Extending Management Rights Agreements
One of the most fundamental elements of maintaining a Management Rights business, especially as a sellable asset, is ensuring that the caretaking and letting agreements with the Body Corporate continue to have lengthy terms remaining. The term of a Management Rights agreement is the length of time that the agreement can operate. When referring to the length of the term remaining, it is common to also include any option terms that have not yet been exercised. This is because, in the vast majority of circumstances, the options in a Management Rights agreement are exercised at the sole discretion of the manager and generally considered a sure thing.
An option in a Management Rights agreement, is a right to extend the current duration of the agreement. An option must be exercised to take effect, and it is very strongly recommended that options are exercised as soon as they can be. If you fail to exercise your options when due your agreements are terminated and you no longer have a sellable Management Rights business.
When extending the term of your agreements, it is import to distinguish the difference between exercising an existing option under the agreement and adding a new option to the agreement. One extends the actual current term of the agreement, the other extends the potential length of the agreement.
In many States the maximum term length remaining of an agreement (including options) is set by the legislation, and therefore it is ideal to regularly top up the length of the remaining term so that it is as close to the maximum length as possible.
The process of “topping up” an agreement, as it is commonly called, can vary from State to State but will ordinarily require a motion to be passed at a general meeting of the Body Corporate. Once the motion is passed a document is signed and sealed by the Body Corporate (usually a Deed of Variation) which sets out how the term has been extended.
In most NSW matters and in certain circumstances in other States, a top up is done by entering a completely new agreement that replaces the prior agreement. But for the most part, a top up is done by a variation of the original agreement, which inserts a new option term into the agreement.
It is recommended that all managers top up their agreements at least once every five years, and more often when the legislation only allows a maximum term of ten years.
The Management Rights team at Small Myers Hughes are experts in the process of exercising options and topping up agreements. Our team can walk you through each step and provide guidance on the best ways to encourage the owners in your strata scheme to vote in favour of your motions. It’s important to make sure that you always top up your agreements and exercise your options correctly, as failing to do so can result in your agreements terminating prematurely.