Management rights agreements in community titles schemes

By Queensland Government

Management rights are a common feature of accommodation style and residential community titles schemes. They are a contractual arrangement between the body corporate and a contractor that allows the contractor to provide onsite letting services for owners in the scheme.

Management rights are typically sold by the developer during the original owner control period. Under the Body Corporate and Community Management (Accommodation Module) Regulation 2020 (the Accommodation Module), the contracts are binding for up to 25 years. For schemes registered under the Body Corporate and Community Management (Standard Module) Regulation 2020 (the Standard Module) the time frame is up to 10 years.

These contracts usually contain options for extension or renewal and can be re-sold by an existing management rights holder.

Management rights have been a source of significant discussion amongst community titles sector stakeholders, as all owners are impacted by the terms of the contract.

This article delves into some of the more contentious issues encountered in relation to management rights arrangements, namely:

• the impact of changing a regulation module on caretaking agreements;

• the current legislative position on extending caretaking agreements; and

• the possibility of review rights for newer schemes.

It is important to note that the information in this article applies to schemes registered under:

• the Accommodation Module, which applies to approximately 10 percent of Queensland community titles schemes; and

• the Standard Module, which applies to approximately 56 percent of community titles schemes.

It does not apply to schemes registered under the Small Schemes or Specified TwoLot Schemes modules.

Changing a regulation module

In addition to the overarching Body Corporate and Community Management Act 1997 (BCCM Act), each community titles scheme is registered under one of five regulation modules. The regulation modules set out more detailed laws that a body corporate must follow. The relevant module is listed in the scheme’s community management statement (CMS).

A body corporate can vote to change its regulation module at any time, provided:

• the body corporate votes by special resolution at a general meeting to change its CMS (section 62, the BCCM Act);

• the scheme meets the criteria set out in the relevant module – for example, changing to the Accommodation Module requires the lots to be mostly accommodation lots (lots that are predominantly let, available to be let, or part of a hotel), whereas the Standard Module has no criteria to be met.

• for schemes under the Standard or Accommodation Module:

• no votes are cast by proxy at the general meeting; and

• such a motion is not considered more than once in the body corporate’s financial year.

An explanatory note in the approved form – specifically, a BCCM Form 19 outlining the implications of changing a regulation module – must accompany the voting paper for a general meeting where a regulation module change is proposed. The mandatory inclusion of the BCCM Form 19 ensures owners have access to the information necessary to make an informed decision.

Change of regulation module: effect on existing contractual rights

There is a common misconception that changing the regulation module is a loophole bodies corporate can use to reduce the length of a caretaking agreement, as various matters about engagements (including the maximum term) are set out in each module.

This is not the case.

Protection is afforded to caretakers under section 128 of the BCCM Act, which confirms that the provisions of the existing regulation module

applying to the engagement or authorisation continue to apply until the engagement or authorisation ends. This means a body corporate cannot strategically use a change of regulation module to reduce an existing caretaking agreement.

For instance, if an Accommodation Module scheme has the maximum 25-year caretaking service contract in place, the body corporate cannot reduce the term of the agreement by changing to the Standard Module (maximum 10 years).

The Accommodation Module provisions continue to apply to the agreement after the change.

The body corporate will only be required to observe the 10-year limit under the Standard Module if they enter a new agreement.

Change of regulation module: possible impact on the value of management rights

As discussed above, section 128 of the BCCM Act preserves the terms of an existing agreement

even if there is a change of regulation module. However, there may be unanticipated consequences for the future value of the management rights should the regulation module be changed.

For example, management rights may decrease in value if a scheme changes from an Accommodation Module to the Standard Module, as the 10-year maximum term would apply for new engagements. Therefore, the caretaker may incur a monetary loss if they sell the management rights.

Also, reducing the term from a 25-year limit to a 10-year limit may give prospective buyers the impression that the scheme is not “caretaker-friendly”. However, a body corporate may simply be exercising reasonable caution for any future agreements.

While we acknowledge these concerns, it is important to recognise that a change of regulation module may equally serve to benefit a caretaker. For instance, if a caretaker is successful in a proposal to change from the Standard Module to the Accommodation Module, the value of their management rights may increase.

Case study - The Reserve [2017] QBCCMCmr 124

The applicant (an owner and the caretaking service contractor for the scheme) sought a declaration that a motion passed at an extraordinary general meeting (EGM), to change to the Standard Module, was void.

The applicant also sought an order that the body corporate record a new CMS and revert to the Accommodation Module.

The applicant firstly contended that the will of the owners was not properly ascertained due to the body corporate’s failure to include the approved form (BCCM Form 19) with the EGM notice.

The adjudicator acknowledged that the applicant was “correct in stating that the legislature specifically considered that a change of regulation module requires exceptional disclosure to members of the body corporate, explaining the effect of the proposed change”.

However, the adjudicator noted that the body corporate had taken steps to rectify this initial oversight. A subsequent EGM was held where the BCCM Form 19 was sent out with the voting papers and the body corporate resolved, by special resolution, to ratify the preparation and registration of a new CMS.

The applicant further argued that the resolution which passed at the subsequent EGM involved a fraud on the power – where “power is duly executed ... but there is some bargain, or some ill motive, which renders the execution fraudulent”. It was submitted that the regulation module was changed to prevent the body corporate from entering any agreement over 10 years and to “significantly diminish the saleable value of the applicant’s management rights”.

The adjudicator determined that there was no evidence that the body corporate’s decision was “motivated by a desire for personal gain at the expense of a minority or that its actions were dishonest”.

The adjudicator observed that the decision to change the regulation module was made at a general meeting by owners who had received sufficient information to make an informed decision.

Therefore, the application was dismissed.

Extending caretaking agreements indefinitely: the current position

Bodies corporate, caretakers and prospective purchasers of management rights should note that, despite any change of regulation module, an existing caretaking agreement containing options of extension or renewal can continue indefinitely. Alternatively, where the body corporate consistently votes against any further extensions, the agreement can wind down to zero years.

This question about continuous extensions – or “top ups” as they are known colloquially in the body corporate industry –has been clarified for the first time in a recent decision by a BCCM office adjudicator.

The adjudicator’s decision in Atlantis West confirms the longstanding practice of topping up caretaking agreements multiple times.

Case study –Atlantis West [2024] QBCCMCmr 340

The applicant owner submitted – in relation to sections 140(2) and 141(2) of the Standard Module regarding the term limit of service contracts and letting authorisations – that caretaking agreements can only be topped up (extended) once, not indefinitely.

Therefore, the applicant sought a declaration that the resolution passed at the annual general meeting to extend the existing caretaking agreement for a further period of 1 year and 10 months was void, as the variation would contravene the term limit provisions in the Standard Module.

The adjudicator ultimately dismissed the application and determined that the proper interpretation of section 140(2) of the Standard Module allows for a caretaking agreement to be topped up any number of times, provided that:

• the body corporate resolves to approve the extension by ordinary resolution at a general meeting;

• each extension is for no more than five years; and

• the remaining term never exceeds the 10-year maximum term under the Standard Module.

In reaching this conclusion, the adjudicator considered relevant explanatory notes and the wording of the Standard Module sections in dispute.

The adjudicator also referred to section 86(7) of the Standard Module, which stipulates that a motion proposing to amend an engagement or authorisation to give a right or option of extension or renewal to a service contractor or letting agent cannot be considered more than once in a body corporate’s financial year. Importantly, the adjudicator observed that “it is difficult to reconcile the presence of section 86(7) with the applicant’s argument that the power granted by section 140(2) ... can only be used once”.

Review rights

In specified circumstances, the BCCM Act enables newly established bodies corporate to request a review of a service contract that was arranged by the developer (original owner). Service contractors also have an opportunity to seek a review under these provisions.

The scope of the review is limited to the fairness and reasonableness of the terms of the agreement, regarding the functions, powers, or remuneration of the service contractor.

Such a review must be conducted by an ‘appropriate person’. The BCCM Act refers to an ‘appropriate person’ who, in the ordinary course of their business, has knowledge of the functions and powers of service contractors and the remuneration for performing those functions and powers.

More information about when a service contract is eligible for review and the details of the review process can be found in sections 130 to 135 of the BCCM Act.

Although these review rights do not extend to the length of the contract, these provisions give bodies corporate and caretakers the ability to ensure contractual terms are fair and reasonable for the life of the agreement.

While the BCCM Act and its associated regulation modules endeavour to strike an appropriate balance between the rights of bodies corporate, developers and those holding management rights, conflict is bound to arise in certain situations.

As well as educating our readers about these critical issues, we hope that this article serves as a reminder about the value of maintaining a harmonious working relationship to avoid unnecessary disputes wherever possible.

If you would like to learn more about caretaking service contractors, read our articles about disputes with caretakers and their role in Common Ground issue 38 and disclosures and commissions in Common Ground issue 46.