Tips for developers selling management rights in new strata schemes to short term letting operators

Overview

For a Queensland developer, the management rights attached to a new strata scheme can be a valuable asset, particularly when the buyer is a short term accommodation operator.

However, as someone that has acted for both developers and operators in the past (as well as working in-house for one of Queensland's largest management rights operators), I have seen many times where the offering stops well short of what "good" looks like to a short term operator, with developers cramming in small back of house areas that are not fit for purpose, redesign being done at the last minute and changing by-laws and caretaking and letting agreements once the operator is selected.

This usually results in further disclosure statements having to be given to buyers at the last minute, which can sometimes lead to buyer termination rights or a sub-optimal price being paid for the management rights (or, importantly for cash flow, delayed settlements).

Getting the documentation and back of house areas right should be considered a crucial step for developers wanting to maximise the value of the management rights, especially if they intend to sell to short term operators.

Whilst by no means exhaustive, this article sets out some key tips for developers to consider before finalising design documents and going to market on presales to buyers of apartments in strata schemes where the intention is to sell to a short term letting operator.

01Get the structure right

Getting the legal structure of the complex right from day one is important to ensure the operator has access to all areas of the building it needs to carry out its various functions, as well as ensuring it is not impeded by other non-accommodation occupants in the building.

For example, a mixed use development that includes retail on the ground floor, a hotel component for the first four levels and then apartments and facilities above needs careful consideration of how each component of the building will operate and interact (and indeed this will need to be finalised before going to market to buyers of lots in the building).

Whilst not exhaustive, below are some tips for getting the right structure.

• Decide what commercial infrastructure sits on title and what sits on common property. Many operators still buy some real estate, but increasingly they prefer to own as little as possible and take occupation authorities, licences or leases over common property instead. Consideration will need to be given to whether each area will be shared with owners or used exclusively by the manager.
• Start with the operating model. Decide how the building will run before drafting anything. A residential scheme, a holiday letting building and a mixed use hotel style development need very different agreements. The duties, hours and staffing assumptions should reflect the operation the building is designed for.
• Don't forget the signage. Many operators will want at least a sign in reception, an under-awning sign and potentially building signage. As signage can sit on common property, a licence, occupation authority or other use right needs to be considered up front (and will likely need to be disclosed to buyers).
• Consider the wider structure. In a mixed use development, building management statements, separate bodies corporate or easements may be required (and will likely need to be disclosed to buyers in off the plan sales).

02Design, build and allocate appropriate back of house areas

One of the most overlooked areas in designing for short term letting businesses is the back of house areas. These areas are almost impossible to retrofit (depending on design), so getting them right up front is important. Some developers give very little consideration to these areas, while others over-do them (leaving valuable saleable area on the table). Getting the balance right is important to operators.

Below are some tips on back of house areas.

• Provide enough housekeeping storage. Allocate sufficient storage to the letting agent for housekeeping. In multi-level buildings, consider storage on each level, so housekeeping is not constantly moving linen and equipment up and down lifts (as that impacts the efficiency of operations and adds costs).
• Give the caretaker proper maintenance space. A small cupboard for chemicals will not be enough for a large complex. Larger maintenance rooms or areas may need to be allocated to the caretaker (depending on the duties).
• Ensure the loading dock, service areas and goods lifts are appropriate for the size of the operation. It is also important to make sure the manager has access over these areas.
• Allocate letting areas to the letting agent where they are to be used by the letting agent exclusively (to avoid future disputes over the permitted use of common property by the letting agent).

03Don't forget the by-laws

Some of the more important by-laws operators will look for are set out below. Each scheme will be different, so this list is by no means exhaustive. Changing by-laws can be difficult later, and a change before settlement can result in a further statement being issued to buyers in off the plan sales.

• Protect letting exclusivity. Include a by-law, and a matching clause in the letting authorisation deed, providing that the body corporate will not allow any other party to operate a competing letting business from the common property whilst the agreements are on foot.
• Keep facility use rules flexible. Rules for using common facilities are needed, but avoid being overly prescriptive. By-laws are difficult to change, and these rules need to evolve as technology and uses change.
• Booking systems. Rules ensuring owners and occupiers use any prescribed booking system are important, and a fit for purpose booking system should be used to avoid future issues, such as one resident booking out areas permanently or regularly.
• Door locking systems. Rules for managing door locking systems (which are usually on common property) ensure an appropriate system is put in place and that one party controls its security. Electronic systems with remote access are preferred by short term operators, as physical keys are difficult to manage and can compromise security.
• No restrictions on short term use. A short term operator will look for this (although such a by-law is unlikely to be valid if it restricts lawful residential uses¹). In addition, the by-laws must not restrict the lawful commercial operations of the operator.

04Important items in the caretaking agreements and letting authorisations

Some of the important items that short term operators will look for are set out below. Again, changing these agreements later can result in a further statement being issued to buyers, so it is very important to get these agreements right up front (rather than pull a precedent off the shelf).

• Make the duties schedule realistic. Caretaking duties and their frequency should match the size of the building, its facilities and the intensity of short term use. Duties that are too light undervalue the rights. Duties that are unworkable create disputes. There are many experts who can assist with preparing and pricing a duties schedule, and engaging them at an early phase is recommended to avoid future disputes or undervalued management rights.
• Get remuneration and review mechanisms right. Remuneration should be adequate for the work, with a clear review mechanism (including a market review at reasonable intervals) and a way to adjust it if duties change.
• Allocate common property occupation areas in the letting deed (not the caretaking agreement, unless the areas are used for both caretaking and letting). Areas intended for the letting business, rather than caretaking, must be allocated to the letting agent in the letting deed. Otherwise, the letting agent may be unable to use spaces designed for the letting business, which can lead to disputes with owners.
• Think about the term. Under the Accommodation Module, agreements can run for up to 25 years, and a January 2026 QCAT appeal decision² confirmed they can be renewed or extended multiple times if proper processes are followed. Set the initial term and options deliberately.
• Allow for a corporate operator. Check that the residency, sub-contracting to related entities, transfer and assignment provisions work for corporate operators (as well as individuals).
• Letting exclusivity. Ensure the operator is granted exclusivity to operate from common property.

05Get an operator's viewpoint before you sell

Before the first apartment contract goes out, have your agreements reviewed by someone experienced in management rights (for example, a management rights lawyer, consultant or advisor) and consider having your plans reviewed by someone experienced in short term operations. They will spot what an incoming operator will object to while it is still easy to fix (or any over-design that can be removed). Some operators (once shortlisted as the preferred buyer) may even do this for you.

Closing thoughts

Management rights are one of the few assets a developer can create from a set of documents and a floor plan. Short term operators know exactly what they are buying, and they will price every shortfall: the undersized linen room, the missing exclusivity by-law or the duties schedule nobody can actually deliver.

Fixing these issues after presales begin costs more than money. It costs time, triggers further disclosure statements and can hand buyers a reason to walk away.

That is where AC Advisory can help. Having sat on both sides of the table, acting for developers and operators and working in-house for one of Queensland's largest management rights operators, we know what operators look for, what they will push back on and what simply wastes saleable space.

At AC Advisory, we enjoy working with developers early in the process, when there is still plenty of room to shape the structure, back of house areas and scheme documents around how the building will actually operate.

If you have a project in the pipeline and would like to compare notes, I am always happy to have a chat.

This article is general information only and does not constitute legal advice.