MANAGEMENT RIGHTS UPDATE: ANOTHER “FINANCED CONTRACT” DISPUTE, ANOTHER COSTLY TERMINATION

Body Corporate for Bay Village Community Titles Scheme 33127 v Breeze MR Pty Ltd [2023] QCA 91

On 5 May 2023, the Court of Appeal delivered a decision that provides greater clarity as to the operation and effect of section 126 of Body Corporate and Community Management Act 1997 (Qld). Much like the highly publicised Gallery Vie decision[1], this decision is particularly important for Bodies Corporate and management rights holders who have a “financed contract” within the meaning of the BCCM Act. We look at this case in more detail and discuss its implications.

Background

The Body Corporate for the Bay Village Community CTS 33127 (Body Corporate) and Breeze MR Pty Ltd (Manager) were parties to a management rights agreement (Agreement).

The Agreement was a “financed contract” within the meaning of the BCCM Act. Westpac was the financier.

Around 19 August 2021, the Body Corporate issued the Manager with a remedial action notice (RAN).

The Body Corporate claimed that the Manager did not comply with the RAN and subsequently terminated the Manager’s engagement under the Agreement (Termination).

Around 28 January 2022, the Body Corporate notified Westpac of the Termination. Westpac subsequently appointed receivers and managers to the Agreement (Appointment).

On 1 July 2022, Westpac was able to settle all debts owed to it by the Manager, including the debt secured by the Agreement. As such, on 19 July 2022, Westpac notified the Body Corporate that the Agreement was no longer a “financed contract”.

For reasons that are not entirely clear, the Body Corporate sought to call a further general meeting to terminate the Agreement in reliance upon the RAN. The Resident Manager commenced proceedings in the Supreme Court to restrain the Body Corporate from doing so.

On 16 September 2022. Justice Kelly found that where section 126(2) of the BCCM Act has been engaged, sections 126(1), (2) and (7), when read together, prevented the Body Corporate from terminating the Agreement based upon non-compliance with the RAN because the RAN related to conduct done or not done before the Appointment. Justice Kelly made this finding even though it was common ground between the parties that the RAN had not been complied with by the Manager.

The Body Corporate appealed the decision (Appeal).

The Appeal was heard on 15 March 2023 before Justice Bond, Justice Boddice and Justice Wilson.

Issue at Appeal

In simple terms, the issue at Appeal was whether Justice Kelly’s construction and characterisation of sections 126 and 126(2) of the BCCM Act was wrong.

Decision

The Appeal was allowed, meaning the Body Corporate won and the Manager lost.

Justice Bond and Justice Wilson both found the purpose of section 126 of the BCCM Act was to protect financiers (not management rights holders) by creating certain constraints against Bodies Corporate terminating such agreements to the disadvantage of financiers who may have lent money in reliance on security over the agreements.

Therefore, once Westpac ended the Appointment, it no longer required the protection of section 126(2) of the BCCM Act and, in effect, the requirements of section 126 of the BCCM Act no longer applied at all.

Given that section BCCM Act no longer applied, the only constraints against the Body Corporate proceeding to Termination were those expressed in the Regulation Module. As the Regulation Module did not operate to constrain the Termination, the Body Corporate was entitled to proceed with Termination, particularly in circumstances where the RAN had not been complied with by the Manager.

Lessons for Bodies Corporate

The key lessons for other Bodies Corporate are as follows:

• Bodies Corporate must ensure that they comply with section 126 of the BCCM Act when dealing with a “financed contract”, including issuing financiers with a notice that complies with section 126 of the BCCM Act, to ensure they preserve any termination rights under the Regulation Module

• If a financier stops acting and/or the management rights agreements cease to become a “financed contract”, Bodies Corporate can proceed to termination provided this is consistent with the Regulation Module

• Bodies Corporate still have other contractual rights they can exercise, separate to termination, including suing for damages for breach of contract

Final comments

This decision will no doubt come as a huge relief to the Body Corporate involved, and other Bodies Corporate dealing with management rights disputes and “financed contracts”.

It is also worth noting the Justice Boddice dissented. He found that once the Appointment was made, the right to proceed with Termination could not be “resurrected” later in respect of the same circumstances.

This shows that even Appeal judges in the Queensland Court of Appeal cannot uniformly agree on the operation and effect of section 126 of the BCCMA.

It also confirms what we have known for some time, including following the Gallery Vie decision: management rights disputes are complex and the law that governs them is equally complex.

If you are engaged in a management rights dispute, it is vitally important that you engage solicitors that specialise in such disputes.

HWL Ebsworth is uniquely placed because we act for Bodies Corporate, management rights holders and financiers, meaning we are able to view these disputes from all possible angles and provide full and complete advice.

If you need any assistance with a management rights dispute, or have any questions about this article, please contact us.

Article Contributed by Mario Esera, HWL Ebsworth Lawyers