There are many considerations every buyer and seller should be aware of after settlement of a rent roll transaction has occurred.

In our final 7-part rent roll blog series below we unpack the post completion considerations that should always be taken into consideration for both parties.

If you need to catch up on the earlier part of our series, click here! 

 

1. relationship building for the buyer

As a buyer, your focus is to build relationships with the landlords and tenants that form the property management portfolio you have just purchased.

This includes:

  • Introducing your real estate business to all landlords and tenants as soon as possible after settlement to ensure landlord’s feel their investment property is going to be well-managed and given priority,
  • Rectifying any issues that were flagged during your due diligence investigations, and
  • Ensuring any maintenance jobs outstanding for properties are continued without any delays.

2. buyers – remember to inform every landlord

The buyer has strict obligations to comply with the Property Occupation Act 2014 by issuing a written notice to every landlord within 14 days of settlement.

This notice must include:

  • The buyer’s name, contact details and registered office address,
  • Confirmation the appointment has been assigned without changing the terms of the agreement, and
  • Confirmation the appointment may be revoked by a landlord by providing at least 30 days’ notice of the revocation to the buyer, unless the parties agree in writing to an earlier day for the appointment to end.

We strongly recommend buyers reach out to our team if they require help ensuring their notice is compliant, as penalties apply for an invalid notice [or failure to issue a notice within the required timeframe, or at all].

3. sellers – remember your restraints

Often the Rent Roll Agreement will have a post-completion restraint on the seller [and directors if the selling entity is a company].

It’s important for sellers to be aware of their restraint obligations, which often include being restrained from contacting or soliciting any landlords of properties that formed part of the sale, selling any rent roll properties for a duration of time [or selling any properties], or being engaged in the property management business at all.

4. don’t forget retention

One of the most important post completion considerations for buyers and sellers is the retention process.

It is crucial that the agreement between the parties adequately deals with this process.

Commonly, the standard process in rent roll transactions involve the seller’s lawyer holding a percentage of the purchase price [known as the retention percentage] in their trust account for a period of time after settlement [known as the retention period].

This allows buyers the opportunity to seek a refund for properties lost during the initial transition period, noting it is likely some landlords may not wish for their property management to be assigned, or may wish to sell or move back into the property during this time.

Below unpacks common terms and details involving the retention process, noting however this is always subject to the terms of the agreement.

a. retention percentage

A standard retention percentage is 20% of the purchase price. It is sometimes common to apply a different percentage to landlords who own multiple properties being sold to the buyer [or alternatively, extending the retention period in part B. instead that relates to those multi owner properties].

Example: if a landlord included in the property portfolio owns 10 property managements, if this landlord terminates their management with the buyer, the buyer has automatically lost a large chunk of the retention percentage on one landlord’s loss. To combat this, agreements often separate retention percentages so a higher percentage applies to a multi owner, with a standard 20% retention still applying to non-multi owners.

b. retention period

A common retention period is three months after the settlement date.

Depending on the terms of the Agreement [and receiving the appropriate legal advice], the retention period may also include an extension of retention mechanism.

Essentially this means if a landlord provides a written intention before the retention period to move back into the property or sell, then the purchase price of those properties are held in the seller’s lawyers’ trust account for a further duration of time to determine whether the properties are actually lost in the future (ie whether they actually sell or the landlord does move back into the property]. This retention extension period can vary from as little as one extra month, up to twelve extra months. However, the ability for a property to satisfy falling within this retention extension is subject to the buyer providing a valid retention claim [as unpacked in section C. below].

c. retention notice claim

Before the retention period falls due, the buyer must submit to the seller their retention claim. This sets out how many properties they lost during the retention period, and how much of the retention percentage they wish to be reimbursed to the buyer.

Commonly, the buyer [or buyer’s lawyer] must email to the seller [or seller’s lawyer] by 5pm on the retention date, a notice setting out each property lost, the reason of the property loss and the purchase price associated with that property. Evidence must strictly be attached to this notice, which clearly shows evidence of the landlord terminating their management with the buyer on or before the retention date. An example of this is an email sent from the landlord to the buyer confirming they terminate their management.

It’s extremely important to flag that standard agreements include incredibly strict notice obligations on how the buyer is to submit to the seller a refund under the retention process, and failure to comply with the notice requirements by the due date can completely invalidate the buyer’s entire retention claim, meaning they are entitled to nothing.

This is the main reason why retention disputes are on the rise and becoming more frequent with rent roll transactions. Noting this, we highly recommend engaging our legal team to act on your behalf during the retention process.

d. what is claimable under retention?

The following lists unpacks common circumstances that allow a buyer to obtain a refund and what is excluded [subject to complying with the notice requirements above, and noting these are not exhaustive lists and always depend on the terms of the agreement):

often refundable

  • A landlord has terminated their management with the buyer before the retention period ends,
  • A property has sold and the buyer has not taken over management from the new owner,
  • A property was vacant at settlement and remains vacant at the end of the retention period, and
  • The property is unfit for living (for example, flooded).

often not refundable

  • The property is lost due to any mismanagement of the buyer, and
  • The buyer acted as sales agent for the sale of the property which derived financial benefit.

we’re here to help 

We hope our rent roll blogs for buyers and sellers has given you some in-depth insights into rent roll transactions and the key pitfalls to avoid. If you are considering selling or buying a rent roll, feel free to reach out to our rent roll lawyers at legal@businessdepot.com.au or give us a buzz at 1300BDEPOT to discuss.

 

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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.