Sale of a Rent Roll

201504.14

The sale of a rent roll involves different considerations to the sale of many other types of businesses due to the nature of the assets and goodwill being sold.

Multiplier

The value of a rent roll is usually determined by a formula which is a multiplier of the yearly management fee.  The multiplier adopted will be affected by a range of factors including:

  • the average annual rent and management income of each property;
  • whether properties are owned by single or multiple property owners;
  • the geographic spread of the properties;
  • whether the properties are predominantly commercial/residential;
  • the location and desirability of the properties;
  • the type and duration of the leasing authorities.

Depending upon the above factors, the multiplier will typically be 2-3 times of the annual management income.

Retention

From a purchaser’s perspective, to protect the goodwill of the business, it is critical to ensure that as many leasing authorities are transferred to it on the settlement date.

A retention sum is usually negotiated to ensure a smooth and effective transfer of the properties to the purchaser.  This will typically be up to 20% of the purchase price and will be held for up to 3 months after settlement.

It is important that there are appropriate adjustment mechanisms in the sale agreement to vary the purchase price / retention sum if:-

  • any leasing authorities are terminated from the date of the heads of agreement, or after the settlement date;
  • any properties become vacant prior to the settlement date, or between the settlement date and the end of the retention period;
  • any properties are in significant arrears of rent or outgoings on the settlement date, or at the end of the retention period;
  • new leasing authorities are entered into between the date of the Heads of Agreement and the end of the retention period;
  • any properties which were vacant at the date of the heads of agreement, become tenanted by the settlement date or the end of the retention period;
  • there is a failure by the purchaser to properly manage the properties after the settlement date;
  • a property is sold by the purchaser between the settlement date and the end of the retention period.

Unfortunately, many of the proforma agreements in the marketplace fail to deal with these issues adequately or at all.

Assignment or Grant of New Leasing Authorities

The requirement to assign existing leasing authorities, or procure new authorities by the settlement date, will partly depend upon the type of leasing authorities used by the vendor.

The REIV Authority allows assignment to another agent by giving written notice to the landlord client.  If no objection is received within 14 days, then there is effectively a “deemed” assignment.

If non-standard leasing authorities have been used, then the parties need to consider whether:

  • the authorities are personal to the agent (and therefore cannot be assigned); or
  • if there are specific assignment provisions, what requirements need to be met to ensure a valid assignment

GST

There is some uncertainty as to whether the sale of a rent roll (and particularly the sale of part of a rent roll) qualifies as a sale of a GST-free going concern.

In summary, the GST legislation provides that the the sale of a business as a going concern is GST-free if all of the following apply:

  • everything necessary for the business’s continued operation is supplied to the buyer;
  • the seller carries on the business until the day it is sold, that is, until settlement;
  • the buyer is registered or required to be registered for GST;
  • payment is made for the sale;
  • before the sale, the buyer and seller agree in writing that the sale is of a going concern.

The issue as to what is “necessary” for the business’s continued operation arises particularly in circumstances where a contract does not, for example, provide for the assignment of the lease, the transfer of employees, or the business name.

In light of that, it is prudent for parties to seek their own tax/legal advice on this aspect of the transaction having regard to the specific terms of the sale.

Restraint of Trade 

A restraint of trade clause is critical to protecting the goodwill of the business after the settlement date.

Most restraint of trade clauses only operate to restrict the vendor from competing with the business in terms of time (e.g. 3 years from the settlement date) and distance (e.g. 10 km from the business premises).

It is important to ensure that any restraint is drafted to restrict the vendor, its directors, and related entities from soliciting, canvassing, inducing or securing the custom or patronage of any landlord on the rent roll for the entire restraint period.

In certain instances, however, it may be necessary to structure the restraint to ensure that a vendor can continue to operate as a leasing/sales agent after the settlement date but subject, of course, to the above limitations.

There are numerous legal issues which arise in rent roll transactions.  As such, a purchaser or vendor should seek the advice of an experienced business lawyer – and business broker – who has experience with these types of transactions to ensure that their rights are properly protected and all relevant issues are addressed.

Matthew Baker-Johnson, Principal, Avery Commercial Lawyers

Matthew is an experienced commercial lawyer who regularly advises parties in relation to sale of business issues.  He is a member of the Law Institute of Victoria (LIV) and an associate member of the Australian Institute of Business Brokers (AIBB)

Disclaimer:

The information contained in this article is intended to provide general information only and is not legal advice or a substitute for it. You should always consult your own legal advisors to discuss your particular circumstances.