LEGAL EASE
Topping up a sound investment decision
There really is no such thing as a passive investment in business, and a management rights business is no different. To get the best return from a management rights investment requires constant work, and one key aspect always worth bearing in mind is the need to top up your management rights agreements. In effect, a ‘top up’ adds a further option to an existing contract, effectively extending the term of your agreement. Extra time means extra certainty for your ongoing financial return and related capital value. It is important to understand the distinction between a ‘top up’ and what is the exercise of an option, which is the exercise of an existing contractual right.
Management rights agreements are all structured differently. They can be straight 10 or 25-year terms at the maximum allowable under the relevant regulation module. They can also be any term less than the maximum allowed. One way to structure an agreement is to have an initial term and any number of options. For example, a 15-year term with a 10-year option (totalling 25 years), a five-year term with a five-year option (totalling 10 years), or a three-year term with a four-year option and a further three-year option (totalling 10 years).
A ‘top up’ adds a further option to an existing contract, effectively extending the term of your agreement Frank Higginson, Partner, Hynes Legal
‘Topping up’ an agreement is adding a new right to the agreement, it is not exercising an existing right under it (although the need to do that when that first term comes to an end is critically important). You usually top up when you are three to five years into your agreement term. A top up essentially seeks to add that expired term back in. From a banking and general industry perspective, provided that the any new option is largely exercisable at your discretion, it is generally considered to be the term that exists. So, with a 15-year term and 10-year option, the industry basically regards that as a 25-year agreement. When we suggest you ‘top up’ you are creating a further option term which extends the maximum tenure of your management rights agreement. Using the same example, the above agreement (when looked at as a whole) would then be a
15-year term with a 10-year option with a further five-year option.
for a further period and provide themselves with far more security.
Assuming the first five years of the term had elapsed, the agreement could then be topped back up to 25 years to the maximum allowed under the Accommodation Module.
This is why we recommend to managers that they top up whenever they think the body corporate in general meeting (and hopefully the committee) would be agreeable to supporting that variation and why we promote our clients to do it when we think the time is right.
In this industry, certainty equals value. Longer tenure creates more certain business income. More certain business income means you at least stabilise the value of your business, but potentially increase it. Imagine there are two management rights businesses side-by-side that are for all intents and purposes identical. One’s management rights agreement term is for 15 years, and the other is 25 years. It is selfevident which one would be easier to sell, and it follows that there may well be a difference in capital value between the two of them. For what is a relatively small legal spend, a management rights owner can secure tenure
For a general discussion of this concept, see the Hynes Legal webinar on the topic. Frank Higginson is a partner and Director at Hynes Legal, with more than 25 years’ experience in management rights and body corporate law. Well known for cutting through the most challenging legal problems to deliver straight-talking, commercially driven advice, Frank is an active member of the management rights industry. He is a regular presenter at seminars and events where he offers innovative thought leadership on addressing the multiple challenges and opportunities facing the strata industry.
Accountants to the accommodation industry. Call 07 5430 7600 or visit holmans.com.au
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MANAGEMENT
ResortNews | August 2022
