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Statutory Review of Management Rights Agreements

Statutory Review of Management Rights Agreements

Any management rights agreement is a contract, and like any contract it is binding on both parties to it.
The only way to vary a management rights agreement is usually:-
1. by agreement between the parties via some form of commercial negotiation, where neither party is forced to agree to anything unless they want to; or

2. through a lawful mechanism under the agreement itself (like a market review of caretaking remuneration), which might set out how a disagreement is dealt with via through the decision of a third party.
Under the BCCM Act there is also a third way – a statutory review. A statutory review can be triggered by either the body corporate or the caretaker in a set of very specific circumstances.

What is a statutory review?
A statutory review is when the body corporate or the caretaker exercises their statutory right to have the management rights agreement reviewed to assess whether they are “fair and reasonable”.

This almost always relates to remuneration and caretaking duties, but in theory it could relate to anything in the caretaking agreement.

That then opens the pandora’s box of strict deadlines, negotiations and potentially QCAT disputes.
When can a statutory review take place?
A statutory review can only take place in very specific circumstances.

The triggers are:

  1. the agreement is entered into during the original owner control period and has not been assigned;
  2. the original owner control period has now ended; and
  3. the review is completed in the review period.

What is the original owner control period?
The original owner is the developer and the original owner control period is the period when the developer has voting control of the body corporate.
Whether the developer has this will depend on the number of lots that the developer owns and any developer powers of attorney that are still in place from those owners that the developer has sold lots to.

Our experience is that the original owner control period will usually end 12 months from when the body corporate was registered, but this is not always guaranteed. It will depend on how many lots the developer has sold and whether they actually obtained powers of attorney from the buyers of those lots.

What is the review period?
This is the period that ends on the latest of:

  1. Three years after the start of the Caretaking Agreement; or
  2. One year after the first AGM held after the end of the original owner control period.

For example, if you had:

  1. a body corporate that was registered on 1 July 2019;
  2. a caretaking agreement that commenced on 1 July 2019;
  3. an original owner control period of 1 year that ended on 30 June 2020; and
  4. the next AGM after 1 year from the original owner control period on 30 October 2021,

the review period would be from 1 July 2020 to 30 June 2022.

How does the process start?
Either party can exercise their rights within the review period, and it is triggered by simply notifying the other party that you are going to exercise that right. If you are the body corporate exercising the right, that needs approval at general meeting first.

Once the right is exercised, there is a 2 month window for the party exercising the right to obtain a review advice from a third party consultant and provide that advice to the other party.

The review advice would ordinarily be from a third party consultant who will assess the scheme and provide recommendations on what the duties should contain and what the associated remuneration based on those duties should be. Sometimes further advice is received from legal specialists about other less commonly disputed terms of the agreements such as guarantee clauses, assignment provisions and termination provisions.

Once that is provided to the other party, they can either:

  1. accept the recommendations;
  2. negotiate changes; or
  3. dispute the recommendations.

To accept the changes – a final approval at general meeting is required. This will normally be given effect to through a deed of variation.

If the party wants to negotiate the changes or dispute the recommendations, they will normally do this through their own third party consultant’s report which concludes with different recommendations. This then leads to the parties negotiating on some middle ground position which, if agreed, will be documented at general meeting through a deed of variation.

If the parties still cannot reach an agreed position, any disputes are off to the Queensland Civil and Administrative Tribunal to resolve the dispute. The reports will then be tested and challenged to seek a determination on what the changes to the agreement should be.

All this needs to be wrapped up before the end of the review period otherwise the rights of either parties to review the agreements are lost.
In summary

While either party may have the right to start a review the smart money will always like to know the answer to the questions before they are asked. So if you think you have a right to do something, it is worth getting the strategy right before you start.

This article was contributed by Todd Garsden, Partner – Hynes Legal.

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