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Owners Corporation update: Reducing the risk of making a toxic owners corporation management contract

Aug 20, 2012

Relations between an owners corporation and its manager often breakdown and become toxic as a result of disgruntlement over management fees charged and misunderstandings regarding the rights and obligations of the manager.

A management contract that clearly sets out the services are to be provided by the manager, the fees to be paid for those services and all the other rights and obligations of the manager minimises the risk that the relationship will become toxic.

Common problems

1. Double dipping

Often the description of services to be provided by a manager in return for payment of an annual fee includes accounting and, preparation of records and documentation.

In some agreements those services are also included in a list of additional or special services to be paid for on an hourly or at some other rate.

For example, some contracts include “the keeping of proper accounts and the preparation of financial statements” as part of the annual fee services and then list BAS preparation or compilation of records for audit purposes as an additional or special service.

Many lot owners expect the services provided in relation to accounting will cover the preparation of BAS documents and the compiling of records for audit purposes.

2. Meetings and site visits

Many owners corporations expect the manager to attend committee meetings and that service to be covered by the annual fee.

However, in some contracts provision is only made for attendance at one committee meeting when committee meetings are sometimes held as often as monthly or quarterly.

Owners corporations also expect the manager to carry out regular site visits and that service to be covered by the annual fee. Many contracts, however, provide for a fee per visit.

The manager’s obligations to attend committee meetings and regarding site visits should be carefully considered and fully set out in the contract and, if appropriate, confirmed as covered by the annual fee.

3. Owners Corporation Certificates

Some contracts include, as an additional or special service, the preparation and provision of certificates under Section 151 of the Owners Corporations Act.

Section 151 requires an owners corporation to give a certificate setting out certain information to any person who applies for it, e.g. an owner or prospective buyer of a lot.

Under that Act an owners corporation can charge a prescribed fee to the applicant for that certificate.

The contract with the manager should clearly state that the manager is to prepare and supply those certificates on the owners corporation’s behalf. The contract should also state that for doing so the manager is to be paid a fee equivalent to the fee the owners corporation is permitted to charge the person who applies for the certificate.

4. The manager’s skill, qualifications and knowledge

An owners corporation should make sure that it is aware of the manager’s capabilities and qualifications and the capabilities and qualifications of all the manager’s relevant staff members.

A management contract should provide that if there is a change in a relevant staff member, the manager must give to the owners corporation for approval information regarding the capabilities and qualifications of the new person.

5. Transfer of the Management Contract

Many contracts oblige the owners corporation to accept a transfer of the management contract by the manager to a third party.

Sometimes the manager’s power to transfer is limited but often only insofar as the new manager must be a member of a professional organisation for owners corporation managers.

From the owners corporation’s point of view the contract should state that the manager must prove to the reasonable satisfaction of the owners corporation that the proposed new manager is acceptable as a manager before the manager is able to transfer its contract.

From a manager’s point of view transferability of a contract is critical otherwise the manager may not be able to sell its business.

Making sure that the transfer provisions in a management contract meet the reasonable requirements and concerns of both parties is very important to both parties but often overlooked.

Management Contract Review

A relationship between an owners corporation and its manager which becomes toxic is likely to result in both parties incurring considerable cost and expending considerable energy in resolving the relevant Issues.

Furthermore, the resolution of the issues often leaves one of the parties (or both of them) poorer and dissatisfied.

It is, accordingly, vital that before management contracts are entered into that they are carefully considered and reviewed to minimise the risk that the relationship will become toxic.

Owners corporations and managers should be aware that standard form contracts used without proper consideration or appropriate alteration will not, in our experience, cater for the reasonable and appropriate needs and requirements of both parties and could easily lead to a toxic relationship.

More information

For more information, or if you would like us to review your contract, please contact Anton Block, Principal Lawyer and Head of Owners Corporation, on (03) 8600 8833 or ablock@kcllaw.com.au.

Note: This update is a guide only and is not intended to constitute legal advice.