Can a body corporate “buy out” the building manager?

Let me start out by making this observation – sometimes it’s tricky to figure out what someone is really asking. Perhaps because of a language barrier… like the time I went to lunch with my friend Scott to a Japanese restaurant (don’t jump to conclusions just yet) and the French waiter enquired as to whether we would like to try some “sussafricken” wine. I spluttered then muttered “that doesn’t sound very appealing” to which the waiter magniloquently replied “well, the sussafrickens would not agree with you”. After considerably more spluttering and vigneronic contemplation, we realised he was trying to tell us the wine was from South Africa.

So, when the hopeful committee approaches the young strata lawyer and poses the question “can we buy the management rights from the building manager?”, the young lawyer’s answer is likely to be “no”. Why? Because the legislation specifically prohibits the body corporate from owning management rights and, generally, from conducting a business.

However, sometimes it’s tricky to figure out what someone is really asking. Although the body corporate can’t “buy” the management rights, in the traditional sense, it can pay consideration to the building manager in exchange for the surrender of the management rights. That’s where the old lawyer (well, 51 isn’t that old) steps in, taps junior on the shoulder and says, “I’ll take it from here champ”. The answer is YES.

We’ve seen more surrenders of management rights in the last 12 months than in the previous decade. Skyrocketing property prices are sufficient justification for some building managers to dump their business, sell their unit and enjoy an early retirement (particularly when the term of the agreements is running low or if there are irreconcilable tensions between the building manager and the committee).

Some committees have lost hope that the available dispute resolution mechanisms will ever assist them to ensure their building managers actually perform the duties they are being paid to perform. Rather than investing heavily in years of dispute resolution, they have opted to cut their losses by buying out their building managers.

It’s not always easy sailing for the parties to finalise a surrender of the management rights. Apart from terminating the caretaking and letting agreements, there are often other loose ends to tidy up including the removal of by-laws, the transfer of parts of the manager’s lot (such as an office) to the common property and the return of the body corporate’s equipment, records and keys (read Andrew’s article on keys here). The body corporate may also wish to borrow funds so the cost of the “buy out” can be amortised over time.

An ordinary resolution is required for the body corporate to approve the surrender of the agreements (which is usually evidenced by a written deed between the parties). However, a greater level of approval may be required if the surrender is dependent on other things.

Assuming the surrender is approved and signed off, what happens then? Usually, the building manager will sell its lot and never be seen again, the body corporate will engage someone else to perform the caretaking duties and the investor owners will engage local real estate agents to manage their lots.

Could a resourceful body corporate seize such an opportunity to package-up new management rights and sell them for a handsome profit on the open market? The legislation prohibits the body corporate from operating or selling a management rights business. However, sometimes it’s tricky to figure out what someone is really asking.

 

This article was contributed by Andrew Suttie, Nicholsons Solicitors

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