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QBCC Deed of Covenant
QBCC deed of covenant
In many cases, QBCC licensees are required to provide a deed of covenant as a condition of obtaining or maintaining a licence.
The deed is typically given by a third party, such as a director of the licensee company.
The QBCC deeds of covenant (which have the title “Deed of Covenant and Assurance”) are difficult to read. Thus, they require careful thought. Especially if someone who isn’t actively involved in running the licensee’s firm is going to give them.
Effect of a QBCC deed of covenant
A QBCC deed of covenant operates alongside the minimum financial requirements for a licence.
In general:
- The licence applicant must comply with the Minimum Financial Requirements to obtain and maintain a licence
- The applicant must provide a minimum financial requirements report, which assesses financial capacity
- The report identifies a defined amount based on the difference between net tangible assets and the required financial threshold
- A deed of covenant may be used to satisfy that defined amount
For example, where a defined amount is required, a deed of covenant may be provided by a third party. That party agrees to meet the defined amount if certain conditions arise.
The defined amount is not fixed and may change from year to year, depending on turnover and net tangible assets. As a result, the liability of a covenantor may increase over time and may continue until the deed is released or the licence is cancelled.
Covenanted amount
The concept of a covenanted amount is intended to address the uncertainty around the defined amount. Under the standard deed of covenant, the defined amount is stated to be no more than the covenanted amount, suggesting an intention to limit liability.
However, the deed does not clearly cap liability where the defined amount is lower than the covenanted amount. It also remains unclear whether the QBCC intends to limit the covenantor’s liability or restrict the effectiveness of the deed in meeting financial requirements.
A person providing a QBCC deed of covenant (the covenantor) may not fully appreciate the risk until an issue arises. The obligation to pay the defined amount is typically triggered by insolvency events, including the winding up of a company or the bankruptcy of an individual.
In the case of a company
Where the licensee is a company, a liquidator will usually call on the covenantor to pay the defined amount. If payment is not made, the covenantor may be subject to recovery action or bankruptcy proceedings.
Any amount paid by the covenantor forms part of the assets available in the administration and is applied towards claims against the licensee, including the costs and expenses of the liquidator or trustee.
Signing a QBCC deed of covenant
When entering into a QBCC deed of covenant, the covenantor typically provides security over their property to support the obligation under the deed.
If the deed is called upon, the QBCC may lodge a caveat over the covenantor’s property and take steps to enforce the obligation, including seeking the sale of the property.
Once given, the obligations under the deed are not easily discharged. The QBCC may release the covenantor from the deed where the licensee satisfies the minimum financial requirements without reliance on the deed.
The obligation may also be released by agreement between the parties through a further deed. Covenantors should ensure that any release is formally documented.
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For advice on building and licensing matters, please contact Justin Mathews at justinm@qbmlaw.com.au
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