The difference between an option and a variation

We are quite often asked by clients to “top up” their management rights agreements.

An important matter that is sometimes misunderstood in a management rights business is the difference between:

• exercising an existing option in an agreement; and
• varying an agreement to create a further option term (a “top up”).

What is exercising an option?

Exercising an existing option is normally a relatively simple matter. This involves issuing a letter to the body corporate in compliance with the conditions in the management rights agreements, and signing a deed of extension. Your management rights agreement is then extended in accordance with the terms of the agreement itself. This is usually only a committee-level issue.

What is most important is that if you have an agreement with an option clause, you must know what is needed to exercise it. If you fail to exercise an option, your agreement will come to an end. It is as simple as that.

What you do when you exercise an option is simply put into place an existing right you have. As an example, your agreement might be for a 10-year term with a 10-year option.

Exercising that 10-year option means you have 10 years to go. It does not mean a further 10 years after that exists.

What is a variation?

What we refer to as a ‘top up’ is where an agreement is varied to create a further option term. You can vary agreements to create option terms, provided that:

• the term created does not exceed the maximum term of 10 years under the Standard Module and 25 years under the Accommodation Module;
• it is for no more than 5 years (i.e. creating an option for 6 years by way of a variation is not lawful); and
• the body corporate has not already considered a variation to the agreement to create a further option term in that body corporate calendar year.

What we find is that when a client asks us to ‘top up’ their agreements, it usually means they might want to exercise their existing option and then create a further option to add to their agreements. This is particularly the case in Standard Module agreements.

Varying agreements to create further option terms can be relatively complex and requires a great degree of attention to detail to ensure the validity of that term. The term remaining on a management rights agreement is critical to the value of your business asset. Making sure it is granted correctly is very important.

You must not simply assume that the variation will be agreed to. You must have a strategy to deal with the concerns of any owners and the committee with respect to your request. This is incredibly important.

We have dealt with hundreds of these types of matters over the years. We can help you achieve your goals in both a legal and commercial context. Contact us for more information.

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