In this video, OMB Solicitors Partner Tom Robinson discusses what a buy-out in body corporate actually means.
Hi everyone. [I’m] Tom from OMB Solicitors.
Today I wanted to have a discussion a little bit about a term that I see coming up a little bit more and more at the moment relating to management rights, which is a buyout of the management rights by a body corporate lawyers Gold Coast. I wanted to talk about this because I think the term buyout is one that’s used quite often because it’s quite an easy concept to understand. But there are a few things for a body to know about that process and how a buy-out can actually occur. And the starting point is really that we’re not buying the management rights as a body corporate.
The reason we’re seeing this is because the terms of these longer-term management rights are starting to come closer to their expiration date. So these agreements that have been for 25 years or more and extended time and time again are coming to a period where they are actually coming to their expiration and because they’re not necessarily sellable on an open market by the caretaker, your caretakers are then seen an opportunity to negotiate with the bodies corporate about mutually terminating the agreement early. And the term that’s used is a buyout. And the reason being is because whilst the body corporate isn’t actually buying the management rights to operate them and if we remember that management rights commonly consist of a unit caretaking agreement and the listing authorization agreement, and with those together they form the manager’s package. So we’re not buying that package as a body of corporate. Rather we are agreeing to mutually terminate the caretaker agreement and the letting agreement.
What usually happens from that process then is the mutual termination, not necessarily buy-out. The reason that terminology I think gets used is because there is an exchange of consideration which is money to the caretaker by the body corporate to achieve that mutual termination. And that’s where I think the term buyout coming from because we’re essentially paying the agreements out early based on a commercially monetary amount to the caretaker. So what that actually then involves and results in if the process actually goes through is the agreement between the caretaker and the body corporate is that the caretaker agreement lending agreement will come to an end.
The caretaker will then be left with their lot, although they won’t be the caretaker anymore. So they will be like any other lot owner if they still own a lot in the scheme in which they can live in the lot, sell the lot, rent the lot out, whatever they desire like any other owner and then they’re letting business. And again, the body corporate is not going to own the letting business or buy the letting business because a body corporate cannot operate a business. So from that perspective, whilst we terminate the letting authorization and usually as part of that, and in some instances that might remain is because the caretaker will then do what they desire with their actual letting business, their rental role. Now that might be them continuing to operate it or selling it to an external agent and that’s a matter for the caretaker in their capacity as the lending agent.
So what we ultimately end up with is a commercial sentiment to end those really, the caretaking agreement, essentially, early of its term and then the body of corporate has the ability to manage and engage other contractors or alternative contractors for the maintenance of the common property.
There are a lot of other factors to consider in the process but that’s generally the synopsis of how these buyouts occur and that’s where that term comes from so I do get committees coming to me asking me how do we buy the management rights so we can run them and the answer is you’re not buying them and you won’t be running the management rights. We can’t operate them. It’s simply a matter of looking at a way to end them early and that’s by payment of some consideration but other matters that we will need to look at obviously is making sure that there’s a proper handover process that the body corporate lawyers Gold Coast resolves to enter into an appropriate agreement with a caretaker that records the mutual termination that the caretaker obviously hands over, like I say all their books and records and so forth and how the body code is going to fund that commercial settlement amount as well.
So there’s a number of factors that will need to be considered in that process but that’s it in a nutshell and certainly, if anyone has any questions or would like to discuss it further please don’t hesitate to contact Our Gold Coast Lawyers.