Management rights, like all industries, change and evolve over time. One of the biggest changes in recent years is changes to the sale process itself.


In the good old days, contracts were regularly prepared and settled on the basis of:

Financial verification in 14 days - Legal due diligence in 21 days - Finance in 28 days - Body corporate approval, prior to settlement - Settlement in 45 days.

These days, the stars need to align with the planets for a sale to be completed within 45 days.

Back then, sellers would regularly book that eagerly awaited European holiday – departing the day after the due settlement date – as soon as contracts were signed. How things have changed! 

So what’s changed in Queensland?

Two big issues have impacted on sales.

Firstly, Body Corporate Committees are no longer rubber-stamping assignments – which is fair enough.

Bodies Corporate are being advised by their solicitors that they don’t have to accept whoever is brought forward by the seller and they are probing far deeper into the work history, character and finances of buyers. Police reports and business plans were never asked for in the past, but are now par for the course. Committees, armed with predetermined questions about what the buyer is going to do for them, now regularly conduct lengthy interviews with buyers. I have no problem with this process, as long as it doesn’t become silly (like a body corporate solicitor recently wanting a buyer to justify how he could handle a 2% rise in interest rates, if it were to happen!)

Secondly, the Gallery Vie decision has had a major impact. I do not intend to go into any detail in relation to this decision but if you haven’t heard about the matter, go and google “Gallery Vie”, as there are plenty of articles explaining the case. In short, financiers of management rights found out that their “step-in” rights on default were not as strong as they had always believed. Consequently, banks are being much more cautious in lending to the management rights industry. The issue could have been easily fixed with the stroke of a pen by the Queensland Labour Government but it appears that they are happy to do nothing and let one of the biggest industries in the State sit in turmoil.

The Banks

Each bank has a different view on how to deal with the “Gallery Vie” decision. The policy is inevitably driven by the credit department of the banks.

A couple of banks only require some additional wording in the deed of assignment of the management rights documents. If the body corporate solicitor agrees to this wording, happy days and the sale can proceed without delay. Other banks are making it a condition of the loan approval that the body corporate, at a general meeting in the year following the purchase of the business, agree to vary the caretaking and letting agreements to specifically overcome the Gallery Vie decision. If not approved, the banks can reassess the loan facility.

Other banks are requiring, prior to the loan being granted, that the body corporate go to a general meeting to approve the variation of the caretaking and letting agreements.

The Timing Problem

Once sale contracts are signed, a three-step process begins for the buyer – firstly financial verification; secondly legal due diligence; and thirdly finance approval. Once these steps are completed, the approval of the Body Corporate is then sought with settlement to occur soon after.

Regardless of the seller’s or the buyer’s wishes, the banks and the body corporate solicitors are ultimately determining the timing of settlements. In Queensland, assignments of management rights can be dealt with by the body corporate committee and they do not have to go to general meetings for approval. In NSW, the approval must be given by an Owners Corporation at a general meeting.

If the bank’s policy is that the caretaking and letting agreements must be varied prior to settlement to overcome the Gallery Vie decision then a general meeting should be called as soon as possible. Unfortunately, the bank’s position on this issue may not be certain until three-quarters of the way through the transaction.

It is only after finance approval is obtained that sellers notify their body corporate of the sale and it is at this stage that the body corporate appoints a solicitor to review and advise on the assignment documentation.

There are a handful of solicitors who act on behalf of the majority of bodies corporate. These solicitors have differing views as to whether they will allow the inclusion of wording in the deed of assignment to satisfy a bank’s requirements or whether they regard the additional wording as something which must go to a general meeting of the body corporate to be approved. If the body corporate’s solicitor requires the matter to be dealt with at a general meeting, which is usually not known until sometime after finance approval has been obtained, then settlement will inevitably be postponed while waiting for the meeting to be held.

Obviously, if the inclusion of wording in the deed of assignment is satisfactory to the bank and satisfactory to the body corporate’s solicitor, the sale will proceed promptly after the assignment approval has been granted by the committee. However, if the bank or the body corporate’s solicitor requires the matter to be dealt with at a general meeting, it can take every bit of six to eight weeks for that decision to be arrived at, the meeting called and the necessary motion approved.

If a general meeting is called solicitors for bodies corporate are recommending to their clients to approve the Gallery Vie variations, provided the banks are reasonable with their requests. This is the one ray of sunshine in the process.

Additional Costs

If a general meeting is required, a debate then often erupts between the seller and the buyer as to who is to pay for the cost of calling the EGM. Under the standard management rights sale contract, the seller is responsible for the body corporate’s costs relating to assignment. However, sellers are often taking the view that the cost of calling a general meeting is a direct consequence of the buyer’s choice of financier and therefore the buyer should bear the cost of the meeting. There is no consensus on who should pay for these costs but in our experience more often than not the seller is covering these costs.

The Role of the Parties

Throughout the sale process, there is a constant clash of competing interests. The seller, the buyer, the bank and the body corporate all engage lawyers to look after their interests. Obviously, this is fine as long as the clash of interests does not become a clash of self-interest. Each party must play their part. The sale is a PROCESS and each party has a role to play to complete the process. When embarking on this process, the selling agent is the first point of contact and needs to condition both the sellers and the buyers as to what are reasonable expectations for settlement.

Sellers need to play their part by cooperating with buyers’ reasonable extension requests and being proactive in managing the sale process (particularly managing owners and committee expectations). Pressuring parties to adhere to unrealistic timeframes is counterproductive and ultimately can lead to the sale collapsing, leaving the seller to start the whole process all over again.

Buyers likewise need to hose down their expectations as to when they can start earning income. We in the industry understand that most buyers go for lengthy periods without income in the lead‑up to settlement where it is all money out and no money in.

And finally we solicitors, engaged by the buyers and sellers, also need to work cohesively, particularly in relation to satisfying the requirements of the body corporate’s solicitor.

Liability limited by a scheme approved under Professional Standards Legislation
Disclaimer – This article is provided for information purposes only and should not be regarded as legal advice.

 

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