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Negative CPI and the implications for Caretaking Agreements

Due to the COVID-19 pandemic and an already stagnating economy, it looks like unfortunately, we will continue to face gloomy projections for economic growth in Australia. Low-interest rates set by the Reserve Bank of Australia are set to continue for the foreseeable future. As households tighten their budgets and curb spending, it is likely that we will continue to see negative Consumer Price Index (“CPI”) rates. This will have implications for a range of different industries, and any contracts or agreements where cost increases are set in relation to the current CPI rate. We are already seeing this issue cause confusion for bodies corporate when it comes to the calculation of caretakers and resident building managers remuneration under the annual remuneration review clause in their caretaking agreements.

 

Caretakers and Resident Building Managers

Most caretaking agreements contain specific provisions regarding the review of the caretaker’s remuneration. There are generally two types of review clauses in each agreement, being the annual review (usually referring to CPI) and a market review, which requires a different type of process and is conducted at longer intervals, such as every 3 or 5 years. This article will focus on the annual review clauses.

Annual (CPI) clauses are usually drafted along the lines whereby the body corporate agrees to pay the caretaker increased salary from a certain date (otherwise known as a review date) and that increase is determined by reference to the percentage change in CPI from the prior period (usually a quarter) to the current period. The agreement will specify which CPI rate is to be used as there is a national rate as well as capital city rates, such as Sydney where prices are generally higher than the rest of the country.  Historically, this has most commonly resulted in an increase in the caretaker’s remuneration.  So much so, that most caretakers and committees have become accustomed to treat these reviews as being synonymous with an increase in remuneration.

Caretakers and committees under these types of agreements may expect that there will be a remuneration increase as a matter of course and may not be aware of the specific wording of their particular agreement. In the current circumstances where the CPI rate is negative, it is particularly important to properly consider the interpretation of the annual remuneration review clause to ensure that the caretaker is paid correctly under the agreement.

Unfortunately, there is no “one size fits all” here as we have seen many widely different types of wording used in these clauses, which can have a significant outcome on the true effect of the clause.

Some clauses are styled purely as a “remuneration increase” clause and this will result in a remuneration increase when the percentage change in CPI is positive and no change to salary where CPI remains constant or reduces.  These clauses will typically contain phrases such as:

The remuneration for each annual period shall not be less than the rate paid for the immediately preceding twelve (12) month period.”

and

“The remuneration is to be increased on each anniversary of the commencement date during the term and any further term by the percentage increase in CPI for the previous quarter or by 3%, whichever is the lower.”

In the first example above, it is clear that the parties contemplated the possibility of reduced remuneration and specifically addressed it to prevent a remuneration review resulting in a reduction in remuneration.  In the second example, the contract does not appear to contemplate the idea of a reduction in remuneration at all.  The entire language of the clause concerns the “increase” in remuneration and the “percentage increase” in CPI.  While it is more arguable than the first, very explicit example, it would still appear that the parties’ intention in this clause was to give effect to an “increase” of remuneration.

The above examples can be contrasted to the “remuneration change” style clauses that appear to support the notion of the remuneration being “pegged” to CPI and essentially floating in accordance with percentage changes that could result in an increase or decrease. These clauses will typically contain phrases such as:

“The Remuneration will be changed to the amount arrived at by changing the remuneration for the previous year by the same percentage as any percentage change in the CPI figure published for the quarter immediately before”

The language of the above clause is much more open to the interpretation that the parties intended the remuneration to be able to float in either direction (increase or decrease).  The use of the word “change” instead of “increase” would be likely to result in the remuneration being reduced in the event of a negative percentage change in CPI.

Unless the language of the remuneration clause is abundantly clear and both parties concur on the interpretation of the clause, it would be advisable to obtain independent legal advice.  Incorrectly calculating the caretaker’s remuneration one way or the other, could result in a future claim for recover of the amount of the overpayment or underpayment.  For this reason, if the body corporate and the caretaker have agreed to a particular interpretation of the remuneration clause in circumstances where the language is unclear or open to multiple interpretations, we would recommend that the parties enter into a deed of variation of the caretaking agreement to reflect their agreed interpretation.  Perhaps this can be done by inserting a phrase such as “the remuneration for each annual period shall not be less than the rate paid for the immediately preceding twelve (12) month period.”

There are specific requirements for the variation of caretaking agreements under the BCCMA and Regulation Modules.  Bodies corporate and caretakers should be careful not to inadvertently vary their agreements without adhering to the contractual and statutory requirements for variation.

If you would like individual, tailored legal advice in relation to the above or any other strata law matter, please contact us.

 

This article was contributed by James Nickless, Partner – Chambers Russell Lawyers

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