Management Rights Businesses – Considerations for Vendors and Purchasers

Having been closely involved in Management Rights Businesses (MRBs) in New Zealand (particularly in Auckland) – both from the legal sideline in terms of advising vendors and purchasers and “on the ground” in terms of working with developers and body corporate secretaries to establish the business and operations of the business – I am from time to time asked to advise on MRBs throughout New Zealand.

While there are a variety of issues to consider (depending upon which party is needing advice), this article briefly explores what a MRB is and some of the more important considerations to be given to MRBs by prospective vendors and purchasers.

What are MRBs?

A MRB typically refers to a business where the MRB operator has a bundle of contractual rights (often contained in a Management Agreement) that include managing a property on behalf of an “owner” together with an interest in a manager’s residence (ownership or lease).  The “owner” can vary from business to business but a typical example is a unit title complex, such as a high rise apartment block or holiday complex, where the “owner” is the Body Corporate (being the collective group of individual unit owners within the complex).

The rights to manage the property can differ from MRB to MRB but many commonly contain two components.  The first often being described as the “building manager” component comprises obligations such as cleaning the common areas of the complex and facilitating the operation of the complex on behalf of the property owner. The second component, and often the more lucrative aspect, comprises the right to act as the property manager in relation to the units on behalf of the owners within the complex who require a property management service (i.e. rental service).  The combination of these two components can provide a good return on investment, particularly if the MRB operator lives onsite in the manager’s unit (as opposed to employing or contracting someone to do that on their behalf).

Management Agreement

The value of the MRB depends on a variety of matters, but will hinge on the terms of the Management Agreement (Agreement) that contains the contractual bundle of rights making up the MRB.

Examples of issues to consider when reviewing the Agreement are:

• Length of term left on the Agreement.
• Rights of Renewal remaining in the Agreement.
• Calculation of the manager’s salary.
• Ability to transfer or assign the Agreement to a purchaser of the MRB and pre-conditions to be met.
• Whether there are any ultra vires issues to consider regarding the rights that have been granted under the Agreement i.e. are there any rights granted to the MRB operator which are beyond the power of the owner of the property to grant. A common example which has arisen in New Zealand in the past is where individual owners in apartment blocks have been forced to use the MRB operator as the property manager if they want to rent their unit out to a third party.
• Manager duties and hours of operation.
• What constitutes a breach of the Agreement and what remedies do the parties have.

Manager’s Apartment

If the MRB contains a manager’s apartment within the complex (and most do), there is often a requirement that the manager must have an ownership interest in the “manager’s unit”.  This can be a positive in the sense that it provides some “bricks and mortar” within the business purchase but of course, it also means that there are risks associated with the normal “ups and downs” of the real estate market.  The usual checks need to be done in respect of this real estate component including building reports and a review of the LIM report.

Sometimes the MRB is structured so that the manager’s unit is simply leased by the MRB operator rather than purchased, in which case consideration will need to be given to the terms of that lease, including who pays the rental under the lease (not always the MRB operator).

History of the MRB

It is essential to get a good understanding of the history and background of the MRB complex before purchasing into the MRB.  Any unusual issues associated with the complex being managed should be researched thoroughly through a due diligence programme.  For MRBs within a unit title complex, this often means doing a thorough review of the Body Corporate Minutes (not just AGM Minutes, but also Committee Meeting Minutes and Building Manager Reports).  While it is expected that an MRB operator will have a number of duties to meet, it is important not to buy into a “problem complex” whereby the role of the MRB operator becomes too involved in relation to the return obtained from the MRB.

Letting Pool Stability and Letting Agreements

The letting pool applies where the MRB operator is also carrying out a property manager role as part of the business and refers to the units within the complex that the MRB operator rents out on behalf of individual unit owners.  The key contract that governs that relationship is usually a “Letting Agreement” and this will set out the terms and conditions upon which the MRB operator will let a unit out (which may be short term or long term).

It is important to ensure that there are robust enforceable letting agreements in place with each owner, including clear provisions for how those letting agreements can be transferred to a purchaser of the MRB and/or a new owner of the individual unit upon sale of that unit.

It is essential to also understand the nature of the letting pool, for example, whether it is stable, growing or decreasing over time. Often considerable value can be placed on the number of units in a letting pool but, if there is a lack of certainty that units will remain in the letting pool (perhaps more individual owners decide to “own and occupy”), the value of the MRB can quickly dimmish and there is little that can be done to salvage that.

Looking to sell or purchase a MRB?

Before putting the MRB on the market for sale, or if looking to put an offer in to purchase a MRB, it is well worth investing time into engaging with the right professionals.  This includes ensuring you are working with a real estate agent who fully understands the nature of a MRB; liaising with an accountant (as often there are important tax and accounting matters to consider with the two components of the MRB (business and real estate)); and working closely with a lawyer who understands the nature of an MRB and what should be considered from the perspective of the party they are acting for.

As a partner in Harkness Henry specialising in commercial property transactions, I have a particular interest and speciality in MRB transactions.  There are a multitude of unique factors to consider with each MRB transaction (the ones addressed in this article are but a few) and so, if you want to learn more or discuss a prospective sale or purchase, don’t hesitate to reach out and discuss.  Our team here at Harkness Henry and I are here to listen, and ready to respond.

This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.