Caretaking Agreement Extensions Explained
Have you ever been asked to vote for an extension of your caretaker’s agreement? Put another way, has your Scheme been asked to ‘top up” your caretaker’s term usually by a further 5 years?
It’s common and can actually occur once every financial year of the body corporate. After all, it is the caretaker’s prerogative to keep the agreement alive for as long as possible in order to increase the value of the asset within the agreement. It is also a trend amongst the management rights industry for those agreements to be extended indefinitely to enhance their value.
The commercial reality is that an extension would provide a significant increase to the value of the management rights. However, what most owners are not aware of is that granting a top-up is discretionary and when you put aside the plethora of marketing material on this topic, owners should be entitled to exercise their vote as they see fit.
This ultimately begs the question of whether it is reasonable for a body corporate to refuse a caretaker’s top-up request.
Requirements for extension
The focus of this article will be on caretaking agreements under the Accommodation Module because it is the only residential regulation module that allows the maximum term of service agreements up to 25 years, as opposed to the standard 10 years.[1]
In practice, a caretaking agreement could consist of a full 25-year agreement, or it could consist of an initial term plus options up to the maximum 25-year term (such as an initial 20-year term with a 1 x 5 option). In either event, it results in the body corporate being bound to the terms of that agreement for 25 years, potentially more if top-ups are granted.
What is a ‘top-up’?
In addition to exercising any options already approved by the body corporate, the caretaker can also request an additional ‘option or subsequent right’ outside of the unexpired term. In industry terms a ‘top up’. Top-ups require body corporate approval at a general meeting, which means that there is only one of two outcomes, either the top-up is approved or it is refused.
It is when options are refused that often bodies corporate are faced with claims of un-reasonability.
Is it unreasonable to say no?
While the legislation clearly provides that top-ups are discretionary, often Committees and Owners are faced with arguments that their dissenting votes are unreasonable and that it is unreasonable for a body corporate to refuse a top-up.
This is simply not the case and the adjudicator in Castaway Cove [2006] QBCCMCmr 452 (17 August 2006), confirmed such position by stating in their reasons:
“While I accept that the caretakers think it would be unfair if the Agreements were not renewed or extended, that is the contractual term that they signed up to and is certainly not unreasonable for the Body Corporate to simply abide by the current Agreements and no more…
…I consider that there is nothing inherently unreasonable in owners passing a resolution that expresses their view that the scheme work towards a situation of no on-site caretaking”
Ultimately, the body corporate has an obligation to act reasonably, and should the body corporate no longer support long-term caretaking for the scheme or no longer supports the contractual duties within the agreement (some of which could be 30 years old), it is reasonable for the body corporate to maintain that position.
No Top Up Policy
While the legislation provides that top-ups are discretionary and such position is supported in adjudicator’s decisions, adopting a formal ‘no top-up policy’ has not been met with the same level of enforceability.
In the decision of K&A Property Services Pty Ltd as trustee for K&A Holding Trust v The Body Corporate for Island Park Gardens CTS 20219 [2016] QCAT 308, the Queensland Civil and Administrative Tribunal held that a body corporate resolution imposing a ‘no top up policy’ was invalid because it:
“gives the impression, whether intended or not, that requests to the body corporate for top-ups will not succeed regardless of their merits. Such a policy also carries a danger of misleading body corporate members into thinking that they do not have to consider top-up requests on their merits.”
In that regard, the Tribunal found that a resolution approving a ‘no top-up policy’ was invalid, however, that did not prevent the body corporate from reasonably voting against a top-up or, in this matter, an assignment.
The importance then in our opinion is ensuring that the body corporate and owners consider each and every application for a top-up (or any variation or assignment for that matter) on its own merits.
So, what should or can a body corporate do?
It is common for the caretaker to directly contact owners and seek their support, this is especially so with owners within their letting pool. While we have seen some creative arguments over the years going to why the top-up is needed, more commonly the reason is that the caretaker’s financier requires the same.
To a large extent, the reason behind the request to extend is irrelevant. What is relevant is what is in the best interests of its owners and the scheme at large. Some schemes do require traditional onsite caretaking, their ownership, facilities, and use ultimately mandates the same. However, perhaps what lets the scheme down is poorly outdated agreements. In these circumstances, it is not the ‘top up’ that is then the concern but rather ensuring that the contractual obligations between the parties are clearly and concisely articulated in the agreements.
Each building is different and accordingly, each committee and body corporate should be turning their minds to what best serves their scheme and ownership.
In the current climate, it is naïve to think that both parties will not lobby and campaign for support. Accordingly, it is important for Committees to take a balanced approach, understand the proposal presented to it, and to ensure that owners are educated with respect to same. Often it is as simply as understanding: what is the caretaker asking for? Put aside the legal jargon, if I vote yes what I am committing the body corporate to?
With this very basic information, owners can then exercise their right to vote freely.
Finally, the key is to act proactively. Do not wait for your budget meeting to receive the owner-submitted motions, make it a habit that on the first day of the financial year ask your strata manager if any owner-submitted motions have been received. If there is a motion going to any form of variation seek specialised legal advice ASAP. This will give the body corporate time: time to think, time to consider and deploy a strategy to ensure that the schemes and owners’ best interests are advocated for.
Remember, top-up motions can be submitted by the caretaker once every financial year of the body corporate. Accordingly, if a body corporate has an attitude against top-ups, this is not a one-off campaign, it is an attitude that needs to be a habit. The committee needs to be prepared on the first day of every financial year to ensure that it is proactively dealing with any requests received.
Conclusion
If after reading this article, you found our comments to be relevant or at least intriguing, you may wish to do further research into this hot topic of discussion with the Attorney General reviewing management rights for further legislative protections, powers and remedies to bodies corporate. That discussion has welcomed community submissions to evaluate the imbalances in management rights.
[1] Section 130 of the Body Corporate and Community Management (Accommodation Module) Regulation 2020 (Accommodation Module)
This article was contributed by Jessica Cannon, Grace Lawyers
Leave a Reply
Many thanks for your article which is clear, professional, and informative.
However, it also makes it obvious that it is far easier to be giving information from the comfort and safety of your legal office, than it is as owners, in strata buildings where you might make a fair, reasonable and democratic decision to oppose 25-year agreements and the regular requests for extensions and, as a result, and be subject to the most “unreasonable” bullying and intimidation that can regularly be experienced by owners when expressing such views.
As a result of my views, I was personally verbally attacked in the car park, physically “stood over”, and had my car kicked…… and “yes” as I was the committee secretary in both the building and in a NHW group, I went immediately to the police. My complaint remains on file to the best of my knowledge.
When an owner cannot afford their levies or their mortgage, they have only one choice. They sell. When a caretake wants an extension to a legally binding document to address his personal financial problems or (as is the most common position) to sell for a maximum financial profit, they anticipate that owners will respond sympathetically and become involved in their personal financial situation. The position lacks balance.
The legislation dealing with 25-year agreements and their extensions is now around 25 years old. At that time, owners in buildings of 15 to 25 years of age were “conned” into changing to the accommodation module and the caretakers of the day received a lovely financial windfall as they sold as soon as possible and disappeared into a “comfortable retirement”.
Unfortunately, the legislators and those owners did not think 25 years into the future. A quick drive along the Gold Coast waterfront shows that many, many buildings of the 40 plus age group are being demolished and replaced by new developments. That brings to light an increasingly significant factor. Does a reasonable person continue to extend agreements in buildings that are no longer sufficiently modern for “holiday rental”. At that time, the duties of the caretaker will be significantly reduced with increased numbers of permanent residents (as the cost of agreements compound yearly) or when the building is to be demolished and the caretaker walks away again with the financial benefit of lengthy extended agreements for nil services rendered? Owners in older buildings certainly need to give “due consideration” to the age and “useful life” of the building before the say “yes” to extensions that will clearly benefit only one person.
Many buildings consider returning to the Standard Module because planning 25 years into a totally unknown future is not “reasonable.” The concerns with covid and climate change, the changes with technology, current economic concerns, the existence of multiple external booking agents online etc. make it crystal clear that the future of this industry 25 years into the future is an unknown factor and a massive risk when it comes to making financial commitments that far ahead. The Standard Module allows for 10-year agreements but even industry conditions 10 years into the future are not able to be accurately predicted.
Discussing the return to the standard module brings me to an issue I have raised with the Attorney General, the Commissioner, several lawyers and anyone else who may listen. No one can give me a clear answer.
Perhaps Jessica you could assist.
On a practical level, one reason for changing to the standard module is to reduce the top ups of lengthy agreements. Section 128 part (2) of the Act indicates that: “The provisions of the existing regulation module applying to the engagement or authorisation continue to apply to the engagement or authorisation until the engagement or authorisation, including any renewal or extension of the engagement or authorisation, comes to an end.”
Does this refer to existing extensions or does it, (as some articles from the legal and strata fraternity infer) mean that future new extensions can still extend for 25 years. (That is certainly not how the length of agreements worked as buildings moved from the standard module to the accommodation module.)
I think this is a question, that needs a finite answer. No discussion on management rights and extensions is complete without this issue being accurately addressed.
I do hope you can provide an informed view on this concern.
Thank you for this informative paper.
The Committee at our Community, last year, submitted to Lot Owners that the application for an extension by the live in Caretaker could not be supported by the Committee.
Some advice was that opposing the extension applied for may be a breach of the Trade Practices Act by endeavouring to restrict the caretakers ability to trade his agreement at some time in the future. That aside the strong representation by a group of those supporting the Caretaker ensured that the application by the Caretaker was resolved in the Caretaker’s favour and the Agreement was extended for a further five years.
This paper is encouragement that if the need for a Live in Caretaker can be overcome as a result new agreements could be put in place.
Secondly, is the Attorney General receiving submissions on other subjects? May I ask the question.. what is the need for Power of Attorney on Committees? Can a Body Corporate resolve not to have persons with a PoA serve on Committees?
The adding of a further option or extension is in the hands of the party to whom it is granted, not in the hands of the grantor. So like an option in a commercial lease the landlord does not gain from any further lease following the expiry of the existing term. In fact is is a detriment to the value of the asset in that it may preclude the owner from re-development, refurbishing or changing the direction of the asset, particularly in retail centres.
Likewise the same thing applies in Management Agreements. The longer the term the greater the inherent value is of the Agreement. As the expiry date approaches so the value diminishes. The Body Corporate may wish to appoint a different provider of caretaking and letting pool duties. They may wish to do it themselves or part thereof. After all, the value of the Management Agreement is in the Letting Pool Rights not in the caretaking duties. That is not where the money is made.
I would strongly urge any Body Corporate to view extensions or Options to the Management Agreement to be viewed in the same way as lease options. It only benefits the holder of the Option NOT the party giving the Option.
I agree with the comments made by others here in that the extension benefits the party to wish the extension is granted, not the grantor of the extension.
Also is the AG looking at a major loophole that allows property developers to appoint themselves or a company they own the managements rights, to do a poor job in delivering the service, lobby for the term to be extended then sell the asset without ever having given any care or concern to the lot owners? This is our experience and the fact that this can be done “legally” stinks. There is no due diligence, nothing about the transaction is done at arms length and it is therefore being completely abused by money hungry developers who laugh in the face of their supposed customers and those who ultimately pay the bill over 25 years!!
The initial appointment of caretaker should be governed by legislation that prevents the caretaker from having any association with the developer and that the selection of a caretaker is made after at least 3 quotes are received and proper due diligence, particularly as these rights are often assigned prior to the formation of the BC committee. How can it be fair & reasonable to bind a scheme to a 10 to 25 year agreement prior to the formation of the BC that represents the lot owners??
The AG should look to adjust this legislation and remove any loophole that allows the developer, an associated company or individual to be assigned the caretakers rights!
How do we make a submission on this topic!
Michael and Sharon Francis
Are very happy with the current managers John and Lynda
We feel they do a very good job of managing View Point
Are are happy for them to have a top up of there current lease agreement
Being business owners our selves we now the importance of having a long lease agreement
Kind regards
Mick & Sharon Francis
Owners of apt 38
Should a new Caretakers Agreement be drawn up when new Managers come in? The management rights were sold but the Caretakers Agreement is still in the previous managers name.
Hi Margaret,
Not necessarily. The way in which management rights operates is that there is an originating agreement and then there can be subsequent deeds of assignment (confirming transfers between caretaking entities) and/or deeds of variation (confirming any amendments or changes to the originating agreement). New agreements can certainly be entered into between the parties however, it is not a requirement that once the rights are sold the parties enter into a new agreement.
Thanks so much. 😊
Accommodation Module – initial 25 year contract.
At the last AGM, a five year extension was requested. The agenda item clearly stated 5 years, however the information provided 30 pages down stated the right to execute the mangers option of 10 years and another option of 5 years.
Unfortunately the vote passed.
My question is that most owners read and voted on the agenda item of a 5 year extension only, not another 15 years. The agenda item was misleading.
Where do we stand on this as the managers signed up for a further 15 years instead of the 5 voted on.
Hi Jennifer,
Whilst it is difficult without sighting all of the material, it appears that the motion and document in question may have simply affirmed existing options of 15 years already in the management agreement/s, and the extension or ‘top-up’ part was only 5 years – which is the maximum that can be achieved by variation of the management agreement/s in any financial year of the Body Corporate.
There are legislative requirements to provide certain information with motions for ‘top-ups’, and it sounds like a full copy of the variation document was circulated with the notice of meeting. Whether the legislative requirements were met in any particular case and whether, if they weren’t met, anything can subsequently be done about it, depends on the nature and circumstances of each case.
Of course, the Committee can decide to obtain advice on behalf of the Body Corporate to assist it in formulating its views about any particular motion submitted to it, or for consideration at a general meeting. It is also open to the Committee to take a supportive, neutral or opposing position on any particular motion submitted by a lot owner.
It is up to each owner to carefully consider the information included with the agenda and, if desired, obtain their own advice about the nature and effect of any particular motion before they vote. If an owner has any doubts about the terms or effect of a particular proposal, they can vote against it.
Jarad Maher, Grace Lawyers