At the outset it is important to understand the distinction between what the management rights industry calls a ‘top up’ and what is the exercise of an option (which is an existing contractual right).
Management rights agreements are all structured differently. They can be straight 10 or 25 year terms to take that term through to the maximum allowable under the relevant regulation module. They can also be any term less than the maximum allowed under the module.
One way to structure an agreement is to have an initial term and any number of options. As simple examples, a 15 year term with a 10 year option (totalling 25 years) or a 5 year term with a 5 year option (totalling 10 years) or a 3 year term with a 4 year option and a 3 year option (totalling 10 years) and so on.
‘Topping up’ your agreements is adding a new right to your agreement. It is not exercising an existing right under those agreements (which is what exercising an option is). To properly extend the term you need to be granted the option (variation) and when it falls due, exercise the option (extension). From a banking and general industry perspective provided that the option is exercisable at your discretion, it is generally considered to be term that exists. So, with the 15 year term and 10 year option example above, everyone basically regards that as a 25 year agreement.
What we talk about when we suggest you ‘top up’ your agreements is that you create a further option term which extends the maximum tenure of your management rights agreements. So, using the same example above, your agreement would then be a 15 year term with a 10 year option and a further 5 year option. Assuming the first 5 years of the term had elapsed, the agreement would then be topped back up to 25 years to be the maximum amount allowed under the Accommodation Module.
Why would you do this?
It’s simple. As a well recognised industry valuer says ‘certainty equals value.’
Longer tenure creates more certain business income. More certain business income means you at least stabilise the value of your business, but potentially increase it.
Take this example – there are two management rights businesses side by side that are for all intents and purposes identical. One had management rights agreements for 10 years and the other had 25 year agreements. It is self-evident which one would be easier to sell, and it follows that there may well be a difference in capital value between the two of them.
For what is a relatively little legal spend you can secure your tenure for a further period and this is why we recommend to managers that they do it whenever they think the body corporate in general meeting (and hopefully the committee) would be agreeable to supporting that variation.
It is best to do it at the annual general meeting as the motion gets included with all of the others. People do not focus on just your top up motion as they may at an EGM.
We can draft the legal documents required to create a valid variation as well as help craft a marketing strategy for owners if needed.