Tool Kits Transfer of Management Rights Tool Kit

Transfer of Management Rights Tool Kit

Transfer of Management Rights Tool Kit

1. Regulation of the transfer of management rights

Management rights are typically a ‘package’ which comprises:

  • a manager’s unit;
  • rights to occupy common property (including an office and reception area);
    a management and letting agreement (which can be separate agreements or
  • combined in a single agreement); and
  • a by-law conferring exclusivity in relation to on-site letting.

The management and letting agreement(s) (“Agreement”) commonly has a term of 10 or 25 years, depending upon the Regulation Module which applies to the community titles scheme. It provides for the caretaking of the building and the conduct of a letting business within the building by the manager. It usually contains a clause entitling the manager to assign or transfer the Agreement and common property occupancy rights upon certain conditions. The Agreement commonly refers to this as an “assignment” whereas the community titles legislation refers to it as a “transfer”. Those 2 terms mean the same thing, a change of ownership from a Seller to a Buyer of the management rights.

There is no similar provision in the Agreement regulating voluntary transfer of the manager’s unit or the exclusivity by-law. The body corporate need not be involved because the unit can be transferred under normal property law rights and the by-law is attached to ownership of the unit.

In addition to the contractual entitlement, the applicable Regulation Module confers on the manager a statutory right to transfer the management rights. For present purposes we will assume that the Body Corporate and Community Management (Accommodation Module) Regulation 2008 (“Accommodation Module”) applies, but most of the regulation modules contain similar provisions to those in the Accommodation Module.2

It follows that the transfer (or assignment) of management rights is regulated by:

  • the relevant regulation module (in our case the Accommodation Module); and
  • the assignment clause in the Agreement

Both of those documents need to be examined to determine how a particular transfer process should proceed.

1This Tool Kit is suitable for use under all Regulation Modules, other than the Body Corporate and Community Management (Small Schemes Module) Regulation 2008 and the Body Corporate and Community Management (Specified Two-lot Schemes Module) Regulation 2011.

The exceptions being the Body Corporate and Community Management (Small Schemes Module) Regulation 2008 and the Body Corporate and community Management (Specified Two-lot Schemes Module) Regulation 2011.

5. Relevant matters for consideration by the committee

In deciding an application, the body corporate can only consider matters that are specified in the Accommodation Module or the Agreement. The Accommodation Module says the body corporate may have regard to the following matters in deciding whether to approve a proposed transfer:

  • the character of the proposed transferee and related persons of the proposed transferee (such as the directors and shareholders of a corporate transferee or the person proposed as the on-site manager); 9
  • the financial standing of the proposed transferee;
  • the proposed terms of the transfer;
  • the competence, qualifications and experience of the proposed transferee and any related persons and the extent to which the proposed transferee and related persons has received or are likely to receive training; and
  • matters to which under the Agreement the body corporate may have regard.

It is not uncommon for Agreements to be silent on matters to be taken into account when deciding applications to transfer. In the case of each assignment, the Agreement must be analysed, and a final list prepared of matters which can be taken into account by the body corporate.

“Related persons” are defined in section 120(8) for the purpose of the section.

6. Information required in support of the application

The information needed to support an application will be determined by:

  • the final list of matters that can be taken into account in determining the application;
  • the broader terms of the Agreement (particularly the duties the caretaker is required to undertake); and
  • the nature of the entity that is purchasing the management rights.

In relation to (c) above, if the entity is a trust with a corporate trustee, then the extent of the required information will be significantly greater than for a purchaser who is a natural person or a sole corporate purchaser.

In addition to obtaining such things as balance sheets, resumes, references, criminal record checks, licences, etc. it is good practice for the body corporate to require the proposed transferee to answer a comprehensive Questionnaire which seeks to elicit information relevant to the final list of matters that can be taken into account in determining the application. The Questionnaire may vary from matter to matter because the final list of matters may itself vary from matter to matter. Care therefore needs to be taken in relying on any “standard form” list of questions.

Unfortunately, some prospective purchasers sign purchase contracts thinking that they will be able to obtain a “top-up” of the term of the Agreement after they settle the purchase. Sometimes they are told this by the outgoing caretaker or the sales agent. It is therefore wise for a body corporate to seek information from the prospective purchaser of their expectations in this regard. Bugden Legal has a “Caution Statement” about top-ups which the proposed transferee is required to read and acknowledge as part of the transfer process. This has the potential to protect the body corporate if in the future it resolves to decline a “top-up” request. A copy of the Caution Statement appears in Form A.

The information process usually concludes with a personal interview of the proposed transferee and related parties by the full body corporate committee or its representative group. The interview is a vital part of the approval process and provides an opportunity for the committee to seek clarification of or further information about materials provided by the transferee as part of the approval process.

7. The draft Deed of Assignment

It is common practice for the draft Deed of Assignment (prepared by the transferee’s solicitor and submitted to the body corporate with the consent application by the transferor’s solicitor) to contain a number of warranties or releases on the part of the body corporate. Great care needs to be exercised in determining whether the body corporate should agree to those warranties. Sometimes, it is necessary for the historical basis of the management rights to be examined before the body corporate can decide with any confidence as to the appropriateness of such warranties.

8. Conditional approval

There is nothing in the Accommodation Module which says the approval must not be conditional. Indeed, section 120(5) expressly allows for the approval to be given subject to a condition that the transferee enters into a Deed of Covenant with the body corporate to comply with the terms of the Agreement. While it might be argued that this is the only condition which may be applied, it is commonly accepted that the approval could be given subject to reasonable conditions, such as a requirement for the transferee to undertake training.

Caution will need to be exercised before adopting a conditional approval, because the scope for additional approvals will no doubt be limited by the Courts.

9. Refusing approval

The Accommodation Module provides that the body corporate must not unreasonably withhold approval to the transfer.10 In practice, this means that there will be very limited circumstances in which a refusal to approve cannot be challenged. Furthermore, if the sale fails to proceed and the refusal is successfully challenged, the body corporate will most likely be held liable for damages for the loss of sale.

If approval is to be refused, a strategy needs to be carefully developed and implemented to ensure that due process is observed and all options to avoid the refusal are properly considered.

Section 120(6)(a) of the Accommodation Module.

10. Transfer fees

In limited circumstances, a body corporate may be entitled to receive a “transfer fee” for approving a transfer of management rights. The legislative provisions in this regard are complex and subject to exceptions, but in general terms, the transfer fee is only payable if the transfer occurs within 2 years of the Agreement being entered into. If the transfer occurs within the first of those years, the transfer fee is 3% of the “fair market value of the transfer”. If the transfer occurs within the second of those years, the percentage is reduced to 2%.

It is normal practice for a solicitor representing the body corporate on a transfer of management rights to assess whether a transfer fee is likely to be payable. The claim is then made on the transferor, who may object to the claim in certain circumstances.

11. Settlement process

The settlement process is similar to a conventional settlement of a conveyance, although it usually involves 3 interdependent transactions:

  • the sale of the manager’s unit;
  • the sale and transfer of the Agreement; and
  • the financing of both those sales (usually involving a Bank).

It is important that the Deed of Assignment (signed by the body corporate) is not handed over until the actual settlement occurs and only then in exchange for payment of its legal costs and expenses and satisfaction of any other conditions of the approval. This can be achieved by the body corporate’s solicitor attending on the settlement or the deed being made available in advance of the settlement on appropriate “solicitor to solicitor” undertakings.

12. Conclusion

It is very clear from the above that the body corporate’s role in relation to the transfer of management rights is complex and needs to be undertaken with care and with the benefit of competent legal advice. It is fortunate that in most cases the cost of such assistance is fully recoverable from the transferor of the management rights (i.e. the outgoing caretaker).



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