A recent decision in the Supreme Court of New South Wales has cast doubts on the ability of a developer to retain the proceeds of sale of management rights for a scheme.
Community Association DP NO 2701801 v Arrow Asset Management Pty Ltd related to a residential development known as Balmain Cove in Sydney. The developer, Australand, agreed to sell the management rights in the complex to Arrow for $190,000. The sale agreement contained usual clauses requiring Australand to cause the Association to enter into a long term site management agreement with Arrow. Under this Agreement, Arrow was to be paid an annual fee to supervise the maintenance of the complex. It also allowed Arrow to carry on a letting service within the complex.
Australand caused the Association to enter the agreement with Arrow in December 1998. In June 2000, Arrow assigned the site management agreement to a company called Bondlake with the consent of the Association.
The Association sought to have the site management agreement (now held by Bondlake) declared invalid on several grounds. It was ultimately unsuccessful with this. However it also sought orders against the developer, Australand, in relation to the sale of the management rights to Arrow.
The judge found that Australand as the developer was in a position similar to a company promoter. As such it owed a fiduciary duty to the Association. This required it:
to act in the interest of the Association; and
not make a profit without the knowledge and assent of the Association or its potential members.
The judge also identified that a conflict existed between the duty Australand owed and its own interest.
Australand argued that it had discharged its duty by disclosing to purchasers in sale documents that it intended causing the body corporate to enter the site management agreement and the proposed terms of the agreement (including the annual fee). The judge held this was not sufficient – that disclosure of the premium payable by Arrow (that is, the purchase price for the management rights) was required to enable a prospective purchaser to consider the terms of the site management agreement.
The result was that Australand was required to account to the Association for the purchase price paid by Arrow. The judge also clearly felt in appropriate circumstances, that a developer could be liable to compensate an Association for any loss it had suffered over and above the amount of the premium paid for the management rights.
Is The Decision Relevant To Queensland?
The Body Corporate and Community Management Act 1997 (Qld)2 places an obligation on the original owner, while it controls the voting of the body corporate, "to exercise reasonable skill care and diligence and to act in the best interests of the body corporate [in entering caretaking agreements, letting agreements and other service contracts]". This is entirely consistent with the fiduciary duty which was found to exist in NSW.
However there is a significant difference between the statutory regimes in Queensland and NSW. Since 1997, a body corporate in Queensland has been prohibited from requiring payment (or any other benefit) for entry into or extension of a service contract or a letting agreement3. In our view the likely outcome of a case such as this, if decided in Queensland, would be:
the developer will be entitled to retain the proceeds of sale of the management rights;
a developer may still be liable to compensate the body corporate for any loss it suffers as a result of the terms of the caretaking or letting agreement being overly favourable to the manager.
1. A Community Association is similar to a principal body corporate in a layered scheme under the Body Corporate and Community Management Act 1997.
2. Section 112
3. Sections 113 to 115. The only exception to this is provided by s113(1)(b) (added in 2003) which essentially allows a body corporate to receive "market value" for the letting rights but only where they were not sold by the developer during the original owner control period.
Many retail leases include a covenant to trade, requiring the tenant to open the premises for trade during certain hours.
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