Oh to have Options

You will have all heard the saying – “the devil is in the detail”.

Sometimes, the detail is a godsend for a body corporate.

Take for example, the exercise of an option in management agreements.

More often than not, the term of management agreements is expressed as an initial term plus options, rather than a straight term.

A manager might be granted an initial 10-year term, with 3 x 5-year options, rather than a straight term 25 years.

The management agreement will set out what the manager is required to do to validly exercise an option.

An option provision may, require the manager to provide written notice to the body corporate of the exercise of the option, which notice must be given at least 3 months, but no more than 6 months, before the expiry of the relevant term.

The requirements to exercise an option are strictly interpreted such that if there is a defect by the manager in exercising the option, the effect can be the body corporate does not need to recognise the exercise of the option and the agreement will simply expire at the end of the relevant term.

Bodies corporate need to be aware of the option exercise requirements, although of course it is not the body corporate’s responsibility to advise the manager of those requirements.

Failure by a manager to exercise, or to properly exercise, an option is usually advantageous to a body corporate as it allows the body corporate to re-negotiate the terms of any further agreements (such as the “inherited agreements” referred to below).

We often get asked by bodies corporate to provide advice on preparing and serving a Remedial Action Notice (RAN) on a recalcitrant manager.

The first thing we will do, is check to see if any option in the management agreement was validly exercised, or indeed exercised at all (it never ceases to amaze how often managers simply forget to exercise an option and when that happens it’s just like tearing up $100 bills – the agreements become worthless).

If an option was not exercised, or not validly exercised, there is no need for the body corporate to go to the trouble and expense of issuing a RAN. The body corporate can simply terminate the month to month arrangement with the manager that comes into existence upon the relevant term of the agreement expiring.

Also, a failure of the part of a manager to exercise or correctly exercise an option will enable a body corporate to revisit management agreements it may have “inherited” from the developer.

Those “inherited” agreements may not be entirely suitable for the scheme. For example, the caretaking duties may be deficient or the salary review mechanism out of kilter with commercial reality. How many caretaking agreements provide or annual salary reviews to the greater of CPI or 5%?

If the body corporate is otherwise happy with the manager, the owners may be minded to grant new agreements to the manager on terms more favourable to the body corporate.

It is worth noting that in the above scenario, if the manager sold those new agreements within 2 years of them being entered into, then a transfer fee would be payable to the body corporate as the manager cannot say the new agreements are a replacement or renewal of the old agreements. Why? Simply put, an expired agreement cannot be replaced or renewed, only an agreement afoot can be.

Also, a body corporate may take the opportunity to dispense with the management rights model. The body corporate may be better served by engaging “Bob’s Mowing” and “Bill’s Pool Cleaning” to undertake the caretaking duties.

It’s ironic that a body corporate is gifted options where a manager fails to exercise, or invalidly exercises, its options.

As always, Active Law is here to assist with all of your body corporate legal requirements.

Warm regards

Mark