UNDERSTANDING DIFFERENT TYPES OF CARETAKING AGREEMENTS
Essentially, there are three types of caretaking agreements in the marketplace:
- “Do” agreements;
- “Supervisory” agreements;
- Hybrid “Do” and “Supervisory” agreements.
A “Do” agreement is a caretaking agreement where the caretaker is responsible for performing the duties (either personally or by staff employed by the caretaker) at the caretaker’s expense. These agreements have a set schedule of duties that the caretaker must attend to at a set remuneration. The remuneration is generally subject to annual CPI increases and the agreements quite often provide for market reviews every three or five years.
“Do” agreements are inflexible as the duties and remuneration cannot be changed during the term, unless there is agreement between the caretaker and the body corporate to vary the terms of the agreement.
The key to these agreements is ensuring that the caretaking fee is correctly set at the commencement of the agreement. If it is not right, problems will eventuate. If the remuneration is too low, the caretaker will often look for ways to shortcut the duties to make the agreement profitable. If the remuneration is too high, the body corporate will be unhappy and the caretaker will be under constant pressure to do more work or increase the frequency of delivery of the services to justify the fee. Sometimes, the body corporate will even go looking for ways to get out of the agreement, if owners believe that the bargain is fundamentally unfair.
CPI increases do not rectify this situation and market reviews often lead to resentment and bitterness between the parties. Also, many (most) market review clauses include a ratchet provision so that the “market” review can only result in the remuneration going up and not down!
These agreements provide that the caretaker must supervise the performance of contractors who are directly engaged by the body corporate. The caretaker’s remuneration is likewise fixed and, again, generally subject to annual CPI increases and market reviews. Logically, the caretaker’s remuneration is substantially less than under a “Do” agreement.
These agreements often take the heat out of the relationship between body corporate and caretaker. The committee remain in control of how much the body corporate spends each year on cleaning and maintenance of common property. They simply instruct the caretaker to obtain quotes, have the caretaker review the work done by the contractors and then authorise payment and report back to the committee. The caretaker is not under pressure to bring the cost of work under a certain price or take shortcuts.
Hybrid “Do” and “Supervisory” Agreements
I often see agreements where the duties are part “Do” and part “Supervisory”. You need to be very careful in reading your caretaking agreement to ensure that you understand just what part of the duties are what. These agreements can be confusing and can lead to conflict between the body corporate and caretaker.
Which Agreements are better?
I believe supervisory agreements are best for the industry. They take the heat out of long-term maintenance contracts because they effectively leave the body corporate in charge of the level of expenditure on common property cleaning and maintenance. The body corporate can budget for whatever level of expenditure the owners want and are prepared to pay for. I see very few disputes develop between caretakers and bodies corporate under supervisory agreements.
Also, nearly every State in Australia has strata legislation that places an onus on developers to only enter into contracts that are in the best interests of a Body Corporate/Owners Corporation. There is a much more logical argument to the Body Corporate/Owners Corporation entering into a 25 year “Supervisory” agreement versus a 25 year “Do” agreement. Supervisory agreements leave the committee in control of expenditure and leave the manager to get on with making their money out of letting – where they should be making their income.
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Disclaimer – This article is provided for information purposes only and should not be regarded as legal advice.