Terminating Management Agreements - What do you mean – I am being reasonable!

As I always tell my children – I am a reasonable man.

Father’s are not obliged to act reasonably (they just do).

Bodies corporate though are obliged to act reasonably.

Section 94 of the Act requires a body corporate to act reasonably in anything it does, including in making or not making a decision.

We were recently engaged by a body corporate to consider whether it had a right to terminate a caretaking and letting agreement based on there being a deemed assignment of the agreement by the on site manager.

The agreement contained clauses which essentially said that where the manager is a corporation (as they often are) and the manager changed directors or its shareholding , then where that altered the effective control of the management company, that was a deemed assignment of the agreement which required the prior consent of the body corporate.

Over the course of some 4 years the management company changed the makeup of its board on several occasions. The shareholding in the company was also altered.

On no occasion did the manager seek the body corporate’s consent to the proposed alterations.

Regrettably, the manager had not been performing its duties under the agreement and the body corporate wanted to terminate the agreement.

Instead of trodding the vexed and long road of issuing a remedial action notice, the body corporate was hopeful it had a right to terminate the agreement based on there being an unapproved assignment of the management rights. In these circumstances a remedial action notice is not required.

Based on the fact scenario the body corporate has every right to think it was in a strong position.

BUT – was the body corporate acting reasonably if it terminated the agreement (by passing a termination motion in general meeting)?

On balance it would not have been a reasonable decision to terminate the agreement (and had the body corporate done so it may have been exposed to a significant claim for damages).

Despite there being changes to the board and to the shareholding of the manager, the day to management of the scheme was essentially unaffected.

There was no evidence that the body corporate suffered any prejudice as a consequence of the manager not obtaining the body corporate’s prior approval to the alterations.

Critically, had the manager sought prior approval to the alterations, it would have been unreasonable for the body corporate not to provide consent.

The take home message – even where it appears there is a right for a body corporate to terminate management agreements, acting on that right must be reasonable.

Let’s hope it never becomes written into legislation that fathers must act reasonably!

As always, if you have any body corporate issues feel free to contact us.

We’re here to help!

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The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.