What is a variation?
A variation is simply changing the terms of an existing contract. For a change to be legally binding it needs to be agreed by both parties – so any variation to a management rights agreement needs both the manager and body corporate to agree to the change.
While this article covers management rights variations, variations are not limited to management rights. The process and requirements for changing management rights agreements is the same as changing any other contract (e.g. an employment agreement or contract to purchase land).
As a general rule it is relatively easy for the manager to agree to a change as most managers operate as individuals, partnerships or through small companies. If the entity holding the management rights is a company all they need is approval consistent with the terms of the company’s constitution.
It is a much more complicated and technical process for the body corporate to agree because of the need to comply with the terms of the Body Corporate and Community Management Act 1997 (Qld).
Body Corporate agreement
The regulation modules provide that a management rights agreement can only be varied if the following requirements are met:
- An ordinary resolution without any proxies is passed approving the amendment.
- The agenda for the general meeting includes the “terms and effect” of the variation.
- If the variation is to amend the management rights agreements to grant an option to extend the term the following additional requirements must also be met:
- The motion is considered by secret ballot. A returning officer is required which increases the costs of the meeting.
- An approved explanatory note, in the form of a BCCM Form 20, must be circulated prior to the meeting.
Why do they happen?
Variations can happen for any number of reasons including:
- a change to the manager’s duties;
- a change to the residential obligations of the manager;
- the manager seeking an increase to their remuneration;
- the removal of invalid or unwanted clauses, for example, mandatory dispute resolution clauses or termination clauses;
- to address changes in legislation or the interpretation of particular sections of the BCCMA, for example, “Gallery Vie”; and/or
- an increase in the term of the agreements.
Any properly submitted motions must be included on the agenda of the upcoming general meeting (assuming it has been submitted on behalf of a lot owner and within the correct timeframes). If the motion is submitted on behalf of the manager who is not a lot owner, it is up to the committee whether the motion will be included on the agenda of the general meeting.
The committee can:
- seek to negotiate changes but the:
- manager does not need to agree to them, but often will if they are reasonable;
- body corporate cannot seek or accept payment of an amount or a benefit in exchange for granting an extension;
- support, lobby against or have no view on the variation.
The committee should make sure that the variation is properly considered at the general meeting with the necessary requirements. Otherwise it may be forced to reconsider the variation at another general meeting at a further cost to the body corporate.
If it is approved, the body corporate has an obligation to advise the manager’s financier of any change.
As with any other issue (except for the assignment of management rights where the seller usually pays the costs) the starting position is that each party will bear their own costs. This means the:
- manager would pay for the costs of their lawyers to prepare and negotiate the variation documents; and
- body corporate would pay for its own cost of the:
- general meeting;
- returning officer; and
- any legal costs.
However, it is common for the manager to agree to bear all or some of the body corporate’s costs as a trade off with any benefit the manager may receive as a result of the variation (for example, a further 5 year extension of the agreement).
A top up is simply a variation to the clause(s) that regulate the length of the management rights agreement.
Usually, a top up variation is achieved by including a new clause that adds a further term starting the day after the current expiry.
A top up can only be for a maximum of either:
- 5 years; or
- to the relevant module’s limit (Standard = 10 years, Accommodation and Commercial = 25 years).
The clause that is inserted usually requires the manager not to be in breach of the agreements for the extended term to be available and either:
- be an automatically exercised option; or
- require notice to be given during a timeframe.
Gallery Vie is a scheme at Robina that had a dispute with their caretaker in the Queensland Civil and Administrative Tribunal (QCAT). The long story short is that:
- A manager breached the agreement and the body corporate had the right to terminate the agreements.
- The financier took control of the business which meant (due to legislative protections) that the body corporate could not terminate the agreement because of the manager’s breach unless another breach happens during this control period.
- Another breach happened during the control period even though it was not the financier’s fault.
- The financier (and the wider industry) thought that because the second breach was not the financier’s fault the body corporate could not terminate the agreement.
- QCAT disagreed and said that the second breach allowed the body corporate to terminate the agreement and there was no protection to the financer.
This issue was blown out of proportion – has only happened to 1 scheme in the history of management rights and the body corporate still didn’t terminate the agreements. However, all financiers then required any management rights agreements to now fix any gallery vie issues.
The solution to the Gallery Vie issue was to vary the management rights agreements to adjust the rights of the body corporate on the second breach to not allow termination if the financier wasn’t at fault.
The issue has now been slowly filtered out and most agreements will have had the one-time fix completed by now.
Separating manager’s lot from the business
It is becoming more and more common for managers wishing to separate their business from their lot.
This is primarily due to market forces where the property value has increased but the management rights value has not. As a result it has created a barrier of entry into the market – e.g. having to buy a $2m unit in order to buy a $200k management rights business.
Any variations of this type also need to consider a variation to the by-laws – so that the person buying the lot does not have any special rights granted to them.
Consideration also needs to be given to any office or reception that would have been owned or used by the manager (e.g. who owns it and what will be done with it.
Pros of separating the lot from the business include:
- reducing the investment required, leading to a larger pool of available contractors
- reducing the risk of putting a manager under financial distress
Cons of separating the lot from the business include:
- manager residing offsite makes it harder to get in contact with
- may not be as interested as an onsite manager leading to poor service levels
Submitted documents and what to look for
A variation will usually require the following documents:
- a motion;
- a deed of variation; and
- a BCCM Form 20 (if it is a top up).
These documents should be reviewed by a lawyer to make sure they are appropriate for the body corporate to consider. For example:
- is the motion made subject to the manager paying the body corporate’s costs;
- does the motion properly approve entry into the exact deed attached to the agenda;
- does the motion accurately explain the terms and effect of the variation;
- is the deed made subject to the manager paying the body corporate’s costs;
- is the deed limited to what the motion says it is going to do (i.e. nothing else has been slipped in);
- what assurances and warranties is the body corporate providing in the deed; and
- is the information in the BCCM Form 20 factually accurate.
What is an extension
An extension encompasses the process of “topping up” the agreement
A top up may be automatic. In this case there is no need for anything to take place. Sometimes the committee will be asked to sign a deed of extension acknowledging that the term automatically extended.
On most occasions, a top up will require notice – if that is the case, what needs to happen is that notice must be given:
- within the correct timeframes contemplated in the option clause (which is strict – 1 day late means not exercised); and
- in the correct manner (the agreement will set out a process to serve notices).
This process can unfortunately sometimes be seen as rudimentary. However it can be a very technical area of law when the conditions of an option being exercised are examined.
A deed of extension is commonly prepared as it records, for the benefit of both parties, whether the notice was correctly provided to avoid future uncertainty.
A motion is also usually prepared to authorise the body corporate to enter into the deed. This motion can be approved at committee level.
Similar to a variation, costs are by default borne by each party. However, the manager will usually agree to bear the body corporate’s costs.
It is important to ensure that the:
- deed does not seek to include agreements, acknowledgements or warranties that are beyond the simple recording of the option being exercised; and
- options are properly exercised and there are no outstanding conditions prior to the deed being signed.