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Commonly Used Terms in Management Rights
|Abbreviation or Term||Explanation|
|Accommodation Module (QLD only)||The module which applies to many Strata Schemes with management rights. The primary feature is the ability to have Management Rights Agreements for a term of up to 25 years, inclusive of options.|
|Accountant's Financial Verification||Process undertaken by a purchaser's accountant to ensure the accuracy of financial statements on which net profit for sale purposes is calculated.|
|Administrative Fund||Is the fund where all spending by the Body Corporate comes out of to maintain and manage the Common Property - which is not covered by the Sinking Fund. This includes the recurring costs incurred by the Body Corporate, including the Caretaking Remuneration and Body Corporate Manager fees.|
|Audits||In Qld, each year the Office of Fair Trading (OFT) requires 3 audits to be conducted by the Resident Letting Agent's accountant. One of these audits must be submitted to the OFT annually. Resident Letting Agent licence renewals are subject to the OFT receiving evidence of a satisfactory audit in the period 8 to 12 months after the licence was granted and annually within that time frame thereafter.|
|Body Corporate and Community Management Act 1997 (QLD). This is the legislation administering Strata Schemes in Queensland, including Management Rights Agreements.|
|Body Corporate or Owners Corporation||The legal term which refers to the consolidated entity which is made up of all of the lot owners within a Strata Scheme.|
|Body Corporate Manager or Strata Manager||The person engaged to provide administrative management services to one or more Bodies Corporate. The Body Corporate Manager will attend to procedural matters such as organising annual general meetings, administering the collection of levies, recording minutes of meetings and circulating minutes of meetings to lot owners.|
|Caretaking Agreement||An agreement between the Body Corporate and the Resident Manager whereby the Body Corporate engages the Resident Manager to perform certain duties for an agreed remuneration. Can also be known as a Management Agreement or a Service Contractor Agreement.|
|Caretaking Remuneration||The annual fee paid by the Body Corporate to the Resident Manager for performance of the duties under the Caretaking Agreement. The fee is generally paid monthly in arrears. It is important to ascertain if the fee is inclusive of GST or GST is in addition to the fee.|
|Claw back / Retention||Refers to the contractual mechanism by which an intending purchaser of an "off the plan" management rights business can ensure that the number of lots projected to be in the letting pool at settlement is achieved. If the projected number of lots in the letting pool is not achieved, the clawback/retention clauses are used to adjust the business purchase price by a set amount per lot.|
|Committee or Executive Committee||Also known as the Body Corporate Committee. A group of elected owners within a Strata Scheme who are empowered to make certain decisions and recommendations to allow for the smooth day-to-day running of the Strata Scheme without the need for all decisions to go before an annual general meeting or extraordinary general meeting. They act like the directors of a company. In Queensland, Resident Managers are included in all Committee meetings but do not have voting rights. The Committee does not have the power to vary Management Rights Agreements.|
|Common Property||Property within a Strata Scheme which is collectively owned by the Body Corporate rather than any particular lot owner. It effectively includes anything that is not part of a lot in the Strata Scheme.|
|Deed of Assignment||Document entered into between an outgoing Resident Manager, an incoming Resident Manager and the Body Corporate. The document allows for the transfer of the Management Rights Agreements and in Queensland, requires approval by the Committee (if the issue hasn't been listed as a restricted issue by the Body Corp�orate). If required, the Lot Owner's Deed can be incorporated into the same document. In NSW, the Assignment must be approved at a general meeting of the Owners Corporation.|
|Deed of Authorisation||Document used to adopt the terms of a past letting authorisation with certain variations, such as the term.|
|Deed of Engagement||Document used to adopt the terms of a past document engaging a caretaker with certain variations, such as the term and remuneration.|
|Deed of Variation||Document entered into between the Body Corporate and the Resident Manager which varies the terms and conditions of the Management Rights Agreements.|
|Due Diligence||Process undertaken by the purchaser's solicitor to ensure the management rights business and its related documentation is on legally acceptable terms and compliant with relevant legislation.|
|Exclusive Use||An area of Common Property the use of which attaches exclusively to one particular lot.|
|Leaseback||An arrangement whereby a Resident Manager leases lots in a Strata Scheme direct from lot owners on the expectation that the lots are then on-let for a higher return than that paid to the lot owner under the Leaseback arrangement.|
|Letting Agreement||An agreement between the Body Corporate and the Resident Manager where the Body Corporate authorises the Resident Manager to provide exclusive, on site letting services to lot owners within the Strata Scheme.|
|Letting Appointment||In Queensland, a written agreement under PAMDA in a Form 20A by which the lot owner appoints the Resident Manager to act on behalf of that lot owner to let their lot and account for funds via a trust account.|
|Letting Pool||The generic name for all lots in a Strata Scheme which are managed by the Resident Manager under the authority of a Letting Appointment.|
|Levies||Amounts payable by lot owners in a Strata Scheme to ensure the costs associated with running and maintaining the Strata Scheme are met. Standard levies cover Sinking Fund and Administrative Fund contributions. Special levies can be introduced from time-to-time to cover unanticipated costs such as refurbishment and upgrade costs.|
|Lot Owner's Deed|
|Document entered into between the Body Corporate and the Lot Owner, if the Lot Owner is not the same party as the owner of the management rights business.|
|Management Rights Agreements||Includes a Caretaker Agreement or Deed of Engagement, Letting Agreement or Deed of Authorisation, and can include a combined agreement which engages and authorises a Resident Manager for the Strata Scheme.|
|The regulations incorporated in the BCCMA under which various types of Strata Schemes are operated.|
|Occupation Authority |
|Document entered into between the Body Corporate and the Resident Manager, allowing the Resident Manager to use a part of the Common Property, provided that the area has not been granted under an Exclusive Use authority. This can only attach to a Management Rights Agreement.|
|Off the Plan||Refers to a management rights business being purchased prior to the construction and/or completion of the development.|
|On Title||'On Title' means that it forms part of the title to the Lot Owner's lot. It is a term used to differentiate areas which are not included in the freehold title and that could be areas of Common Property granted by Exclusive Use or Occupation Authority.|
|PAMDA (QLD only)|| Property Agents and Motor Dealers Act 2000 (Qld).|
Legislation administering real estate licensing, property management licensing and real estate trust accounting in Queensland.
|Rental Guarantee||An arrangement whereby a developer undertakes to pay a set amount to lot owners within a Strata Scheme. Usually applied to make the purchase of units in a Strata Scheme more desirable for investors.|
|Resident Manager||The person engaged by the Body Corporate to manage the Strata Scheme and authorised to provide letting services to lot owners within the Strata Scheme. Also referred to as the Caretaker, Resident Unit Manager or On Site Manager.|
|Resident Letting Agent||A licensed agent under the PAMDA (QLD) for the purposes of acting as a letting agent for a Strata Scheme.|
|Sinking Fund||The accumulated funds collected from Sinking Fund Levies go toward the capital upkeep of the Common Property. Bodies Corporate are obliged to put in place maintenance plans and budgets on a regular basis.|
|Standard Module |
|The module to which all Strata Schemes defaulted when the BCCMA came into force in 1997. The primary feature is the Management Rights Agreement term is limited to 10 years, inclusive of options.|
|Strata Scheme||Multi-titled residential development comprising individually owned lots, Exclusive Use entitlements and Common Property.|
|Percentages of the management rights business sale price which must be charged by the Body Corporate in the event of a sale within the first 2 years of ownership. There is a 3% fee in year 1 and a 2% fee in year 2. This does not apply to the management lot.|
|Trust Account||The OFT approved account into which the proceeds of all letting must be banked by the Resident Manager. Owners are paid from this account on a monthly basis net of letting commission and any other deductions such as cleaning costs, linen hire and charge backs to owners.|
|Wholesaling||Refers to commercial arrangements via organisations such as 'Wotif' website; whereby holidays are sold by the wholesaler who in turn takes a percentage of the tariff.|
|3,2,1 Rule |
|In Queensland, the BCCMA contains a provision that allows a Body Corporate to charge a fee to the selling management rights owner if that owner sells his business within a legislated time frame. Up until 30th August 2008 this was referred to as the 3,2,1 rule, but these provisions have since been superseded by transfer fee rules.|
Assignment Of Management Rights
In the Body Corporate industry it is common place for bodies corporate to enter into a series of contracts that provide for the care and maintenance of the common property and to also grant the exclusive rights to conduct a letting business. Collectively these agreements are referred to as Management Rights.
These Management Rights can be worth significant sums of money and it is quite common for Management Rights to be bought and sold just as other types of businesses and investments are bought and sold. For many years there have been a considerable amount of misconceptions held by those in the Body Corporate Industry about the protections afforded to a Body Corporate. Chief among these misconceptions is that a Body Corporate “must” agree to the sale (“Assignment”) of its Management Rights from one person to another.
To some extent these misconceptions have been allowed to exist because for a long time bodies corporate have been naïve about their rights and the considerable effect that a Manager / Service Contractor / Caretaker / Resident Unit Manager (these are all names used by the industry but all are essentially the same) can have on the harmonious community living experienced at a Body Corporate.
The Importance of Obtaining Legal Advice
We are often surprised when we first meet with a Committee of a Body Corporate that is experiencing difficulties with their Caretaker and they inform us that they did not obtain legal advice or have anyone represent the interests of the Body Corporate when the Management Rights were last sold.
The Agreements that form Management Rights are complex and are worth significant sums of money. For example a 25 year Caretaking Agreement with remuneration payable at $100,000.00 per year is a contract that equates to $2.5 million and this does not include CPI increases in the remuneration and the profit that the Caretaker can generate from conducting an exclusive letting business.
Would you as an individual obtain legal advice if you were considering entering into a contract that lasted 25 years and was worth $2.5 million? Every time we ask this question of Committee members the answer is always "yes". Your Body Corporate is no different. There is a reason that the seller is represented by a Solicitor and the purchaser is represented by a Solicitor. They engage Solicitors to protect their interests. It is only appropriate that the third party involved in the transaction, the Body Corporate, is also legally represented.
It is also normal for the outgoing Caretaker to pay the reasonably incurred administrative and legal costs incurred by the Body Corporate during the Assignment.
Your Body Corporate has rights in the Assignment of Management Rights that need protecting, both the outgoing and incoming Caretaker are normally represented by Solicitors and it is normally the responsibility of the outgoing Caretaker to pay the legal costs of the Body Corporate. In these circumstances, the Body Corporate must obtain legal advice to protect its rights.
OMB Solicitors provide balanced advice to the Committee’s of its Body Corporate clients, so that those Committees can understand the process that they must follow during an Assignment, the rights that they have to properly consider the incoming Caretaker and negotiate on behalf of the Body Corporate to ensure that the Deeds that document the Assignment of the Management Rights accurately reflect what is occurring and are sufficient to protect the interests of the Body Corporate, rather than just giving away rights to the outgoing and incoming Caretaker.
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Body Corporate News
See attached news articles by OMB for more information and recent developments in this area of law: