Extra Time - Use It

Published: 16 March 2007.

Almost invariably the date of a service contractor?s engagement or a letting agent?s authorisation (contract) commences after the body corporate resolves to enter into the contract. Usually the contract is executed immediately after the general meeting, but commences some time after that date. Section 81(2) of the Body Corporate & Community Management (Accommodation Module) Regulation 1997 allows the period between the date of the resolution (which is usually the same date as the contract) and the date of commencement to be up to 12 months. This allowance of 12 months can make a lot of difference in some circumstances, so why not take advantage of it?

For example, the clock for the transfer fee under section 83(2) of the Accommodation Module can be started up to one year earlier, thereby shaving 1% of the fee. In the decision of Sirocco Resort [2003] QBCCM Cmr 29 the adjudicator determined that the contract date under section 83(2) was the date of execution of the contracts (6 September 2001) and not the date the contracts commenced (24 September 2001). This common sense finding was critical because the body corporate?s decision to consent to the assignment of the contracts was made between the first annual anniversary of the execution and commencement dates (i.e. between 6 September 2002 and 24 September 2002). The 18 day difference between the dates meant the transfer fee was reduced from 3% to 2% of the fair market value of the contracts.

Another example is maximising the term of contracts in anticipation of a sale. Consider a caretaker in a Standard Module scheme working out the last 12 months of a 10 year engagement. The next annual general meeting of the scheme is due in two months time, which is 10 months before the expiry of the engagement. The body corporate has already agreed the terms, in principle, of a new 10 year engagement with the caretaker. The caretaker has also decided that he may sell the business within the next couple of years.

One strategy for the caretaker might be to have the new engagement approved at the AGM, enter into the new engagement immediately after the AGM and use the new engagement to terminate the old one. The transfer fee clock is started on execution and commencement (which in this case is the same day), but by the time of sale a couple of years later the caretaker only has around eight years of the engagement left to sell. A remaining term of eight years might be fine if the sale is a quick one, but if there is some delay then the engagement might get very close to the seven year minimum term that most financiers insist upon.

A better strategy would be to enter into the new engagement, which is approved at the AGM and entered into immediately after the AGM but which commences on the day after the existing engagement expires. The 10 months between execution and commencement mean that by the time of sale the caretaker would have around 9 years left to sell. That extra time should make the sale easier and the caretaker could even use a bit of that time to better position the business for sale.

Why not take advantage of the extra time that Section 81(2) of the Accommodation Module gives?

Article written by Michael Kleinschmidt at Munro Thompson Lawyers March 2006