In part 4 of our rent roll series, we focus on key terms to consider when drafting a rent roll agreement to ensure parties are adequately protected should challenges arise. If you haven’t yet read part 3 of our series, you can find it here.
Once the buyer and seller have come to a mutual agreement on the key terms of the transaction, it is important that a solicitor who specialises in rent roll transactions prepares an agreement that not only captures the basic terms, but it also protects the parties’ rights and obligations post completion.
things to consider post transaction
To govern the post transaction relationship of the buyer and seller, the following 3 aspects must be considered in a rent roll agreement
- Seller’s representations and warranties;
- Seller and Seller Representative restraints; and
- Retention mechanisms [which will be unpacked in part 7 of this series].
seller representation and warranties
Under a rent roll sale [which is a type of asset sale], in exchange for the purchase price, the buyer receives ownership of the business assets [which includes all property management agreements and associate management files].
In addition to the buyer’s due diligence [you can read more about that here] which allows the buyer to mitigate transaction risk by undertaking enquiries on the seller’s business assets, the seller should be required to:
- make representations as to the quality and condition of the business assets;
- warrant that the seller’s representation are true and correct at the date of the contract and at the date of completion; and
- indemnity the buyer if the buyer suffers a loss as a result of a seller representation being false or untrue.
The exact form of the seller representations will be negotiated by the parties’ solicitors, but the general base expectation is that the seller warrants that each property management authority being sold to the buyer:
- is valid, binding and enforceable in accordance with its terms, including being signed by the property owner and seller,
- is on the correct and updated Form 6 [Noting Form 20s are no longer assignable under legislation]and
- is provided to the buyer complete, accurate and contains the entire agreement between the parties to it concerning its subject matter;
Well drafted seller warranties will expand substantially on the above, with further representations and statements specific to the management authority.
Consideration will also need to be given to the business assets being sold and the nature of the transaction. Specifically:
- if the buyer is taking over seller employees, the buyer would be wise to seek warranties from the seller as to the seller’s compliance with workplace legislation;
- if the rent roll is transacted as a share sale, substantially more expansive warranties should be requested that incorporate taxation warranties and taxation indemnities; and
- if the buyer is purchasing plant and equipment, then it is imperative the seller should warrant the quality of such items being sold to the buyer.
restraint to protect the goodwill of the property managements being acquired
The buyer must have confidence that the seller and seller’s representative are not going to turn around after the transaction and erode the goodwill of the acquired properties. To combat this, the agreement should include an obligation and restraint on the seller and seller’s representative:
- to not to sell, rent or manage any properties purchased by the buyer, including not contacting, soliciting or approaching owners of any such properties [non-solicit];
- to not to employee any staff [for a specific period of time] that are employed by the buyer as part of the transaction and
- to not compete with the buyer’s business in a defined restrained area post settlement [non-compete];
While the above non-solicit restraint is non-negotiable for a buyer, the non-compete restraint can be optional [and not included in the agreement] as it is not uncommon for some sellers to dispose of only a portion of their rent roll portfolio.
Any buyer who is acquiring a rent roll without employing the seller’s property manager will also need to consider the potential risks in doing so. Here, there is little to no ability for the buyer to restrain a seller’s property manager from engaging in any of the above items listed.
As such restraints could be arguable unenforceable if the seller’s property manager has not received any consideration for the transaction.
On the other hand, if a buyer is employing a seller’s property manager, consideration should be given to the adequacy of the non-solicit restraints in the seller’s property manager employment contract.
The complex nature of a rent roll transaction requires specialist and tailored drafting. In order for the buyer to gain protection on their purchase:
- a clearly defined set of seller’s representation;
- the seller must indemnify the buyer for losses where the buyer relied on the seller’s warranties that were subsequently found to be untrue; and
- a clearly drafted seller restraint detailing what the seller and the seller’s representative will not do.
To navigate this, it is vital that parties do not enter into a rent roll agreement without receiving the appropriate legal advice.
Stay tuned for the next part of the blog series which unpacks GST and taxation considerations in a rent roll transaction.
we’re here to help
If you are considering selling or buying a rent roll, feel free to reach out to us at firstname.lastname@example.org or give us a buzz at 1300BDEPOT to discuss the potential agreement and all aspects of the sale or purchase.
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general advice disclaimer
The information provided in this booklet is a brief overview of the subject matter and does not constitute any type of advice. We endeavour to ensure that the information provided is accurate however, information may become outdated as legislation, policies, regulations and other considerations constantly change. Individuals must not rely on this information to make a financial, investment or legal decision and should consult an appropriate professional before making any decision.