For directors and members, a change to the company title constitution may seem a daunting process. Updated constitutions can assist companies in managing letting and subletting, improving corporate governance and bringing their constitution in line with the most recent legislation.
Modern issues with company title
Many of the major issues facing company title buildings today were not considered at the time of drafting. For example sub-letting and short term leases have become a major problem for buildings since the launch AirBnb. Similarly, renovations, as buildings age, are becoming increasingly necessary.
Sub-letting and AirBnb
Unlike in strata, any form of sub-letting can be prohibited in a well drafted constitution. This means that Board approved tenants cannot further sub-lease their unit onto an unapproved tenant.
This can also limit the effect of short-term or holiday leasing on sights such as AirBnb. AirBnb can be a problem for buildings, in terms of increasing the noise and coming and going of people in common areas, as well as increasing the risk of damage to common areas. Constitutional updates allow for these kind of activities to be effectively prohibited.
Certain provisions in the constitutions can also have the effect of creating a legal relationship between the company and tenant. This will assist the company in pursuing the tenant for any conflict that may arise. In effect the matters contained in the constitution and company house rules become applicable to the tenant. This means noise complaints, damage to property and other issues are enforceable with the tenant, without the need to go through the landlord member. This is especially helpful when members live overseas and may not be available or willing to enforce house rules directly onto their tenants.
Updating constitutions gives an opportunity for the Board to include special provisions relating to renovations. Creating a clear framework for both members and Boards can alleviate confusion, cost and time in getting renovations approved by members and the Board.
Well drafted provisions can also ensure the building is protected from defective renovations. If a member renovates their unit and on-sells that unit, ceasing to be a member, they will remain liable for defective renovations for an ongoing period. This protects the company and new members from defective renovations carried out by past-members.
Corporations Act 2001
The introduction of the Corporations Act in 2001, replacing older legislation has simplified and streamlined requirements around corporate governance. Many old memoranda and articles of association contain defunct or vestigial provisions which no longer serve a purpose. These do little more than clutter and complicate what is already a difficult document.
The Corporations Act 2001 also introduced the replaceable rules. These are constitutional provisions that can be read into a constitution which is silent on a certain subject. This is incredibly important in filling the gaps in modern constitutions written under the legislation, meaning a constitution does not remain silent on an issue that may become controversial or debated.
Further, many old memoranda and articles of association do not sit easily with the mandatory provisions of the Corporations Act and contemporary governance practices.
Levies and interest
Most articles of association have an inflexible list of costs that can be levied on shareholders, and a narrow range of mechanisms for recovering levies. This can undermine the financial sustainability of the company.
Also, many old memoranda and articles of association set interest rates or fees that are extortionate by contemporary standards. These interest rates and fees may be unenforceable.
Old fashioned language and concepts
Often constitutions, especially for older buildings, contain outdated language and social mores. References to moral behaviour, class and race are not uncommon in some older and un-updated constitutions.
Depending on the context, these requirements can be legally binding and should be removed from modern constitutions, based on the fact that they are inappropriate and irrelevant to modern buildings.
For assistance, advice or estimated costs for updating constitutions, articles of association or house rules to contemporary best practice for company title buildings, contact JFMLAW on (02) 9199 8597.