There can be significant commercial value in management rights. Many will need to take out finance to fund a purchase of management rights. Just as a lender will take security (i.e. a mortgage) over real estate it lends on, when finance is given for the purchase of management rights the financier will take security over the borrower’s interest in the caretaking and letting agreements.

If you accept a mortgage over a house you purchase, the lender may secure its position by requiring you to take out home and building insurance. That is a precaution taken by the lender to guard itself in the event that the house was destroyed to ensure the value of its security in the house does not disappear. Just as the value in a home can be destroyed by flood or fire, the value in caretaking and lettings agreements can be destroyed if they are terminated by a body corporate.

To guard financiers against that, section 126 of the Body Corporate and Community Management Act 1997 (Qld) sets out special protections for “financed” caretaking and letting agreements. In effect, section 126 requires a body corporate to give 21 days’ notice to the financier of any right to terminate the agreement. During that 21 day period, the financier can elect to act in place of the caretaker or appoint a person as a receiver and manager of the agreement. In other words, the financier can “take possession” of the management rights. If it does that, the body corporate can no longer terminate the caretaking / letting agreement on the ground it previously held.

However, this does not operate to stop the body corporate from terminating the caretaking / letting agreement for something done or not done after the financier started to act in place of the caretaker. The intention of this qualification was to ensure that if the financier or its receiver starts to act in place of the caretaker, the body corporate can still hold them responsible for the proper performance of the caretaking duties and the observance of other contractual obligations. If the financier / receiver fails to carry out the caretaking duties, the body corporate could still issue a new remedial action notice and terminate the agreement if it is not complied with.

What has been described as a loophole in section 126 was discovered in 2015 in a case that went before the Queensland Civil and Administrative Tribunal involving a community titles scheme called Gallery Vie. The body corporate for that scheme gave notice to the financier of its right to terminate the agreement. The financier stepped in and appointed a receiver over the caretaking company. That nullified the body corporate’s right to terminate. Three days later, a liquidator was appointed to wind up the caretaking company. The caretaking agreement entitled the body corporate to terminate if a liquidator is appointed. The body corporate seized upon the opportunity and moved to terminate the agreement again, arguing that the liquidation was something done after the financier started to act in place of the caretaker. The tribunal agreed, and the management rights industry went into panic mode.

Liquidation is seen as an ordinary and natural consequence of receivership. So what has occurred since the Gallery Vie decision is an influx of variations to caretaking and letting agreements seeking to “plug this loophole” by changing the agreements to say that a right to terminate for liquidation or other similar events is suspended if a receiver is appointed. Many financiers simply will not lend on an agreement that does not have this plug, and the plug is called a “Gallery Vie clause”.

So if a body corporate is ever presented with a motion proposing a Gallery Vie clause as a variation of the agreements, it is a common sign that the current caretaker is starting to prepare for a sale of the management rights. If the Gallery Vie clause is not already in the agreements, then the buyer or their financier will usually insist on it before a transfer / assignment occurs.

A Gallery Vie clause will often be pitched to a body corporate on the basis that it is essential for the security of the management rights and that its inclusion will not cause prejudice to the body corporate. However, I often see a Gallery Vie clause reach well beyond its intended purpose by trying to suspend other rights to terminate (such as for a conviction for an indictable offence) and some bodies corporate may be concerned that its inclusion will cause the loss of a future opportunity to terminate. So while it may be proposed as an uncontroversial amendment, a committee should seek legal advice when it is put forward.

This article was provided by Jason Carlson of Grace Lawyers. Grace Lawyers was listed as one of three finalists in the Strata Services Business of the Year (2020-2021) through Strata Community Association (Qld), the peak industry body for the strata sector. It was the only law firm that was listed for this award. You can learn more about their unique approach to strata law here.

This information is intended to provide a general summary only and should not be relied on as a substitute for legal advice.