Published: 12 February 2010.

Contributed by Frank Higginson of Hynes Lawyers

Welcome to the new decade!

A recent supreme court decision in New South Wales has cast more legal light on the issues surrounding options in management rights agreements and what constitutes a default. While this decision is not formally binding in Queensland, it will be very persuasive.

The situation was that a resident manager had an agreement for a five year term with a five year option. Exercise of the option was conditional upon the resident manager complying with the management agreement during the term. This was an unusual provision as most agreements allow options to be exercised by the resident manager if there is no continuing default.

The litigation related to whether compliance had occurred, and whether the exercise of the option was valid.

The good news for resident managers is that the decision confirms that trivial breaches of management rights agreements are not ones that courts will generally allow to bring an agreement to an end. It was held that this was ‘necessary to avoid the absurdity which would otherwise flow from a wholly trivial default nevertheless depriving a party of a significant commercial benefit.’

While this was found with respect to the exercise of an option in this case, we believe that it applies equally to threatened terminations. Minor breaches should not lead to termination. What constitutes a minor breach is always going to be a question of fact and degree.

The bad news was that, amongst the myriad of allegations made by the owners’ corporation, it was found that the resident manager had not complied with the management agreement in one singular respect, which related to the completion of annual common property audits (which is a rather unusual duty in itself). As a result of this the court found that the management agreement had not been complied with and as a result the exercise of the option was not allowed. This was despite the fact that the owners’ corporation had not complained of the failure to perform this duty at the time.

While this is an important decision, it did deal with an unusual provision in the agreement. This reinforces the need to obtain expert advice on what your agreement provides if there is any uncertainty.

So what is the lesson here?

From a resident managers perspective it is simple – know your agreement, and do what it says you must do. Failure to understand your role can quite clearly lead to catastrophic consequences.

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