In Queensland, the “Gallery Vie” decision continues to cause significant problems when it comes to the sale or refinancing of management rights.

 


Essentially, financiers have found the “step in” rights, under the legislation (when a manager defaults), don’t actually exist. ARAMA continues to lobby the State Government to fix up this anomaly.

In NSW, there is no legislation at all relating to financiers’ rights. Accordingly, a purchaser’s financier will require a Right of Entry Deed or Deed of Consent to Security (known as a ‘Finance Deed’) to secure a loan to a purchaser.

Each financier has its own precedent Finance Deed, however the substance of their terms are fairly similar. This article looks at each party’s perspective in entering a Finance Deed and summarises the most common terms of such deeds.

The Financier Perspective:

Basically, a financier needs to protect the value of its security – i.e. the interest of the purchaser in the caretaking and letting agreements (‘Agreements’). To do so, it needs to have in place a Finance Deed with the Owners Corporation. Where a financier exercises its “step in” rights pursuant to a Finance Deed, it is in the financier’s interest to do so in a manner that fosters the smooth operation of the management rights business so as to maximise its value.

The Owners Corporation Perspective:

Generally, an Owners Corporation does not wish to commit to any further obligations beyond those contained in the Agreements. This particularly becomes an issue where the terms of the Finance Deed purport to vary the terms of the Agreements in a way that benefits the Financier. However, Finance Deeds can also be very beneficial to an Owners Corporation as it places an obligation on the financier to install an experienced operator to run the business until the Financier finds a purchaser for the business who will be reasonably acceptable to the Owners Corporation.

The Purchaser’s Perspective:

The purchaser has usually already signed numerous bank documents as security for their borrowings and pays little attention to the Finance Deed terms.

The Vendor’s Perspective:

The Vendor generally sees a Finance Deed as one more hurdle to jump to make the sale contract unconditional and to move forward to settlement. The aim of the Vendor’s solicitor is to achieve a Finance Deed that balances these interests. Such a deed will incorporate the following:

 

  1. Consent: that the Owners Corporation consents to the purchaser charging its interest in the Agreements to the financier.
  2. Step-in Rights: that the Owners Corporation consents to the financier stepping in to the purchaser’s shoes to rectify a default under the Agreements, or where the purchaser is in default under any of the security taken by the financier, the financier can step in and perform the duties under the Agreements (usually with a view to maintaining the value of the business).
  3. Assignment Rights: the financier can step in and assign the purchaser’s interest in the Agreements with the consent of the Owners Corporation. Some Finance Deeds set out the terms to be taken into account by the Owners Corporation in considering the assignment whilst others utilise the assignment provisions in the Agreements themselves.
  4. Notices: the Owners Corporation is required to give copies of all notices given to the Manager under the Agreements to the financier at the same time as they are given to the Manager. In the event of default, this strengthens the Owners Corporation’s position as the Manager rarely wants their financier breathing down their neck as a result of such a notice. In addition, the financier can step in and remedy the default.
  5. Representations: the Owners Corporation is required to provide warranties and make representations to the financier that it was authorised to enter into the Agreements and the Finance Deed. This won’t be an issue where there are minutes of meetings to evidence such authority.
  6. Variations: the purchaser and the Owners Corporation are not permitted to agree between themselves to vary, terminate or rescind the Agreements without the prior written consent of the financier. It is important for managers to remember to provide their financier with details of any variations prior to submitting them to a general meeting for approval, otherwise the variations may be void.

Finance Deeds can be approved by the Executive Committee. However, for expediency, the motion to approve the Finance Deed is often added to the agenda of the general meeting held to consider the assignment of the Vendor’s interest in the Agreements to the purchaser.

The costs of negotiating and executing Financier Deeds are generally borne by the purchaser as it is a condition of their finance approval, rather than part of the assignment itself. Purchasers should also note that Owners Corporations are generally under no obligation to agree to enter a Financier Deed nor are they usually under any obligation to enter a Financier Deed within 30 days or some other time period.

When entering a Financier Deed all parties are encouraged to use common sense and give consideration to the reasonable requirements and expectations of each of the effected parties.

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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