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QBCC Deed of Covenant
QBCC Deed Of Covenant
A necessity for many QBCC licensees is that they submit a QBCC deed of covenant for their licence to be granted. Usually, a third party (like a director of a licensee company) gives you this deed.
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
Briefly, the QBCC Deed of Covenant has the following effect (in the case of a company):
- The licence applicant must comply with the “Minimum Financial Requirements” Regulations to obtain the licence.
- The applicant (except for some involved in design services) must provide an MFR report. MFR means minimum financial requirements.
- The MFR report identifies a “Defined Amount” for that year. This amount is the difference between the licensee’s net tangible assets and the required net tangible assets based on their turnover.
- The obligation to make up the “Defined Amount” is often met by the provision of a QBCC Deed of Covenant.
An example can help us understand the effect of this. Let’s say the “Defined Amount” is $200,000, then the licence requirements will call for a Deed of Covenant. It obliges a third party (the covenantor) to pay that “Defined Amount” if certain things occur.
However, one issue is that the “Defined Amount” is not fixed – it can change year by year depending on the amount of turnover and the net tangible assets. Thus, with a deed that essentially remains valid until it is cancelled (which could be never), a covenantor’s liability that began at $100,000 could end up being notably more, without their knowing.
Covenanted Amount
The inclusion of the “Covenanted Amount” aims to manage this issue. The standard deed of covenant (as of October 2021) states that the Defined Amount will be no more than the Covenanted Amount. It suggests an intention to cap liability at a specific sum. However, the deed itself does not cap liability to the Covenanted Amount (if it is less than the Defined Amount). Plus, it is unclear whether the QBCC intends to cap the Covenantor’s liability or limit the Deed’s effectiveness in satisfying financial requirements.
The person who provides the QBCC Deed of Covenant (the “covenantor”) generally does not consider it until a problem arises. The obligation to pay the “Defined Amount” is triggered by insolvency events. Such as the winding up of a company if the licensee is a company, or bankruptcy if the licensee is an individual.
In Case of a Company
In the case of a company, the liquidator of the licensee usually demands that the covenantor pays the “Defined Amount.” Then, if the covenantor does not pay, the liquidator may sue them or potentially bankrupt them. On the other hand, the amount paid by the covenantor goes into the pool of receipts in the administration. It is used to meet claims against the licensee and cover the liquidator’s or bankruptcy trustee’s costs and expenses.
Signing a QBCC Deed of Covenant
The covenantor charges their interest in property to secure the payment when they sign a QBCC Deed of Covenant. If the covenant is invoked, the QBCC may caveat the covenantor’s home or other property and seek orders to sell the property to pay the penalty.
Once given, the obligation of the covenantor is difficult to release. The QBCC can release it by providing written notice to the licensee and the covenantor that the licensee has satisfied the MFR without relying on the deed. Another way to release the obligation is by entering into a further deed between all parties. Any covenantor should promptly seek the notice releasing their obligations or the further deed.
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For advice about building and licensing matters, please contact Justin Mathews at justinm@qbmlaw.com.au
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