Management Rights and Advisory Service

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Who are Mahoneys?

The Management Rights partners at Mahoneys are John Mahoney and Matthew Manz. John has been at the forefront of the management rights industry for over 17 years. He is passionate about the industry and was awarded life membership of the Australian Resident Accommodation Managers Association (ARAMA) for his voluntary work representing the industry at all levels of government. He has been involved in the development and subsequent review of all relevant legislation. He is regularly consulted in this specialised area by other lawyers as well as his many clients.

Matthew Manz has over 8 years in the property and Management Rights. John's experienced paralegal Margaret has worked with John for over 20 years.

The professional and support staff at Mahoneys share a commitment to make Mahoneys the number one choice of resident managers in Queensland.

Commercial Advice for Buyers of Management Rights Off-the-Plan

Buying Management Rights "off-the-plan" in new complexes offers not only opportunities but offers some substantial risks.

The biggest risk is not achieving the number of expected letting owners. That could result in paying too much for the rights.

That risk is compounded if marketers try to take control over the rental process. That problem seems to have been reduced in recent times, with most developers, marketers and selling agents being very supportive of Resident Managers.

The rewards can be great if a Manager buys at a low price, builds up the business, and sells with a higher income. But if the actual income is lower than projected, the Manager may well sell at a loss.

Some developers are aware that because of their track record, they are able to sell the rights at high multiplier. Their projections though are often based on high estimates of rentals, and on the assumption that many or all of the units will be sold to investors. Buyers should consider these assumptions carefully.

There are steps a buyer can take to increase the prospects of a successful off-the-plan purchase. At least the following issues should be addressed:-

  1. Seek experienced legal and financial advice. How you structure your purchase contract is critical. Carefully review any projections. Have these checked by an experienced Management Rights accountant. Deal with a respected specialist Agent.
  2. Establish the track record of the developer. Do they usually sell all or most of their units to investors? How are the units marketed, and by whom? Have any promises been made to the investors about the achievable rental, or the expenses to be incurred? Are these realistic? Will the expenses represented reduce your ability to charge normal fees and commissions?
  3. Make sure your purchase contract is subject to legal due diligence enquiries. Obtain a comprehensive due diligence report from your solicitor.
  4. Seek to have the developer agree to provide names and addresses of investors in the course of buying a unit. This enables you to make contact with them at the earliest opportunity.
  5. Ask for early possession of the unit and commence operating the business, once construction is finished. This gives you an opportunity to advertise and arrange tenants before the pressure of settlements of the investors' units arises.
  6. Will the developer allow its unsold or unsettled units to be rented out by you prior to settlement? The developer will have to ask the investors if this is acceptable.
  7. Seek a contractual undertaking by the developer in the purchase contract that they will not undertake any letting in the complex, either themselves or through any of their sales agents.
  8. Are you paying a price that takes into account the risk that the units might be sold to owner occupiers? Or is the purchase price calculated at a higher multiplier, on the basis that the units will all be sold to investors?
  9. If on a high multiplier, seek to negotiate a rebate at settlement. The rebate (or "claw-back") is for any units which are not in your letting pool. There are several different ways this can be treated. The methods used can be very complex and are often the subject of intense negotiations. Some developers are reluctant to agree to this type of rebate. The higher the multiplier, the more appropriate it is that the developer should agree to a rebate.
  10. If buying rights in a holiday style or serviced apartment complex, the Managed Investments Act needs to be considered. We have other checklists on this if it is relevant to you.
  11. The impact of GST on the price of Management Rights also needs to be considered. The rules differ to existing businesses. Obtain accounting advice about the effect of the GST. There are steps you can take to minimise the effect of GST on your purchase.
Do Agreements ever end?
John Mahoney

The relatively high value of management rights businesses comes about because of the expectation that if the manager performs the duties properly, the agreements will be renewed. There is the added protection of a body corporate being precluded from receiving a benefit for entering into new, or renewing old, agreements.

Experienced managers have no concerns about having their agreements renewed but potential newcomers to the industry see this as one of the major risks of the business.

Until 2001, I had only ever experienced one situation where a manager effectively lost the management rights to a complex. In 2001, I saw it happen twice. In the first case, a manager of a small complex forgot to exercise his option and subsequently failed at an E.G.M. to secure new agreements. He was very strongly opposed by the committee and fell just short of the required numbers with many owners blaming the manager for perceived low returns.

The other situation involved a medium size complex where managers of some 7 or 8 years were unable to convince owners to enter into new agreements, the old ones having expired. The body corporate put the rights out for tender. The existing managers came in at an extremely low remuneration (about 60% of what had been determined as the market remuneration a few years earlier) but were beaten by a tender $1,000 lower. The matter is not over yet. Our manager clients, who also hold full real estate licences, are still letting out almost all of the units being let in the complex.

These examples highlight that agreements can and do come to an end, albeit in a very small number of cases. Like any business, even this one has risks. In at least one of them, the outcome would have been different if the by-laws had been properly structured, but that was overlooked at the time of the purchase by a solicitor not experienced in management rights.

From my experience the following points are important:

  • Build and maintain strong relationships with as many owners as possible
  • Its often not enough to do a good job, its important that owners know you are doing an excellent job - use your newsletters to tell this to the owners
  • Be careful that you don't get too complacent if you have been in the one complex for a long time
  • Do not dismiss complaints lightly - do something, and be seen to be doing something, about them
  • Try and get your agreements renewed well before their end - I suggest 2 or 3 years before
  • Always diarise the date by which you have to exercise an option
  • Use a solicitor with the experience to ensure that the by-laws offer you protection.
Letting Appointments - How Important are they?
John Mahoney

Very! Even more so under the P.A.M.D. Act. An agent cannot claim orretain commission unless the agent holds a signed letting appointment. It must be in the prescribed Form 20. There is also a maximum penalty of $7,000 for a failure to comply. You are also likely to be in breach of your Letting Agreement with the body corporate, placing your business at risk.

The government followed only a small number of ARAMA suggestions in developing the Form 20a. Even then they were dealt with in unusual ways. That lead to a lengthy, confusing document to which a number of special conditions need to be added to make it effective.

In conjunction with ARAMA I have developed a sample Form 20a and special conditions for permanent, short term and combined lettings. The combined one is really quite unique and allows a manager with different units in the different letting pools or with units that are used for different lettings during different times of the year to use the one form in all cases. We can make these available to our clients in hard copy or electronic format.

Should new managers get new appointments when they take over, or just rely on the previous manager's? There are now complex provisions in the Act governing assignment of appointments. Sellers and Buyers of Management Rights should ensure that there is an assignment clause in the form 20a, otherwise steps will need to be taken to assign the forms, including approval of the letting owners.

To assist in encouraging owners to sign and return the forms you might make the following points:-

  • It is a requirement under the legislation and your agreement with the body corporate that you get the form signed;
  • The forms are designed to protect the owner more so than the manager;
  • The O.F.T. has advised that you should not let out the unit without the signed appointment;
  • Other owners in the complex have signed and returned the form to you.
  • If despite this you are still unable to get the form signed by an owner, you should seriously consider advising the owner that you are unable to let the unit out at all.

About Mahoneys

Mahoneys has an enviable reputation for its service to clients and for the competence of its partners and staff who offer expert services in Management Rights Law, Business and Commercial Law, All aspects of Property Law. One of their major areas of expertise is in the field of management rights.