by John Mahoney - Mahoneys
20th November, 2019
Stop reading this article!
Instead, go and check the option exercise dates in your management rights agreements and deeds of variation where you or a previous manager may have added a further option/s to the agreements.
I have, in many previous articles, reported instances of managers failing to exercise options in their management rights agreements. Unfortunately, we are still seeing more and more instances of this occurring. I suspect it has much to do with many new managers not appreciating the importance of their agreements generally and more specifically not understanding how the options in agreements work.
Many managers wrongly think that topping up their agreements (the term the industry uses for amending an agreement to add another option) has the effect of exercising an existing option and somehow automatically extending the term. That is not so.
Very few options are “automatic”. Many require the option to be exercised by giving written notice before the end of the current term but many give a window of opportunity within which to exercise the option – typically between six and three months from the end of the term.
So I encourage all managers to go and look carefully at exactly what their agreements and deeds specify. Check to see what if anything your lawyer told you when you purchased. Check to see how the notice must be given – most agreement will require written notice actually sent by post of hand delivery to the body corporate manager or secretary. Email may not be enough. Consult a lawyer now if you are in any doubt at all. Diarise the date/s and some earlier reminder dates in your calendar, mobile phone or wherever you can.
The consequences of not exercising an option by the due date can be dire. If an option is not exercised in accordance with the terms of the agreements, the agreements will expire at the end of the term, in which case the manager no longer has the right to conduct the caretaking and letting business for the scheme. In such a situation the only solution generally is for the manager to request the body corporate to enter into new agreements. However, depending on timing, it may be possible to adopt a simpler process at a general meeting. We have successfully devised and used a simpler procedure at the general meeting resulting in a lot less expense for the manager but the opportunities to do so are rare.
Problems can arise if, after the manager forgets to exercise an option, the body corporate exploits the opportunity and seeks to impose changes to the agreements against the manager’s interests. Even worse, if there has been real conflict in the complex, the body corporate might seek to tender for and engage another contractor to conduct the business or do away with management rights altogether. We have seen this happen more than once in recent times.
To avoid this from happening, as suggested above managers should ensure that they diarise all of the option extension dates to ensure that they do not lose the opportunity to renew the agreements. At the time of exercising an option, managers should ensure that the extension of the agreements is properly recorded in a document executed by the manager and the body corporate, as the documenting of the option being properly exercised and the body corporate’s acknowledgment of that is something a subsequent buyer will want to see.