Before starting to read this article you should go and check your management rights agreements and make sure you know your option exercise dates and then put those in your diary. If you are not sure then you need to ask us.
When looking for these dates, you will need to look in your caretaking agreement, letting agreement, and in the deeds of variation where you or a previous manager may have added a further option/s to the agreements.
We have explained the importance of knowing your dates in many articles, but we are still seeing many instances where a manger does not properly exercise their option.
The seriousness of this cannot be sugar coated. If you do not properly exercise your option, then your agreements will come to an end.
What is the difference between all of these terms?
- All management rights agreements are for a certain length of time – that is the term. There is no set term within the industry. Some agreements have an initial term of 25 years, some 10 years, some 5 years, and some 3 years.
- When you get to the end of the initial term, there may be an option (or options) in your agreements that need to be exercised. An option is an existing clause in your management rights agreements and gives you the right to extend the term. This is called exercising your option, but it can also sometimes be called extending your agreements. A management rights agreement will commonly include more than one option clause.
- There will be a time frame within which you need to exercise your option. Very few options are “automatic”. Many require the option to be exercised by giving written notice by a certain date. This is your option exercise date/s.
- To ensure that you never run out of option clauses (refer to point 2), you need to constantly add new options to your agreement. This is called topping-up your agreements, and, confusingly, can also be called extending your agreements or varying your agreements.
Exercising your options and extending or topping up your agreements are entirely separate tasks. Both need to be attended to in the lifecycle of your management rights agreements.
Exercising your options (that already exist in your agreements)
To exercise your option you will most likely need to give written notice to the body corporate before the end of the then current term. Some clauses include a window of opportunity within which to exercise the option – typically between 6 and 3 months from the end of the term.
Once you know by when your option needs to be exercised, it is just as important to know how. Most agreements will require written notice to actually be sent by post or hand delivered to the body corporate manager or secretary. Email may not be enough.
Finally, whilst not strictly necessary, it is important that the exercise of your option be documented. It will be needed down the track, to prove that the option was validly exercised and is of effect. We often do this by way of a deed of extension.
Top-Ups or Variations (adding more options)
Failing to add more options to your agreements does not have the same dire consequences of failing to exercise your option, however as time goes on, failure to do so is likely to have an impact on the length of term remaining on the agreements and therefore the saleability (and potentially the value) of your business should you decide to (or need to) sell.
If your scheme is governed by the standard module we suggest that you should be looking at doing this every 2 or 3 years. If your scheme is governed by the accommodation module, then every 5 years is common practice.
A top-up involves varying your management rights agreements to include a new option clause. This needs to be done at a general meeting (usually the AGM) and approved by ordinary resolution by secret ballot – which is simply more votes for than against (from those owners who choose to vote).
What dates/information do you need to know?
You need to become familiar with your management rights agreements (this means your agreements and all variations of them) and know:
- the initial term;
- the options (including how many and for what period of time for each);
- how do your option clauses work – how can they be exercised (by post or hand delivery) and what are those dates;
- what is the total term (the initial term plus all available options); and
- when is the body corporate’s end of financial year.
You should check to see what your lawyer told you about these dates when you purchased the business (it will be in your due diligence report) and you should diarise all relevant dates (along with early reminder dates) in a way that is readily accessible to you and cannot be forgotten.
Again, if you do not know, then please ask us. We are more than happy to assist.