The market value of a management rights business is determined (to a large degree) by the terms and conditions of the caretaking and letting agreements between the manager and the body corporate (Agreements).
Having fixed-term agreements provides certainty and secures the income (and therefore value) of the business.
What is ‘topping up’?
In Queensland, the legislation dictates that Agreements can have a maximum fixed term of:
- 25 years—for complexes governed by the Accommodation Module legislation; and
- 10 years—for complexes governed by the Standard Module legislation
The process of ‘topping up’, is requesting the body corporate to agree to vary the Agreements by increasing the fixed-term to (ideally) the maximum allowed under the relevant Module (or as close as possible to that).
Why ‘top up’?
Simply put – it is the best way for a manager to lock in and hopefully increase the market value of their management rights business.
The market dictates businesses with Agreements for longer fixed terms are more valuable.
Banks won’t lend on management rights with short-term Agreements (or will lend less).
Some buyers (typically only experienced managers) may look for a bargain and back themselves to successfully top up after buying. But most don’t see it this way and/or can’t afford the luxury of taking the gamble.
Topping up is not an automatic right.
It requires the body corporate to vote in favour of a top up at a general meeting of the body corporate.
Getting the individual lots owners in a complex (who comprise the body corporate) to vote “yes” — is the challenge.
Managers need to be very mindful body corporates and lot owners have absolutely no obligation to:
- agree to a top up; or
- even to act reasonably when considering a request to do so.
Strategies to Get “Yes” Votes
In our experience, the best way for managers to get enough “yes votes” is a proactive strategy from day one.
Creating and maintaining good relationships with as many lots owners as possible is the key.
All managers should:
- Keep their lot owners informed about the services they are providing at every opportunity.
- Issue a regular newsletter (or email) summarising the good work being done to maintain/ improve the common property, successes with letting or selling lots, current activities being undertaken to promote the complex, etc.
- Educate lot owners on the importance to their management rights business of topping up (in our experience, most people will respond well to this).
- Consider a concession when you go to the lot owners for their support. For example, if you know your annual increase to the caretaking salary is above market, consider offering to change that in the body corporate’s favour. When you are selling management rights, long-term agreements add more value than a 4% fixed increase to the salary versus a 3% or CPI increase.
- Don’t wait until it is too late to start the process!