Negotiating Rent Roll Contracts

Overview: The two competing interests under any rent roll agreement are the Buyers need to protect the goodwill in the rent roll being purchased, and the Sellers need to receive all monies due to the Seller for each property management agreement transferred.

A Guide for Agents Who are buying or selling Rent Rolls

1. Assignability: The Buyer needs to be assured that the management agreements are assignable. Under PAMDA, management agreements can be assigned provided the property owner consents to the assignment. Under section 133 of PAMDA at least 14 days before the agent assigns the appointments, the agent must give each client written notice of the proposed assignment. Notices must state: a. the assignees name; b. the appointments are to be assigned without changing the terms of the appointment; c. the client may agree or refuse to agree to the proposed assignment; d. when the proposed assignment is to take effect.

2. However section 133 does not apply to the assignment of an appointment if: a. the terms of the appointment authorise the assignment of the appointment; and; b. the assignment is made in accordance with the terms of the appointment.

3. The PAMDA Form 20a contains an assignment provision at clause 4.4. For this to be effective under section 133 each property owner needs to initial that clause as to whether they agree or disagree with the assignment. If they disagree with the assignment then a new property management agreement should be negotiated with the Property Owner.

4. Due Diligence: A Buyer should check and secure warranties from the Seller in relation to tenants that have paid rent in advance so that on settlement fees that have been collected on rent paid in advance is paid to the Buyer.

5. The Buyer should also check and or the Seller warrant that the: a. parties stated in the form 20a are in fact the registered owners. It is not unusual to find in the course of due diligence that a registered owner is not named in the form 20a; and b. Schedule (usually the REIQ Property Management Agreement) attaching to the Form 20a is also executed by all of the registered proprietors to avoid confusion.

6. The Buyer in the course of its due diligence should also gauge the happiness of the property owner. A Seller will need to be aware that an unhappy property owner may result in loss under the retention.

7. The Buyer should also insist on a clause that entitles termination should say 20% or more of the properties not be successfully transferred. This calculation will usually have an impact on the Buyer’s financing conditions.

8. Restraint of Trade: Poorly worded restraint clauses create litigation. A Buyer should ensure that the Seller is restricted from managing the property in the future as well as restricted from selling those properties. A Buyer would want to secure the sales that derive from the rent roll. The Seller should be careful not to sign agreements that unreasonably restrict the Sellers trade. Negotiating these provisions can be complex. Some flexibility is usually allowed for continuing to operate as a salesperson but not as a rent roll operator for a period and/or within a nominated area. Sometimes, the Buyer should also require the Seller to obtain a separate restraint deed from family members, co-directors and shareholders. Understanding and agreeing to the restraint provisions upfront will avoid costly litigation in the event of dispute.

9. Retention: A retention clause is essential. Generally a retention amount of 20% to 30% over a period of three months is not unusual. The retention clause protects the Buyer to the effect that any properties paid for that are lost in the first three months is refunded to the Buyer out of the retention. A longer period of retention suits the Buyer.

10. The retention clause should set out the definition of what constitutes a termination of the management agreement. A notice given by a property owner that they intend to sell should be included in this definition.

11. Settlement: The purchase price is usually calculated in accordance with a formula applying the agreed rental multiplier. Be aware that if the formula is expressed as a weekly rental, a lower purchase price will be obtained then if the formula was expressed as a daily rent.

12. The contract should also precisely define the documents to be produced at Settlement. Having the documents ready and in order avoids frustration, time, costs, and energy spent post settlement.

For more information contact Evan Sarinas on 0418150111 or esarinas@sarinaslegal.com.au

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