A body corporate cannot unreasonably withhold consent
When a building manager sells its business, it is required to obtain the body corporate’s consent to the assignment of the management rights prior to settlement. The body corporate cannot unreasonably withhold consent to the assignment, but that doesn’t mean the body corporate is required to rubber stamp the request.
Obtaining body corporate consent is the final condition of the sale
Obtaining the body corporate’s consent is usually the final condition of the management rights sales contract. So, by the time the body corporate is notified of the sale, the incoming manager has already, at some expense, confirmed financial verification and legal due diligence and has obtained finance approval (if required). In the meantime, the existing manager is likely to be busily packing and planning how to best spend any leftover settlement funds.
Historically, neither the incoming nor outgoing manager has given much consideration to the possibility of the body corporate withholding consent. In fact, the body corporate’s consent is regularly requested on the mistaken basis that the management rights contract is already “unconditional”.
The assignment can be considered and approved by the Committee
The committee is usually charged with the responsibility of considering a request for an assignment (unless the management rights agreements require consent to be given by ordinary resolution of the body corporate in general meeting or the approval is listed on the body corporate’s register of reserved issues). The committee should ensure it has all the information required to make a decision about the assignment. It should also conduct reference checks, arrange an interview with the proposed purchaser and seek legal advice (which is paid for by the departing manager).
What information can the body corporate consider?
In considering whether to approve an assignment, the committee is entitled to have regard to:
- The character of the new manager (and, for example, its directors or the individuals who are proposed to perform the duties);
- The financial standing of the new manager (to ensure, for example, it will be capable of making repayments under its loan facility);
- The proposed terms of the transfer (for example, the conditions in the management rights sale contract);
- The competence, qualifications and experience of the new manager and the extent to which they have or are likely to receive training; and
- Any relevant conditions or requirements of the assignment provisions of the management rights agreements.
30-day time limit
Once it receives all the information reasonably required to consider the request for approval, the body corporate has 30 days to make a decision. The body corporate should be mindful of its obligation to act reasonably and should communicate its requirements for further information as soon as reasonably possible after receiving a request for consent from the manager.
The body corporate should keep the following things in mind when considering the assignment:
- The parties are contractually bound by the existing agreements. The committee cannot reasonably require the purchaser to perform a duty or abide by an obligation that does not already exist in the agreements or insist on an amendment to the agreements as a condition of approving the assignment;
- Most caretaking and letting agreements do not require the manager to conduct any specialist work or to have any particular expertise or skills. Consequently, the committee can’t reasonably insist the purchaser possess skills and experience over and above the requirements of the agreements;
- Where a bank or other financier has agreed to fund the purchase of the management rights, the body corporate cannot reasonably require the purchaser to have some higher level of financial standing;
- The Office of Fair Trading will not issue a resident letting agent’s licence to the purchaser until approximately 30 days after the body corporate has provided its consent to the assignment. It is acceptable for the purchaser to operate the letting business without a licence during that initial period;
- Where the management rights agreements include a letting authorisation, the Office of Fair Trading will conduct a police check prior to granting the purchaser a letting licence.
Recently we have seen a dramatic increase in the number of committees withholding consent to assignments. The reasons provided by the committees include the following deficiencies of the proposed purchasers:
- No experience in performing caretaking duties or operating a business of any kind;
- No understanding of the duties required to be performed under the caretaking agreement or the letting agreement;
- No understanding of the by-laws for the scheme;
- Refusal to provide any evidence of financial standing;
- Very poor communication skills (no English language);
- No understanding of Work Health and Safety requirements or Fire Safety requirements, in circumstances where the agreements required knowledge of those requirements;
- No experience in cleaning or maintaining a swimming pool in circumstances where the swimming pool was a major feature of the scheme; and
- No experience in letting where the scheme was very large with a significant number of investor owners who relied heavily on the letting services provided by the manager.
Whether those reasons, or a combination of them, are sufficient for the body corporate to reasonably withhold consent to an assignment is yet to be seen. However, we anticipate it will be particularly challenging for a manager to establish the body corporate has acted unreasonably in circumstances where the proposed purchaser has no understanding of the fundamental duties required of it under the agreements.
How to determine whether withholding consent is reasonable
There is no particular or objective basis upon which a committee can rely to withhold consent to an assignment. Rather, the relevant consideration is whether the committee’s decision to withhold consent would have been made by a reasonable person in the same circumstances (i.e. at the same time, with the same information before it and with the same range of statutory obligations – for example, the obligation to administer the common property and the body corporate’s assets for the benefit of the owners and to act reasonably).
Likely consequences of withholding consent
Because the outgoing manager and the purchaser have contractually and emotionally committed to the sale, the manager is likely to challenge the reasonableness of the body corporate’s decision to withhold consent to the assignment. The onus is on the manager to prove the body corporate has acted unreasonably. If the manager can establish that, the body corporate could be liable to pay damages to the outgoing manager.
Committees need to carefully consider any request for an assignment of the management rights and should keep in mind their overriding obligation to act reasonably. However, if the purchaser does not meet the minimum requirements for the position, the body corporate is not obliged to approve the assignment.
If you would like assistance with an assignment of management rights at your scheme, or any advice relating to Strata Law, please contact Andrew Suttie on Ph. (07) 3226 3955