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Smart questions to ask before you buy management rights

Before you decide to purchase management rights, it is important that you seek legal advice in relation to the documentation. You are buying the rights contained in contracts with the body corporate . These contracts are not standard and differ between each complex. 

Some smart questions to ask before you purchase management rights:

What structure  should I use to purchase the management rights?

Choosing the right structure  when purchasing management rights is really important. The right structure  can have a significant impact on the amount of transfer duty  you pay and any future capital gains tax . There are various entities  to consider – a company, a company acting as trustee, or one or both of the individuals involved. 
There are normally 2 contracts when purchasing management rights – one to deal with the purchase of the real estate (the manager’s lot) and the other to deal with the purchase of the business. There can be separate entities between those 2 contracts. The entity purchasing the manager’s lot is purchasing a residential lot and so it will have special arrangements for both transfer duty  and capital gains tax  if structured correctly. Speak with us before you sign any documentation to ensure that you structure  your purchase in the best possible way. 

How much will I be paid by the body corporate?

You should be aware of how much the caretaker’s salary is and whether it is increased each year. The body corporate  will pay you a fixed remuneration for your caretaking  services. It is important that you ensure the documentation reflect the salary increasing each year, at least linked to the consumer price index.  
You need to understand your responsibilities associated with caretaking  and ensure that you can meet those requirements.  The caretaking functions are usually set out in the caretaking agreement . Some agreements may be general while others will set out the specific daily, weekly, monthly duties. Some functions must be carried our personally (or by contractors you arrange), while others must be undertaken by outside contractors paid for the body corporate  and the work supervised by you.

How many owners are in the letting pool?

The letting pool is the number of owners who use your letting services .  Payment for the letting service is made by owners who choose to use your service. The more using the letting services , the more income being paid. Remember, you are not otherwise paid by the body corporate  for providing the letting service . You need to understand how many units are in the pool, how many units are owner-occupied and how many are with outside letting agents. You must have a separate agreement with each owner setting out the charges for collecting the rent and looking after the unit, using the prescribed form.

What are the costs involved?

There are 2 main cost components in purchasing management rights – the cost of the real estate and associated office, and the actual management rights business. As well as these costs, you will also have transfer duty  on the management rights business, legal costs, accounting costs (including costs associated with conducting due diligence  on the figures provided by the seller) and the costs of obtaining the resident letting licence. 

Where is the office located?

When purchasing management rights, traditionally you purchase a unit in the development.  You need to understand whether the office / reception area for the business is located within the unit, or if there is a separate area on common property .  If the office is on common property , you need to ensure that you have authority to use this area (usually by way of an exclusive use by-law).  The location of the office and your right to use that area is important, particularly when it comes to renewing or ending your agreement.

How long do the caretaking and letting agreements have to run?

It is really important to understand how long is left to run on the management rights agreement . Management rights have a definite beginning and end date. The maximum term of management rights agreements  will depend upon the relevant regulation module that applies to the community titles scheme .  Under the standard module the maximum term, including all options to renew, is a period of 10 years.  Under the accommodation module the maximum term of management rights agreements  is 25 years.

Upon the expiration of the management rights agreements , you have no right to insist that the body corporate  enter into new management rights agreements  with you and the body corporate  is not legally obliged to renew the management rights agreements  with you. Understanding the time left to run on the current agreement and having a reasonable period of certainty is obviously important.

To find out more about management rights, read our further articles in the series - links

If you are considering purchasing management rights, please contact us on 07 5443 9988 or [email protected] and we would be happy to assist you in understanding the documentation and guiding you through the process. 

Argon Law is a Sunshine Coast law firm based in Maroochydore.  We are commercial lawyers with many years of experience in business and property and are eager to assist you in any way we can.

Always ensure you seek professional advice for your specific circumstances.  The above is not advice and is intended to be general in nature only.

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