Is your finger on the “Pulse”?

What does “financially sound” mean in the contract of an assignment of management rights.

Last month an Adjudicator made orders in the decision of Pulse CTS 40129 and TDCCT Pty Ltd.

The case involved the reasonableness of the conditions imposed by a body corporate in regards consenting to the assignment of management rights.

The committee, acting on the advice of the body corporate’s solicitor imposed onerous pre conditions on the prospective assignee of the management agreements.

The substantive preconditions imposed were to deal with establishing the financial soundness of the assignee and its directors and to ensure the prospective assignee was horticulturally qualified.

Financial Soundness Condition

Despite the Body Corporate having been provided with a copy of the assignee’s financier’s approval letter, the body corporate also wanted asset and liability statements, tax returns, bank statements and (here’s the kicker) statutory declarations  from the assignee’s directors verifying the financial information provided, and stating that in the event that there is any material inaccuracy in the information (referring to the financial information) provided to the body corporate or in any statement in the statutory declaration that this will constitute gross misconduct justifying termination of the caretaking and letting agreements.

Understandably, the assignee was advised not to execute a declaration in the form required by the body corporate as it was simply an unreasonable requirement for it to do so.

The assignee’s financier also objected to the statutory declaration having to be provided and said it would withdraw finance if the body corporate were to insist on this.

Putting aside the reasonableness or otherwise of a body corporate requiring statutory declarations supporting an assignee’s financial position, the Adjudicator held that the termination provision the body corporate insisted on being included in the declarations was unreasonable.

Whilst  it is indeed the case that bodies corporate are entitled to be satisfied as to an assignee’s financial soundness, it has generally been accepted that a body corporate ought be sufficiently satisfied if an assignee has been approved worthy of receiving financial accommodation from a major lender.

In my view this is no more than common sense. A major lender would undertake far more diligent and extensive enquires on an assignee’s and its directors financial soundness before approving finance than a committee could ever hope to do.

In the Pulse decision, the Adjudicator accepted the assignee’s financier had undertaken stringent financial interrogation and were satisfied as to the assignee’s ability to financially manager the purchase.

Importantly, the Adjudicator went onto say it is not the body corporate’s role to judge the financial viability of the assignee.

The Adjudicator accepted that a body corporate is entitled to determine the financial standing of an assignee, but that determination is likely satisfied where a financier has approved finance and the assignee provides evidence of that approval to the body corporate.

A demand by a body corporate for anything above and beyond, runs the risk of being considered unreasonable

A committee should focus on more relevant matters, like, for example, establishing an assignee’s ability to adequately perform the caretaking duties.

Horticultural Qualifications

The Adjudicator found the unreasonable pre conditions imposed by the body corporate also included a requirement that the assignee complete a certificate course in Horticulture Landscaping Management.

At the scheme in question, the obligations on the caretaker in regards gardening etc, were to undertake very basic gardening duties such as mowing lawns and maintaining garden beds.

The scheme did not have extensive landscaping and consequently the Adjudicator found the condition that  the assignee become horticulturally qualified was also unreasonable.

Conclusion

It is important for bodies corporate to note that where unreasonable conditions are imposed in regards an assignment of management rights, then any costs incurred by the body corporate in pursuing those unreasonable conditions are likely not to be recoverable from the manager.

It is also important to note that where an assignment of management rights does not proceed in circumstances where the committee is found to have acted unreasonably, the body corporate could be exposed to a damages claim.

The Pulse decision is more evidence that 2016 is for bodies corporate the year of being reasonable and not the year of living dangerously.

Warm regards,

Mark