The Background
Law can be a very dry occupation. As long as you are not on the receiving end of them, some of the lines in legal judgements can be somewhat amusing. One of the best judgments in recent times was the striking out of the bulk of Mark Latham’s defamation defence, but the judgement in this decision started with:
‘In his notes for a law lecture dated 1 July 1850, Abraham Lincoln wrote:
Discourage litigation. Persuade your neighbours to compromise whenever you can. Point out to them how the nominal winner is often a real loser – in fees, expenses, and waste of time.’
If you were in the courtroom listening to that statement, and you were the aggressor, the sinking feeling in your stomach would not have been enjoyable.
This management rights termination dispute for The Grange at Brendale (an enormous complex of 302 lots) in Brisbane’s northern suburbs had all of the typical hallmarks:
- multiple remedial action notices over successive months;
- a general meeting resolution to terminate;
- an application by the manager to the QCAT to prevent that termination.
One of the key legal differences for this scheme, in what is an odd legal setup, was that the management rights business had two sets of management rights agreements because the scheme was built over stages. One was notionally called Grange East for stages 1, 2, 3, 9 and 10, and the other was Grange West for stages 4, 5, 6, 7 and 8.
However, there was still only one body corporate. Legally, it was a bit messy, but it worked.
The Intent of the Committee
The other thing this scheme had was a very active chairperson who clearly did not want management rights agreements for the scheme.
Monies were raised at a general meeting expressly for the purposes of exploring the rights to terminate the management rights agreements (presumably before the manager had actually done anything wrong). The explanatory note for that motion included:
‘This caretaking contract is ludicrous and insane. We do not need, nor can we afford, an exorbitant caretaking contract – we need cost-effective self-management. Support yours and our children’s futures – VOTE YES’
A letter sent by the chairperson for that meeting also included:
‘We need to rid ourselves of this blood-sucking dysfunctional and truly unfair caretaker’s contract. It’s bleeding us absolutely dry!’
and
‘I will tell you now that I have but one major achievement that I intend to attain should you continue to vote for me as your chairman – and that is to rid ourselves and The Grange of the caretaking/letting contracts that are destroying us.’
The QCAT member took this as an intention of the committee to terminate the management rights agreements to achieve the perceived financial advantage in doing so.
The Legal Position
Try to cut and dice it any way you want, but the BCCM Act does not allow a body corporate to terminate management rights agreements because they want to get a better financial outcome, want to do something different with management or they just don’t like the agreements anymore.
Management rights agreements are contracts. They are binding on the body corporate and the manager. They cannot be varied without the consent of the other party, outside very limited statutory circumstances.
In a sense, management rights agreements are no different to you signing a contract for the sale of your house. Once it is signed, it is binding. Neither buyer nor seller can change the terms of it without the other’s consent, and it represents a binding legal commitment to act in accordance with the terms of the contract itself. Both parties have agreed to settle on a set day for a price. If one party doesn’t honour their contractual commitments, it opens them to legal consequences.
Management rights agreements are that – but for a set term and relate to the completion of certain duties for a fixed remuneration.
Termination of management rights agreements is only allowed for certain very specific causes. Technical arguments can be asserted, and that is what happened in Gallery Vie, but those are very unusual matters. The vast bulk of these sorts of disputes relate to the performance of caretaking duties.
The “Duty” RANs
The body corporate issued five Remedial Action Notices (RANs). Three of those RANs attached a report from a management rights consultant identifying various issues that he perceived needed work around the scheme.
The first step should have been reconciling those issues against the actual duties required by the manager under the management rights agreements, which was certainly not the job of the consultant.
As an example, it is all well and good to say the pool surrounds needed work. It is something else entirely to then issue a RAN to a manager based on that alleged default without first identifying the duty that the manager has breached that has given rise to that necessary work.
What matters is what the management rights agreements say – not what actually needs to be done. They may both refer to the same thing, but they also may not.
The RANs also attached photos of alleged breaches of the caretaking duties, but provided no detail about where the area referred to was. In a scheme of 302 lots, the lack of identification of the location made it difficult to determine where every matter raised was.
The Duty RANs were effectively declared invalid for these reasons.
The “Information” RANs
The other two RANs directed the manager to provide a pile of information about points such as their checklists, systems, and processes. The RANs also wanted details such as copies of employee/subcontractor arrangements and work rosters and so on.
These were all based on what are usual caretaking agreement clauses along these lines:
‘The Committee of the Body Corporate shall from time to time authorise one of its members to give instructions to and communicate with the Manager’
and
‘The Manager will confer fully and freely with the representative of the Body Corporate if so requested relative to the performance of the duties of the Manager herein set forth…’
and
‘The Manager will comply with and carry out all reasonable directions from time to time given in accordance with Clause 13 hereof by the Body Corporate to the Manager in and about the administration and management of the building…’
The member didn’t even get down to whether the information requests were proper directions. These RANs were declared invalid for two reasons before that was considered because:
- They were issued by the body corporate’s lawyers – not the actual body corporate itself – rendering them not in compliance with the provisions; and
- Both RANs referred to the ‘Caretaking Agreement’ – which didn’t exist. There were two agreements. How was the manager to know what was to refer to where?
The Financial Consequences
The hearing ran over 10 days in which the body corporate spent $427,000 plus GST getting there. The manager spent $472,000.
Costs in the QCAT are not automatically awarded to a successful party. They are effectively only awarded when the interests of justice require it.
The member found here that:
‘where termination is pursued for the purposes of obtaining a financial advantage, the party pursuing the termination should not escape the financial disadvantage of having to pay a costs order if they are unsuccessful.’
The body corporate sought to argue that a costs order would require a special levy and therefore be a substantial financial imposition to owners. The member observed that while that may be the case, the submission may have had merit but for the fact that owners had voted twice to resolve to terminate the management rights agreements.
Live by the sword, die by the sword.
The body corporate was ordered to pay $300,000 of the manager’s costs.
What we Take from the Decision
- The Abraham Lincoln quote is gold. It is just as true in 2019 as it was in 1850. Litigation is simply not for the faint-hearted.
- If you want to prosecute a technical argument like the body corporate did, you need to make sure you comply with whatever technical provisions you need to as well. What is good for the goose is just as good for the gander in these styles of matter.
- We do (just quietly) wonder why the body corporate didn’t correct the deficiencies in any of the RANs and start afresh when they were no doubt made aware of them before the hearing. Those deficiencies would have been pled in the application when first filed by the manager.
- There are far better ways to sort something like this (be that for the manager or the body corporate) than spending near enough to a $750,0000 on litigation. Management rights agreements do get terminated but the interesting thing is that managers win almost all of the contested termination fights, which means bodies corporate should tread very carefully before issuing a RAN.
- Lot owners won’t be protected from adverse costs consequences just because they didn’t take an active interest in what was going on. The apathy that usually reigns supreme in strataland can come at a cost.
We do see management rights agreements come to an end. Occasionally that is through termination for cause, but more often it is by negotiation. The other thing we see more frequently is an agreed sale process where the body corporate acknowledges that the management rights agreements are there but they just want a different manager to operate under them. If you had a choice, it is much more sensible to seek a negotiated outcome that you are in control of than running a piece of litigation where you are relying on a third party to decide things on an all-or-nothing basis.
While the case study focuses on the legal challenges of terminating existing agreements, it’s equally important to emphasize the proactive side: ensuring a good fit between a body corporate and its manager from the outset.
Change Body Corporate Victoria plays a valuable role by helping bodies corporate navigate the process of finding and appointing new managers, reducing the likelihood of disputes and costly litigation down the line.
If you would like further advice on body corporate management matters, Frank can be contacted by email at frank.higginson @hyneslegal.com.au or by telephone +61 7 3193 0588.
