Think Nicholsons

Oct 06

Dates in management rights agreements: have you set your EPIC reminder?

Managers of management rights businesses have had a lot on their minds lately. From keeping people safe during the global pandemic to getting the tourism industry back on track, it’s easy to see how managers could overlook something so important as the key dates in their agreements. It’s time to set an epic reminder.

Annual remuneration reviews

Some body corporate managers will automatically review a caretaker’s remuneration at the time stated in the agreement. Other body corporate managers will not. Managers seeking to ensure their remuneration is properly increased in accordance with their agreement should diarise the review date and ensure the review occurs as agreed. Bodies corporate cannot refuse to comply with remuneration review clauses – even during a pandemic.

Options

‘Options’ are so-called because they give managers the option (choice) to extend the term of their agreement – if they wish to do so. The length of an option is set out in the agreement. Five or 10 years is common. It is rare for an agreement to be automatically extended. This means that managers wanting to exercise (take up) an option must notify the body corporate of their intention to do so.

Agreements usually specify a timeframe during which an option must be exercised. They also generally set out a procedure that must be strictly followed. Not exercising an option properly has serious consequences. The agreement automatically ends and managers lose their right to conduct the management rights business from the complex. Not exercising an option may also put managers in breach of their finance arrangements.

Buying a management rights business is a significant investment for most people. Losing the business because an option is not exercised or is not exercised properly is a significant risk that must be managed. Fortunately, this risk can be easily managed by doing these four things:

E Enter the earliest and latest dates by which the option can be exercised into your diary.
P Peer support - get another person to diarise the dates as well. They’re your back-up.
I Include a couple of reminders in advance of the option dates so you know the time for 
exercising the option is approaching.
C Consider using technology to assist.

Bodies corporate are not required to give managers new agreements if managers forget to exercise options or fail to exercise them properly. The fact that a manager may have had other priorities, like keeping people safe during the current pandemic for example, may be of no assistance.

Managers who find themselves in this situation and have a good relationship with the body corporate committee may be able to negotiate a new agreement. However, real issues arise when the manager and the committee are not getting along.

“Top ups”

A ‘top-up’ is a colloquial term used in the management rights industry. When an agreement is topped up it is varied to include a clause giving the manager a further option for a specified period of time. There are specific limitations on how long the additional option term can be. The further option clause is usually worded the same as any previous option clauses in the agreement for consistency.

Some managers think that topping up an agreement and exercising an option are the same thing. They are not. Top-ups do not extend agreements. They merely give managers another option (choice) to extend their agreement if they wish to do so. Managers wanting to extend their agreements still need to notify the body corporate of their intention to exercise the further option – and follow the rules about how it is to be exercised.

Exercising these further options is not straightforward. The original agreement may have only had a simple requirement to exercise an option before the expiry date, but it is becoming increasingly common for bodies corporate to require further top-up options to be exercised within a specific timeframe – ordinarily between three to six months before the term expires.

The procedure specified in the further option clause is as important as ever and must be strictly followed. The method to notify the body corporate is usually very prescriptive. Even in these uncertain times, notice by email may not be enough.

Expiry date 

The other important date is the date when the agreements expire. This date is particularly important for managers looking to sell. Buyers and their financiers want to see that agreements have as long as possible to run – depending on which module the scheme falls in. This is why top-ups are so common.

How can we help?
If you have any questions about management rights or you just want to confirm you’ve correctly calculated your option exercise dates, please reach out to us at vas@nicholsons.com.au or (07) 3226 3944.

Think management rights, think Nicholsons!

By Vanessa Sciortino, Special Counsel