There are many legal complexities associated with the ownership
of property by Custodians on behalf of Responsible Entities for
Managed Investment Schemes. One example from a Landlord's
perspective is the enforcement of leases against tenants. Taking
action where breaches of a lease remain outstanding is a necessary
step to ensure profitability of investments, performance of the
Scheme for investors and compliance with statutory obligations.
A recent Queensland Court of Appeal case identifies potential
issues in circumstances where the respective rights and obligations
of the Responsible Entity and Custodian are not clearly understood
when it comes to lease enforcement.
Kern Consulting Group Pty Ltd & Anor v Opus
Capital Ltd  QCA 111
In this case, a Responsible Entity and a Custodian entered into
a Custody Agreement under which the Custodian agreed, among other
things, to take legal ownership of real property acquired with the
funds supplied by the Responsible Entity.
Under the Custody Agreement, the Custodian became the registered
owner of an office building. It has previously been stated that a
Custodian is effectively a trustee, holding the legal title to the
property for the benefit of the members of the Managed Investment
The Custody Agreement outlined certain rights and obligations of
the parties, including the obligation of the Responsible Entity to
manage the Scheme property as though it were the owner. The
argument in this matter centred on whether the Responsible Entity
or the Custodian was the trustee for the purpose of commencing
On the basis that the Responsible Entity understood that it was
given the requisite authority under the Custody Agreement, it
commenced proceedings against a tenant who had failed to pay
significant amounts of rent and outgoings. The Responsible Entity
also relied upon Chapter 5 of the Corporations Act 2001,
which provides that a Responsible Entity holds property on trust
for members of the Managed Investment Scheme, inferring that the
Custodian consequentially holds legal title to the property on
trust for the Responsible Entity.
The Court decided that the Custodian held legal title to the
property and, accordingly, the interest as landlord. Therefore the
Custodian enjoyed a contractual right to receive rent and payments
under leases from its tenants. Furthermore, and contrary to the
view of the Responsible Entity, the Court determined that there was
nothing in the Corporations Act or the Custody Agreement
that vested ownership of the right to recover outstanding amounts
under the leases in the Responsible Entity.
Accordingly, the Court held that the Custodian, rather than the
Responsible Entity, was the proper party to bring proceedings.
While the Court consented to the Custodian being joined as a
party to the proceedings upon further application by the
Responsible Entity, costs were awarded against the Responsible
Entity for the original application and the appeal.
In light of the Court's decision in this matter, Responsible
Entities operating under Custody Agreements should consider:
Reviewing Custody Agreements to make sure that the Custodian
expressly assigns all choses in action in favour of the Responsible
Entity and authorises the Responsible Entity to do all things
necessary to enforce those rights, including commencing proceedings
in the name of the Responsible Entity to recover amounts owing to
the Custodian by tenants and guarantors.
Including similar provisions and acknowledgements in lease
Serving notices and commencing proceedings in the name of the
Custodian, or joining the Custodian in proceedings with the
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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