We have all heard these terms, and we all know that we need to be aware of the key dates in our management rights agreements, but what does it all mean?
- All management rights agreements are for a certain length of time. Unfortunately 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 needs 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.
- 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 toping up, and, confusingly, can also be called extending your agreements.
As the owner of a valuable management rights business you need to be reviewing points 2 and 3 regularly – both of them. They are different tasks and both need to be attended to in the lifecycle of your management rights agreements.
Exercising your options (that already exist in your agreements)
The consequences of failing to understand your options (point 2 above) are dire. Many options need to be exercised by giving written notice before the end of the then current term but many others give a window of opportunity within which to exercise the option – typically between 6 and 3 months from the end of the term.
If you miss these dates, then you are out of time, the option cannot be exercised and your agreements will come to an end. There is no sugar coating the message.
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 (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 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. However some managers may choose to do this more often so that it becomes a standard practice for a body corporate to top up the agreements.
A top-up involves varying your management rights agreements to include a new option clause. This needs to be done at a general meeting and approved by ordinary resolution by secret ballot – which is simply more votes for than against (from those owners who choose to vote). Often our clients submit their top-up motion at the AGM (any lot owner is entitled to submit a motion for consideration at the AGM and provided it is submitted by the end of body corporate’s financial year, then it must be included on the AGM agenda).
What dates/information do you need to know?
You need to become familiar with you management rights agreements – go and have a look at them now and identify:
- The initial term;
- The options (including how many and for what period of time each);
- How do your option clauses work – how can they be exercised 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.
To protect the value of your management rights business you need to take the extra step of collecting this information, keeping it handy and diarising the 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.