of the consent deed are unreasonable. There is no doubt that a financier of a management rights purchase wants to be afforded the utmost protection of its security.
Consequently, the terms required by financiers under consent deeds can be drafted heavily in favour of the financier. I have recently experienced financiers that require rights to be conferred on them under the consent deed that exceed the rights conferred on the caretaker under the caretaker agreement!


What is the answer?


There needs to be a balance between the two competing interests. Owners corporations need to recognise the commercial reality that such deeds are a necessary part of a management rights sale. Accordingly, their consent should not be unreasonably withheld. This is always provided that the terms of the deed are reasonable.


I have previously raised these very issues when making submissions on possible amendments to the strata legislation in NSW and have proposed amendments which would recognise and provide a reasonable level of protection to financiers, such as that seen in Queensland. Unfortunately no changes were made when the legislation was last revised and it means that caretakers still need to be aware of the potential for disputes between financiers and owners corporations which could inhibit their ability to sell. Hopefully with further submissions from the industry and some luck this will be addressed when the next review of the legislation comes around.

 

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.

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