Three things to know about separating lots:
- High residential prices are placing pressure on the management rights model
- Managers are seeking to separate lots from businesses
- Managers should sound out their body corporate for support before proceeding
▶️ Watch the 3.5-minute explainer video below
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Separating lots from management rights
One of the biggest themes in management rights over the last couple of years has been the separation of the real estate from the business component. The traditional management rights model was a unit and a business; however, ‘business only’ is the latest favourite phrase for buyers.
Certainly, we're seeing many more ‘business-onlys’ sold off the plan, and we're seeing clients come back to us asking to separate the obligation to own or reside from their management rights agreement.
Why separate a management rights business from the lot?
From an industry perspective, this trend is a little concerning because in one sense it takes away from the strength of the management rights model, where the manager is actually living on site.
But the reality is that in an environment where interest rates are higher and the price of residential real estate is higher, having an expensive unit with a smaller net profit does make it harder to sell or finance the business.
First things first - get your body corporate on board
When we're approached by a client to deal with separating a lot from the business, the first question I ask them is: Is your committee on the bus?
This is because if the committee doesn't understand why you're doing this or what you're trying to achieve and lobbies against it, it's almost certain that this type of variation will be defeated.
The starting point is to make sure the committee understands what it is that you're doing – even if they're not necessarily supportive of it or maybe they're apathetic – that’s okay.
But a committee lobbying against this type of proposal is usually death to it.
If you consult the body corporate and they’re supportive, we then need to follow a legal process.
The legal process of separating a lot
The first thing is: What do the by-laws say?
The by-laws might provide special protection for a lot to be used for management rights purposes.
We need to deal with that because if you're not going to have a specific lot, then we need to take that out of the by-laws, and that requires a special resolution.
That requires 66% of those who vote to have voted in favour, and effectively no more than 25% of the lots against.
The next thing is to look at the management rights agreements themselves. We need to see what the obligations are about ownership and residency. It may be possible to change these to perhaps still have the obligation to reside but not own, or the obligation to own and not reside, or no obligation at all to own or reside.
We also look at the provisions relating to termination or relating to assignment and the duties in relation to occupancy or ownership because those will need to be addressed.
Changing management rights agreements requires an ordinary resolution of the body corporate, which is simply more votes for than against of those who choose to vote.
And then it's a question of putting those resolutions to the general meeting and letting owners know what it is that you're trying to achieve.
We can provide a helpful Q&A with the common questions that get asked by owners and how you're likely to respond.
So that's the process.
What this means for you
Most importantly, managers want to make sure there is engagement with your committee before you start because there's no point wasting money if they're going to be against it.
But if you need help on this complex issue, just reach out.
