Are body corporate management contracts ultra vires?

agreementWe have written previously about body corporate rules considered ultra vires by the Courts. Contracts entered into beyond the powers conferred by the body corporate rules will be void and unenforceable.

On 21 February 2011 the High Court gave its judgement as to whether or not the body corporate secretarial services contract and management contract at the Westin Hotel were void. The secretarial services contract was declared void but the management contract was not.

The contracts appointing the building manager and body corporate secretary had been put in place by the developer (Melview) prior to the investors acquiring their apartments. These arrangements were contemplated in the body corporate rules that Melview had registered. The building manager and body corporate secretary were both Melview entities. The contracts were each for 10 year terms and renewable for a further 10 years by the building manager/secretary unless there had been a breach by them.

Litigation had been commenced by 114 of the serviced apartment owners. They owned 66% of the residnetial apartments at the Westin or by unit entitlement 55%.

The management contract

Importantly the management contract was enforceable. The judge notes that in a large unit development, the engagement of the building manager will be essential in order to carry out the duties conferred by the Unit Titles Act to control, manage and administer the common property. The 10 year term, payment of a fee of $173,000 (subject to review) and right to renew were all terms that the building manager could enforce against the body corporate. These were things that Melview could legitmately decide and bind the owners to under the body corporate rules. The amended body corporate rules that enabled this contract to be entered into were appropriate and broadly speaking did not appreciable expand the body corporate’s powers. Each of the current owners had the chance to review the management arrangements before buying their apartment.

Although the body corporate could enter into the management contract on such terms as it thought fit, there were some individual rules that were then reflected in the management contract which were ultra vires. The judge allowed these provisions to be severed from the management contract. These included:

  • The exclusive letting rights granted to the manager
  • A prohibition on the grant of management rights without the manager’s consent
  • The manager’s power to assign, transfer its rights or delegate its duties.

The body corporate secretary’s contract

The contract appointing the body corporate secretary was void and unenforceable. The default rules in the Unit Titles Act do not give a body corporate as broad a discretion as to the terms of appointment of the body corpoate secretary. The Westin contract did not allow the body corporate to remove the secretary in a general meeting. The Court saw this as an important power. The secretary’s role is concerned with the financial management of the body corporate and the right to remove the secretary at a general meeting is designed to enable the individual proprietors to protect their financial interests.

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