If you are going to buy a management rights business in a holiday letting or serviced apartment strata scheme, you need to know:
- if the business is deemed to be a managed investment scheme (MIS) under the Corporations Act 2001;
- if it is an MIS, whether any exemptions from the MIS rules may apply to the strata scheme you will operate from; and
- what steps are required (if any) to take advantage of the exemptions.
The MIS regime is a technical area of law and the answers to the above questions are not always straight forward.
What is clear is that the consequences of operating a management rights business in breach of the MIS rules are severe. They include large fines, loss of your letting agent’s licence and an automatic right for unit owners to terminate their letting appointments.
Don’t buy a non-compliant management rights business
This note is a general summary only (for most people, drilling into the detail is a watching paint dry exercise).
Don’t get caught out by buying a non- compliant business.
If you are considering an acquisition of a holiday letting or serviced apartment management rights business – please give us a (no obligations) call to discuss your situation.
The best time for the call is before you sign a contract to buy management rights.
What is an MIS?
The MIS rules apply nationwide.
In summary, an MIS is a scheme with these features:
- people contribute money or other value to gain a right to benefits produced by the scheme;
- the contributions people make are pooled or used in a common enterprise to produce a benefit for scheme members; and
- the scheme members don’t have day to day control over the operation of the scheme.
When is a management rights business an MIS?
In the context of management rights:
- if people buy an investment unit in a strata scheme;
- put the unit in a letting pool with other units in the strata scheme; and
- give the day to day control over the unit to the resident manager,
then the resident manager (as the operator of the management rights business) operates a MIS.
What are the consequences of management rights business being an MIS?
Unless an exemption applies to the strata scheme (see below), the MIS rules require the operator of the management rights business to:
- register the scheme with ASIC;
- meet specified strict financial criteria;
- produce and comply with a scheme constitution and scheme compliance plan;
- hold an Australian Financial Services Licence; and
- give unit owners a product disclosure statement.
Complying with all of these things is onerous, time consuming and expensive. In the context of operating a management rights business it almost never warranted.
What strata schemes are not caught and what exemptions apply for strata schemes caught?
Operation of a management rights business in a strata scheme with permanent letting only is not considered a MIS.
Likewise, if there are 20 units or less in the letting pool, operation of a management rights business is exempt.
If you don’t fit within the above exemptions (or other more narrow exemptions we can discuss with you), you will need to rely on other relief available for management rights from full compliance with the MIS regime. To obtain the relief the list of conditions summarised below must met.
Conditions for general relief
The list does seem long and onerous, but we can work with you to set up a base set of disclosure documents and a letting appointment which will make compliance relatively painless. Again, please feel free to call to discuss this.
- You must have a licence under State law to manage real estate (this is just your letting agent’s licence)
- A product disclosure statement (PDS) in the correct form must be given to unit owners before they put their unit in the letting pool (we can prepare a base PDS you can then easily replicate)
- It must be voluntary for unit owners to put their unit in the letting pool
- You must hold all monies received in a trust account before distribution to unit owners and the trust account must be audited
- Both you and the unit owners must be able to withdraw from the scheme on 90 days’ notice
- The units must be able to be lawfully used as a permanent residence or if the town planning rules say the units must be used for short term letting only you need to apply for a specific exemption
- There are specific rules about funds for furniture, fittings and equipment and reporting to unit owners which must be observed
- Your letting appointments must include a provision which allows a majority of the unit owners to force you to sell the management rights for the complex
- Any rental guarantees you give to unit owners can’t apply after you sell the management rights
For anyone who is interested in reading more detail about the law – in the first instance refer to ASIC Regulatory Guide 140