Rent roll transactions can be tricky to navigate. Between the legal fine print, financial complexities, and operational handover, there are plenty of moving parts and just as many opportunities for things to go wrong.

That’s why having the right professionals on your team isn’t just helpful, it’s essential. With experienced advisers guiding the process, your transaction can run smoothly [and as quickly as possible], minimising those inevitable bumps along the way.

In the next 3-part blog series, we’ll unpack the top five issues we regularly see arise in rent roll transactions through the lenses of a lawyer, accountant, and rent roll broker. Each brings a unique perspective and lens, and together they’ll help you understand not only what can go wrong, but also how to stay one step ahead and keep your deal on track.

 

from a lawyer’s perspective

 

1. specialist rent roll contract terms + considerations

 

It is crucial that a solicitor who specialises in rent roll transactions is engaged to prepare the Rent Roll Agreement. This is fundamentally important, noting the complexities of a rent roll transaction.

We often find that negotiations around the following terms can take some time to reach an alignment between the buyer and seller:

conditions Conditions of sale, whether due diligence, finance, franchisor or landlord approval or other conditions apply. Inclusion of deeming satisfying conditions is considered problematic.
due diligence Whether management documents can be reviewed electronically by the buyer during due diligence.
employees Whether the buyer can take over any employees, and if so, what is the adjustment mechanism in favour of the buyer to do so.
final property list Which properties form the rent roll paid for by the buyer on completion. Does this remove any properties where a notice of termination has been received, and can the seller add new properties without the consent of the buyer.
multi landlords Are there any landlords who own multiple properties in the portfolio, and are they treated differently [for example, lower multipliers, higher retention percentages or longer retention periods].
retention claim How does a buyer claim a property under retention, and what are the evidence requirements? What reasons constitute a valid retention claim?

Are there any niche retention clauses that could invalidate claims or allow the buyer to claim more than the agreed amount?
restraints Whether the seller [including directors and shareholders] is restrained appropriately following completion.
form 6s Does the contract adequately confirm only valid Form 6’s are capable of assignment.

 

2. correct management documents + due diligence

 

To help ensure a smooth transition on completion and minimise the amount of property losses [and therefore retention claims by the buyer], it is important to carefully consider the management documents and due diligence process.

 

for a seller

It is recommended that before a seller wishes to sell their portfolio, they complete a thorough internal file audit to ensure all property management files are high quality, with all key documentation readily available, correctly signed and up to date.

This helps to ensure that:

  1. the buyer’s due diligence can occur smoothly,
  2. all files are in great condition to allow for a simple data migration on completion to the buyer, and
  3. the buyer spends the first few weeks after completion building their relationship with landlords, rather than going into damage control trying to locate missing files or rectify incomplete files.

 

for a buyer

On the other hand, it is highly recommended that buyers undertake a thorough rent roll due diligence, including a review of the seller’s property management files they are acquiring and identify any issues as soon as possible [and before satisfying any due diligence condition], which can include:

  1. any missing forms or documents,
  2. any forms that are incorrectly completed, invalid or require amendments, and
  3. any expired pool safety certificates or smoke alarm certificates to ensure compliance of properties are up to date.

This then allows the seller an opportunity to rectify any issues flagged so that the property management files are of the highest quality and ready for completion.

If the buyer fails to complete a thorough due diligence [or elects to review only a portion of the portfolio], or the seller hands over unorganised management documents, then the buyer runs the risk of spending the first few weeks after completion rectifying documents which could impact landlord retention [and what the buyer claims under retention].

 

3. retention

 

In many rent roll transactions, negotiations of agreeing on the retention clause language between parties are becoming more and more contested.

Lately, we have seen a number of clauses in relation to retention that require additional consideration, including [but not limited to] the following:

20% retention cap Removing the percentage cap a buyer can claim – essentially attempting to allow a buyer to claim more than 20% of lost properties;
not definitive loss refund Including an ability for the buyer to receive a refund automatically for a property that is listed for sale, or an intent to terminate – a property should only be refunded if the buyer has lost that property;
evidence Including an obligation of the buyer to provide evidence from every landlord confirming the reason they have terminated with the buyer, or it is invalid.

We consider that this is too high of a threshold for the buyer to meet. Evidence obligations should be balanced to ensure that reasonable evidence is provided so the buyer is not subject to a threshold that renders valid losses non-refundable or that the seller is subject to a low threshold resulting in every loss [including where the Buyer has mismanaged the management] being deemed a valid loss.
notification of loss Inclusion that the buyer must notify the seller within a set window period of a property loss [from the time it is lost], otherwise it cannot be claimed on or before retention.
reasons for loss Sellers not accepting some key reasons for a loss – such as if the property was sold uninhabitable and will not accept this as a retention claim, despite it being unable to be let [and it was uninhabitable before completion].
invalidity of notice Inclusion that if the notice is provided incorrectly, it is invalid, and the buyer is entitled to nothing. An error [or lack of evidence] should potentially only invalidate that singular property.

 

4. ensuring correct restraints

Restraints on sellers and directors in all capacities [restrained parties] following completion are crucial in ensuring that the goodwill and value in the seller’s business purchased by the buyer is protected and not impacted negatively post completion.

It is recommended that restrained parties are restrained from:

  1. contacting, soliciting and canvassing the landlords of the rent roll portfolio purchased,
  2. selling, managing or letting any rent roll properties purchased,
  3. poaching any staff who are taken over by the buyer following completion to resign,
  4. assisting or procuring anyone in doing any of the above.

Depending on the transaction, restraints may also include the restrained parties from engaging in a property management or sales business following completion.

It is crucial such restraints are documented in the agreement, as without them, this could result in sellers, following completion and retention, reaching out to landlords [directly or indirectly], attempting to obtain the management back.

Confirming whether sellers are also restrained from selling the properties is also vital, as buyers are usually buying the goodwill and opportunity to sell such properties [by building relationships with the landlords], and allowing the seller to sell properties contradicts this purpose.

It is also important to understand what the seller [including their staff if the buyer does not employ them] intends to do after Completion. Opening a competing business after completion is unfortunately something we have seen in the past, which can impact the portfolio and goodwill of the sold business and/or portfolio.

 

5. know who you’re dealing with

One of the most common items overlooked in a rent roll transaction is underestimating the impact of knowing who you are buying or selling from. Even the smoothest-looking deal can quickly unravel if you’re buying or selling from the wrong business.

Due diligence for both parties isn’t just about reviewing the management documents; it is also about knowing who you are dealing with and how they have operated their business. A history of a good reputation will usually make the process transparent, communicative and solution-focused if any issues arise, including during the contract negotiation phase.

At the end of the day, rent roll sales are more than just the transfer of an asset; they are also about relationships, trust, and long-term value between the parties. Choosing the right counterpart can be the difference between a seamless transition or stress, disputes and potential loss of revenue following completion.

 

we’re here to help!

We hope you’ve found this series helpful in giving you a clearer picture of how rent roll transactions work and the key pitfalls to look out for.

If you’re thinking about buying or selling a rent roll management portfolio, our rent roll lawyers are here to help. Reach out to our legal team on 1300BDEPOT or email legal@businessdepot.com.au

 

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general advise 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.