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QBCC Deed of Covenant

QBCC Deed Of Covenant

Many QBCC licensees find that as a condition of the grant to them of a licence, they must provide a QBCC deed of covenant. This deed is generally given by a third party (such as a director of a licensee company).

The deeds of covenant (which have the title “Deed of Covenant and Assurance”) are quite difficult to read and require careful thought particularly if they are to be given by someone who is not directly involved in the operation of the licensee’s business.

Briefly, the QBCC Deed of Covenant has the following effect (in the case of a company):

  • An applicant for a licence must comply with the “Minimum Financial Requirements” Regulations as a condition of being granted the licence;
  • This involves the applicant (save in the case of some applicants involved in design services) having to provide an MFR report (where MFR means minimum financial requirements);
  • The MFR report then will identify a “Defined Amount” for that year which is the difference between the net tangible assets that the licensee has and the net tangible assets that are required for the licensee, having regard to its turnover;
  • The obligation to make up the “Defined Amount” is often met by the provision of a QBCC Deed of Covenant.

The effect of this is that if the “Defined Amount” is $200,000, then the licence requirements will call for a Deed of Covenant obliging a third party (the covenantor) to pay that “Defined Amount” if certain things occur.  One issue is however that the “Defined Amount” is not fixed – it can change year by year depending upon the amount of turnover and the net tangible assets.  As a result, with a deed that essentially remains in force until it is extinguished (which might be never), the liability of a covenantor which might have started at $100,000 could end up at being significantly more than that, without their knowledge.

This has been sought to be managed however by the inclusion of “Covenanted Amount”.  The standard deed of covenant (as at October 2021) states (in the definition of Defined Amount) that the Defined Amount will be no more than the Covenanted Amount, which implies that the intention at least is to cap liability at a particular sum.  However there is nothing in the deed itself to cap liability to the Covenanted Amount (if less than the Defined Amount) and it is unclear whether it could be the position of the QBCC that the wording of the Deed is intended to cap liability of the Covenantor, or instead to provide a ceiling on the effectiveness of the Deed itself as a mechanism to satisfy financial requirements.

In any event, the person who has provided the QBCC Deed of Covenant (the “covenantor”) generally thinks nothing more about it until there is a problem.  The obligation to pay the “Defined Amount” (whatever it is then) is triggered by insolvency events (eg if the licensee is a company, the winding up of the company, and if the licensee is an individual, the individual going bankrupt).

In the case of a company, what generally happens is that the liquidator of the licensee will demand that the covenantor pays the “Defined Amount”, and at that time, the covenantor may be sued by the liquidator and potentially bankrupted if it is not paid.  Whatever is paid by the covenantor goes in to the pool of receipts in the administration and is available to meet claims against the licensee, and the costs and expenses of the liquidator or bankruptcy trustee.

When signing a QBCC Deed of Covenant, the covenantor also charges their interest in property to secure the payment.  This means that if the covenant is called on, the QBCC can caveat the covenantor’s home or other property, and attempt to obtain orders to sell property to meet the charge.

Once given, the obligation of the covenantor is difficult to release.  It can be released if the QBCC gives written notice to the licensee and to the covenantor that the licensee has satisfied the Minimum Financial Requirements in a way that does not require reliance on the deed.  It can also be released if a further deed is entered into between all parties.  It would be prudent for any covenantor to attempt to obtain the notice releasing obligations, or the further deed, as soon as they could.

For advice in relation to building and licensing matters, please contact Justin Mathews at justinm@qbmlaw.com.au

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