Management Rights and the Coronavirus – some guidance amongst the uncertainty

25 March 2020

You will be unsurprised to learn that over the past few days we have fielded many questions from resident managers who and whose owners are suffering adverse impacts from the COVID19 crisis. As the crisis is evolving rapidly with regular policy announcements from local, state and federal governments it is impossible to provide clear and current advice on all questions raised. However in this circular, as best we can, we will give you our comments on the principal issues which have been raised with us or which we see as warranting comment.

As you will appreciate, these insights are general only and should not be relied on as legal advice. If any of these issues are affecting your specific business, contact Mahoneys to obtain timely and practical legal advice on the actual issues.

General overview

There is no point in sugar coating the impact this crisis has inflicted already and will continue to inflict but our industry has always proved to be resilient and to bounce back from adversity, just as it did after the GFC. It will no doubt do so again but over what period remains to be seen and any recovery will likely be gradual.
Whilst our clients in short term letting complexes have been hard hit, we are still seeing purchase and sale transactions in a number of long term complexes as the market perceives that such businesses remain strong and viable. For many of those clients it is, at least for the moment, business as usual.

Your committee

Now more than ever is the time for you to be in close, regular contact by phone or email with your committee or its nominated liaison person. Decisions which impact on you, your owners and tenants need to be made and you should try and involve yourself in that process as much as you can.

Be proactive. Try and be the one coming up with suggestions. Recommend strategies to the committee which you think will benefit owners or tenants. Recognise that you, the committee and the owners are all in this together and need to work cooperatively for the good of every one of you.

Remember that the committee does not have to have a physical meeting to make a decision – it can meet by teleconference or skype for example. If necessary encourage the committee to do so.

Common property facilities

You should keep in close contact with your committee about common property facilities, particularly the recreational areas such as the pool and the gym. The committee should decide if these facilities or any part of common property should be closed – you should not make that decision. Liaise closely with and follow the directions of the committee. If you think there should be restrictions placed on the use of any areas of common property, push for that with the committee.

Whilst the committee may not lawfully be able to compel you to undertake additional duties not specified in your caretaking agreement (such as cleaning at greater frequencies or carrying out sanitising), some extra cleaning during this time may well be regarded as part of your general duties and or something about which the committee can give you reasonable directions to undertake. You should consider complying with any reasonable request to perform such extra work where there is no material detriment to you.

We have heard of one committee engaging specialist sanitising cleaners and deducting the cost of that from the manager’s remuneration – in our view that is unlawful and should be resisted.

Short term lettings

Owners of holiday and short term let units are already seeing returns slashed and the situation will not improve for some time when travel and other restrictions are lifted. You should consider utilising such units for long term lettings so that your owners receive some form of return. You should first discuss that with the owner and also make sure that your form of letting appointment allows you to do that – if not ask the owner to enter into a long term letting appointment. Make sure owners realise that as onsite manager you are better placed to source a tenant than an external agent.

ARAMA members can take advantage of using the Accom Properties facility to get free access to to advertise long term lettings.

Many managers are committed to a fixed return to owners under some form of lease agreement or guaranteed return in a letting appointment. Whilst letting appointments can as a general rule be terminated on no more than 30 days’ notice, a lease arrangement is more complicated and must be assessed on a case by case basis. If you are unsure, contact us to review the lease for you.

Some of these arrangements specifically cater for a suspension of the guarantee in circumstances such as we are now facing but the actual agreement would need to be reviewed to ascertain your exact rights. In any event we recommend that rather than terminate such arrangements you first try and renegotiate the guaranteed return.

If you propose to negotiate alternative arrangements with your owners we suggest you do so as soon as practical.

Some managers may be fortunate enough to have insurance that covers you for loss of income caused by the COVD-19 crisis. Check that with your broker and consult with us if you need assistance to determine if you are covered.

Tenants and rent

Although the services shut down has meant an immediate loss of jobs for many, the ability for the newly unemployed to access the unemployment allowance, and the doubling of that allowance, should limit the number of tenants unable to meet rental payments. We suggest that you keep an even closer eye on your tenants, immediately contact them if there is any delay in paying rent and otherwise deal with defaulting tenants as you normally would. It is important to continue to maintain the relationship with both your tenant and your owner during this time. As units previously used for corporate and short term letting enter the long term market, there will be an effect on rents. So working with your tenants and owners through this difficult time may be better for your owners than losing them altogether.

At the time of writing this circular we are waiting to see the details of the rental assistance packages which the state and federal governments are set to announce and our comments above are made subject to what they might announce.

Your remuneration

The body corporate must lawfully continue to pay you your caretaking remuneration. Provided there are sufficient funds in the body corporate’s admin fund there is no reason why it will not do so. Of course if owners fail to pay their levies that will impact on the ability of the body corporate to pay your remuneration in the future.

A body corporate cannot raid its sinking fund to pay expenses like your remuneration if there are insufficient funds in the admin fund.

Should the body corporate indicate that it may be unable to pay your remuneration, or all that is due, you might consider some interim arrangement whereby there is a corresponding reduction in the duties performed or some kind of deferment arrangement.

Likewise if as a consequence of changes to the current lockout rules it becomes impossible for you to perform all of your duties, that does not of itself allow the body corporate to stop paying you all of your remuneration. However in such circumstances you might consider it appropriate to offer the body corporate a reduction in your remuneration for the period of the reduction in the duties.

Don’t get too distracted

It is easy in these times to be distracted by the uncertainty and stress of what is going on around you. Be careful to make sure that you continue to go about all of your duties and the conduct of your business. In particular make sure that you are conscious of any critical dates coming up – including the date by which you may have to get a top up motion on the agenda for an AGM or the date by which you have to exercise an option.

Check your management rights agreements and/or the advice from your lawyer when you bought your business to make sure about such dates and contact us if you need to check or action an option exercise or a top up.

Bank support

All banks have offered a variety of packages to assist their business and personal customers and details are or will soon be available on the website of the banks. Your accountant or finance broker will be the best person to assist you if you want to approach your bank seeking assistance. We suggest you do so as soon as it becomes apparent that you will need such assistance.

Value of your business

It is far too early to make predictions about this but from our observations to date the crisis has not yet had any real impact on what buyers are prepared to pay for solid long term management rights businesses.

Where a short term business suffers a drop in income for the period of the crisis but recovers after the crisis then it is likely that the market will not use the much reduced annual profit as the basis for valuing the business. Regard might be had to a much longer period than the typical 12 months or some form of normalised profit figure might be adopted ignoring all or most of the period of the crisis.

None of us have a crystal ball which will accurately tell us when the crisis will end or where we will be when it does. There is much to play out in coming months but we remain confident that our industry can survive.