The recent decision of Vie Management Pty Ltd (Receivers and Managers Appointed) (In Liquidation) v Body Corporate for Gallery Vie [2015] QCAT 164 (published on 29 May 2015) casts serious doubt over the value of security taken by financiers with respect to management and letting rights ("MLR") agreements in Queensland.

MLR agreements are entered into by the body corporate of a community title scheme and an onsite manager. The onsite manager is paid a fee for performing services for the body corporate and is also entitled to conduct the onsite letting arrangements.

The MLR industry has flourished in Queensland over the last 20 years with significant value being placed on MLRs. Financiers have commonly lent against the value of MLR agreements and assumed that they will have recourse to the MLR agreements following a default.

In the Gallery Vie case, the Queensland Civil and Administrate Tribunal ("QCAT") confirms the right of a body corporate to terminate the MLR agreements following enforcement action by the financier where other subsequent breaches of the MLR agreements occur (even if the breaches are beyond the control of the financier or result from the actions of a third party). In the Gallery Vie case the appointment of a liquidator to the onsite manager gave the body corporate the right to terminate the MLR agreements notwithstanding the financier had taken over the performance of the MLR agreements by the appointment of a receiver.

Previously in Queensland a financier would enter into a "side deed" with the body corporate to regulate the respective rights of the parties in an enforcement scenario. Whilst this remains the market practice in most other states, such agreements were outlawed in Queensland in 2003. Section 126 of the Body Corporate and Community Management Act 1997 ("BCCMA") deals exclusively with the rights of the financier where the onsite manager breaches the MLR agreements. Unfortunately, due to what appears to be inadvertence in the drafting of the provisions, the statutory protections given to the financier are inadequate.

The QCAT determination means that once a financier has "stepped in" any further breach of the MLR agreements (such as the appointment of a liquidator to the onsite manager or other technical defaults) will potentially trigger the termination of the agreements and the destruction of the financier's security. This is irrespective of whether the duties of the onsite manager under the MLR agreements are being duly performed by the financier or a receiver.

Unless the decision is overturned, statutory amendment will be required to restore comfort to the position of MLR financiers. Alternatively, financiers will seek amendments to MLR agreements to exclude matters beyond the financier's control from the list of defaults that give the body corporate the right to terminate the MLR agreements. However, reaching an agreed list of breaches with the body corporate is likely to be tough negotiation.

We are currently assisting several of our clients to respond to these developments from a policy and credit perspective. We will keep you informed of any further developments in this area.

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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