When acting for sellers or buyers of management rights, we are often confronted with situations where management and letting agreements have a relatively short period to run, for example less than 5 or 6 years. 

Buyers have three options under most sale contracts if they regard the remaining term of the agreements as too short: 

1. cancel the contract (although this does not generally occur);

2. ask if the seller is agreeable to seeking new agreements from the body corporate before settlement;

3. settle on the basis that the agreements remain "as is", and then seek new agreements from the body corporate, once they are established in the complex and get to know the other owners. 

New Agreements Before Settlement

Disadvantages - 3 percent rule

The disadvantage with obtaining new agreements before settlement, from the outgoing manager's perspective, is the 3 percent rule. If the manager obtains new agreements from the body corporate and then sells the management rights business within three years, the body corporate is entitled to ask for a percentage of the sale price of the business.  The percentage is three percent if the manager sells in the first year, two percent in the second year, and one percent in the third year. 

Advantages

It has been our experience that less than half the bodies corporate entitled to such a payment ask for it, and even then managers may be successful in having their body corporate waive the payment. In quite a number of transactions in which we have been involved, unit owners have actually voted against the imposition of the payment. 

Nevertheless the 3 percent rule should be uppermost in a manager's mind when deciding whether to ask their body corporate for new agreements.  If there are less than five or six years left to run on the agreements, the manager may have difficulty selling unless they ask the body corporate for new agreements. 

New Agreements After Settlement 

Advantages

The buyer may wait until after settlement before asking the body corporate for new agreements.  The advantage of this is that the 3 percent rule will not apply to the outgoing manager. It also looks better from the body corporate's point of view if the manager has been in place for a while before asking for new agreements. 

Disadvantages

The possible (but unlikely) risk for a buyer if they wait until after settlement before seeking new agreements from the body corporate, is that the body corporate may not agree.  

We usually have no difficulties obtaining new agreements for managers but there are of course some unit owners or bodies corporate that make life difficult for managers by opposing new agreements. Many buyers who are concerned about the term remaining on the agreements have been satisfied to settle on the basis of the agreements "as is", and then seek new agreements after settlement.  This is particularly so if buyers are confident that:

1. they will be able to give good value for money to the body corporate;

2. there is no history in the complex of the body corporate being difficult when entering into new agreements;

3. they will be able to develop a good relationship with the body corporate.  

3 Percent Rule - Window of Opportunity for selling 

Managers should carefully consider the timing of new agreements with the body corporate.  Bear in mind that if a manager intends selling in the three years after the agreements are put in place, they will be subject to the 3 percent rule.  If the agreements are for a term of 10 years, the manager may want to wait until the end of the third year after new agreements are in place before selling, in order to avoid the 3 percent rule. There will then be six to seven years left to run on the agreements.  This is obviously a good time to sell. 

If a manager with 10-year agreements waits any longer than the end of the third year, they may need to obtain new agreements and will again be subject to the 3 percent rule.  Of course, if the complex is in the accommodation module, the manager can possibly ask for 15-year agreements, or up to a maximum of 25 years. If the manager then sells after the end of the third year of 15-year agreements, a buyer should still be completely satisfied with 12 years remaining.