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DEVELOPERS & MANAGEMENT RIGHTS

By July 22, 2020No Comments

Article prepared by John Punch Partner and Matthew Parker Lawyer, SP&G Lawyers

Up until the late 1990’s, the laws regulating the activities being conducted under the umbrella of Management Rights in Queensland were State Government based. However, the Federal Government produced legislation controlling and regulating what is referred to as Managed Investments and gave its policy making and enforcement roles to ASIC (Australian Securities and Investments Corporation). This came as a surprise to both Developers and Managers at the time, as there was no real consultation with industry groups at the time. 

The Managed Investments Act 1998 (C’th) or MIA came into effect and attempted to impose significant obligations and requirements on a broad category of ‘Managed Investments’. By ASIC’s interpretation of the definitions contained within the MIA, this includes, but is not limited to, certain Management Rights. The obligations imposed involved substantial disclosure by prospectuses to prospective investors and registration of the operating entity with the Australian Securities and Investments Commission (ASIC), as well as the holding of types of licences for financial services. While the Act itself has since been repealed, the provisions have been incorporated into Chapter 5C of the Corporations Act 2001.

Consequently, from responses by Queensland representatives of the industry (including SP&G Lawyers), the Federal Government acknowledged that their intent was not to affect the Management Rights industry with such onerous conditions and issued a series of Class Order exemptions to grant relief to Management Rights Operators. Where these exemptions become relevant to the caretakers and letting agents of Queensland is the list of conditions they must abide by to be granted the relief.

The Class Orders relate to the ASIC Policy Statement PS140, which sets out to capture Serviced Apartments only, as being a Managed Investment. Whilst there is no specific definition of Serviced Apartments, they are generally taken to mean those apartments that are furnished, serviced by the Manager and let on an overnight basis (short term lettings).

Developers are treated as promoters of Schemes and have their obligations for Disclosure under the Class Orders and Managers are dealt with as Operators of Schemes.

These conditions for the Managers of Serviced Apartments exemption are:

  1. The operator must provide a Product Disclosure Statement, when offering a Letting Appointment outlining risks, benefits and costs to a unit owner when they are given the offer to participate in the Management Rights Scheme;
  2. Participation in the Scheme must be voluntary, meaning owners must not be required to pay to join the Scheme or during the Scheme, except for the reasonable expenses of the letting agent;
  3. There must be no restrictions on the use of the unit as a residency such as those imposed by the local authority under zoning restrictions or a development approval. This is to limit the reliance on the operator by the unit owner. An exemption of this rule may be applied for by the operator submitting a written statement including evidence from an independent real estate agent;
  4. The operator and each unit owner must be able to withdraw from the Scheme on 90 days’ notice;
  5. The operator must ensure that any monies held must be placed in an annually audited trust account;
  6. The operator may require upfront payments from owners for standardised furniture, fittings and equipment however, this is on the basis the items become the property of the owner. Additionally, any money placed into a fund for such furniture, fittings and equipment must be returned to the owner if they withdraw from the scheme;
  7. The Letting Agreement must contain forced sale provisions, which allow the majority of owners on the letting pool force the letting agent to sell their Management Rights to nominated new operator. Such a sale would be at market value;
  8. The letting agent must also hold and relevant real estate agents licence (State Government) and issue periodic reports to their clients among other items.

A breach of any of these requirements for relief does not invalidate the relief granted as long as ASIC is notified promptly of the breach in writing.

Some of these requirements have also been built into the Body Corporate and Community Management Act 1997 such as in Section 116 where the forced sale provisions must be agreed by both the Management Rights owner and the manager’s unit owner where they are owned by different entities. This is to ensure that if the majority of owners in a scheme want to remove the manager, the manager’s unit goes with the Management Rights. We recommend that when purchasing Management Rights there is a check as to whether there is a Deed between the owner of the Management Rights and owner of the manager’s unit accepting the application of the forced sale provisions on both assets. Otherwise, the section makes the Letting Agents Authorisation Contract with the Body Corporate “not effective”.

In conclusion, whilst there is nothing that can be done to work around this Federal imposition on Management Rights, it is important to understand the omnipresent risk posed by the MIA when developing residential apartment buildings or purchasing management rights.

To discuss a purchase or sale of Management Rights and potential issues involved, please do not hesitate to contact our office on 07 5538 2277.