The crucial difference between exercising options and top-ups

6 November 2019

A troublesome element of management rights legislation is the difference between exercising a current option and ‘topping up’. Here, we explain where the confusion lies and how managers can protect themselves.

At Mahoneys, we find that many managers of strata complexes are unclear on the difference between exercising a current option and obtaining a new option (commonly known as ‘topping up’). Not that we blame them because the distinction can be confusing. Especially when people in the industry talk about how many years are left on an agreement without considering how that term is broken down.

The term of a management rights agreements can be up to 10 or 25 years, depending on the module that applies to the complex. This can be a straight single term or broken up into any number of option terms. For example, when an agreement is first entered into a common split of the term under the accommodation module is 10 years with 2 options, the first of 10 years and the second of 5 years (total = 25 years). That said, there are no set rules – apart from that when topping up, you cannot add more than 5 years. Any combination of the initial term and options is possible up to the maximum time limitation.

As the years roll on, managers will ask the body corporate to top up. It’s important to note that topping up does not of itself extend the term of the agreement for any existing option. Whether or not the existing option needs to be exercised (and the timing of that) will depend on the wording of the management rights agreements.

If an existing option needs to be exercised, notice needs to be given to the body corporate within the timeframes specified in the agreement. Should you fail to exercise the option in the required time frame, the agreement will come to an end on the last day of that current term (not including the options).

Manager case study
To give you an example, we recently talked to a manager about the term of his agreement. The current term was due to expire in December 2019 and there was an option of 15 years and a further option of 5 years, which options would make the agreement end in 2039. The option of 5 years had been added by the manager previously, and at the time of the discussion the manager had approximately 20 years remaining.

We advised the manager that the next option for the period 2019 to 2034 was due to be exercised. The manager said he had already taken care of it when he topped up the agreement. When asked to provide a copy of the notice to the body corporate for our file, the manager advised that they had a copy of the deed of variation from the top-up file. As discussions continued, it became apparent that the manager believed that the entire term had been extended when he topped up and he no longer needed to exercise any option.

Unfortunately for the manager, that was not the case. Topping up does not  itself exercise any existing options. Exercising an existing option is often still necessary despite the agreements being topped up. Thankfully, we were still within the timeframes outlined in the agreement and the option was exercised. The worry is that we have been involved in cases where it was too late for a manager to exercise the option.

How to avoid strife
To avoid this scenario, managers should become familiar with the term of their agreement and how that term is split. If there are options (as is often the case), managers should diarise the date that the option is due to be exercised so they do not lose the opportunity to extend their agreements.

Mahoneys will provide this advice to buyers as part of the purchase process and also when we assist a manager with new agreements or a top up. It’s important, however, for managers to take that extra step and diarise dates in a way that is readily accessible and cannot be forgotten. It is a manager’s responsibility to ensure they exercise their option when required. We recommend adding a couple of reminders in the weeks or months leading up to the due date.

Not exercising your option correctly can cost you lots of money and forgetting to exercise an option is likely to be a breach of your financing arrangements.

If you would like to discuss the term and options of your agreement/s further please contact one of our Management Rights team.