Despite the body corporate being a party to the management rights agreements (Agreements), they are usually only involved toward the end of the assignment process. If the process is not managed carefully, the rights and obligation of the body corporate can be affected.

In this article we discuss the stages of the assignment process, why the body corporate is involved, what rights the body corporate has, and how to help a body corporate in the assignment of management rights agreements.

 

What are the assignment stages?

The sale of a management rights business usually involves the following stages:

1. Advertising the business for sale.
2. Signing contracts (which are usually subject to a number of conditions).
3. Accounting due diligence (checking the net profit of the business).
4. Legal due diligence (checking the validity of the Agreements).
5. Finance.
6. Body Corporate consent.
7. Settlement.

It is ordinarily the case that it is only at step 6 that the body corporate will become involved.

 

Why is the body corporate involved?

Because the body corporate is a party to the Agreements the body corporate’s consent is required for the Agreements to be transferred to the buyer.

 

How is consent provided?

Consent is usually provided by the committee within 30 days of being provided with all of the relevant material needed to make a decision.

 

What can the body corporate do as part of the assignment?

The body corporate can:

• ask for an interview with, or meet, the buyer;
• ask questions of the buyer or for further information related to the assignment; and
• if appropriate, ask the buyer to carry out further training.

 

What information should be provided to the body corporate?

The body corporate is entitled to consider the following information:

• Character of the buyer and any related persons.
• Financial standing of the buyer.
• Proposed terms of the transfer.
• Competence, qualifications and experience of the buyer.
• Anything else the Agreements provide for.

The interview questions should relate to this information.

Usually this will include, resumes, references, credit checks, police checks, qualifications, details of the buyer’s financial position, details of any training, the proposed terms of the transfer and anything else the Agreements provide for.

 

How is the buyer’s financial standing proven?

The buyer’s financial standing can be proven by a number of means. This can include any of the following:

• Provision of statements of assets and liabilities.
• Confirmation that the buyer is purchasing the business without the involvement of a bank (if the buyer can purchase the business without a loan, this would show that they are of sufficient financial standing to operate the business.
• Confirmation that the buyer has obtained finance from a bank to complete the purchase of the business (if the buyer can pass the credit requirements of a bank, this would show that they are of sufficient financial standing to operate the business.

 

Is the information provided to the body corporate kept confidential?

No.

The body corporate must keep all documents provided to it on the body corporate record. Interested persons have the right to inspect the body corporate record subject only to the material being defamatory or subject to legal professional privilege.

 

Is there any fee payable by the seller?

The seller must pay the:

• body corporate’s reasonable costs related to the application for the body corporate’s consent; and
• transfer fee (this is only payable if the consent to the assignment of the Agreements is given within 2 years of the seller buying the management rights business).

 

What can’t the body corporate do as part of the assignment?

The body corporate cannot:

• unreasonably delay or withhold consent to the assignment;
• receive a fee or consideration for approving the transfer other than reimbursement of its costs or the transfer fee (if applicable); or
• leverage the request for consent to renegotiate the management rights agreements – this can be asked of the seller and buyer (or by the seller and buyer) but cannot be insisted upon.

 

Should the body corporate get legal advice on the assignment?

Yes.

The body corporate will be asked to sign legal documents that may affect its rights and obligations.  For example – the body corporate may be asked to confirm something that is not legally correct or that requires general meeting (not committee) authorisation.

 

It is important that the body corporate obtains advice from a body corporate lawyer experienced in management rights transactions to protect its legal position.

 

This article was contributed by Todd Garsden, Special Counsel – Mahoneys Lawyers

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