Certainty in Uncertain Times

The Consumer Price Index (CPI) has skyrocketed by a whopping 5.1% from March 2021 to March 2022, Australia’s greatest annual increase in 20 years.

This inflationary surge does not appear to be slowing down any time soon.

The Reserve Bank of Australia (RBA) forecasts inflation will reach 7% by the end of the year.

An annual increase in the cost of goods and services is not unusual.

We are all used to seeing CPI increase by a small fraction each year.

A steep rise in CPI, the likes of which the RBA is forecasting, is unsettling for all.

To keep unrelenting price rises at bay, the RBA announced its biggest increase to the official cash rate in 22 years this June. As expected, another rise was announced yesterday following the RBA’s first policy meeting of the new financial year.

Steep inflation has major implications for bodies corporate, beyond purchasing consumables.

Caretaking agreements often contain a provision by which the caretaker’s salary is increased annually in line with CPI. When inflation rates are low, increasing a caretaker’s salary in line with CPI is manageable. Now though, we may see increases upwards of 7%.

This will be a bitter pill for owners to swallow, especially when they are not enjoying a similar increase to their own salaries.

It is timely for bodies corporate to consider how remuneration review provisions in caretaking agreements are worded.

The most common remuneration review clauses we see are drafted such that the caretaker’s salary is increased annually to CPI or by a fixed percentage increase (say 3-5%), whichever is the greater.

Bodies corporate may prefer to adopt a provision that allows the caretaker’s salary to be increased at a fixed rate. For example, remuneration clauses could provide for the caretaker’s salary to be increased every year by 3-5%.

The difficulty of course is that any change to the salary review mechanism under the caretaking agreement requires the caretaker’s approval.

Where an agreement provides for reviews solely linked to CPI, then a fixed rate increase might also be attractive to a caretaker. In the event CPI plummets, as we saw during the Covid-19 pandemic where it rose by a mere 0.9% from December 2019 to December 2020, caretakers benefit from knowing their salary is protected from such economic downturns.

Ultimately, a fixed percentage increase allows caretakers to continue enjoying an annual pay rise whilst body corporate funds are not strained to meet rapidly rising inflation rates.

There is no greater comfort than certainty in uncertain times!

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

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