Buying A Rent Roll

WHAT HAPPENS TO EMPLOYEES AND THEIR ENTITLEMENTS WHEN I BUY A RENT ROLL?

To assist in the transition process as well as reduce churn and lost managements, it may be a good idea to take on some of the seller’s employees. However, before doing so there are a few factors you need to consider. It must be noted that you can refuse the transfer of employees when buying the rent roll if your contract for sale is set up correctly.

Employees in Australia are afforded various leave entitlements and denying them these, whether unintentionally, could land you and your real estate agency in legal hot water.

The first is annual leave, also known as holiday pay leave, and are days/time employees can take off whilst still being paid. All employees, except those that are casuals, are entitled to annual leave. Generally, your staff are entitled to 4 weeks annual leave per year (pro-rated for part-time employees) unless you have been more generous in your employment contracts. The second is long service leave which an employee who has worked for a long period for the same employer is entitled to.

As a rule, when you take staff on, you will inherit their leave balances and other entitlements if the employees transfer across. Therefore, the transferring employees won’t be considered new employees, and this also means they won’t have a probationary period. However, if you want to take on these employees and also include probationary periods it can be done. This involves the seller first terminating the employee, paying out their entitlements, making them redundant, and then you are able to give them a letter of offer and contract. With this you must be very clear on the terms on which these staff members are being employed by you.

In addition to this, when employees transfer with the purchase of the rent roll, their service to the seller will count towards their service to you. This means that, even if you give the old employees new offers of employment in the same business, their employment period does not reset back to the start. Therefore, when calculating the long service leave of an employee, the duration of employment must include the time up to and after the purchase of the rent roll.

There are some exceptions to this. If the seller has already settled the employees leave balances before the transfer, then the employees old service will not be counted towards the entitlements owed by you so they start afresh. This will also allow you to reset their probationary period. However, this can only be done if you, as the buyer, have notified the employees of this in writing in their letter of offer and contract. Notably, this also means that the unfair dismissal period will also reset as the purchaser will not recognise the service the employee has provided the old employer. Unfair dismissals refer to employees who have been let go from the agency in a manner that is unjust, harsh, or unreasonable, this includes if the dismissal was unlawful or a breach of general protections.

In some circumstances you may also be required to honour work arrangements employees have made with the seller, such as those with carer responsibilities having flexible working conditions.

With all of the above to consider, how does this impact the rent roll purchase price/value? Well, the smart thing to do would be to consider adjustments for employee entitlements. For example, adjustments are usually made for long service leave, if the employee has at least five years services, but this differs between states, and annual leave. Adjustments are usually done to take into account the company tax rate and not adjusted at 100%, usually 72.5%. Generally, adjustments are not made for sick/personal leave.

HOW DO I DEAL WITH LOST MANAGEMENTS? WHAT ARE RETENTION PERIODS AND SUMS/AMOUNTS?

We all know that relationships are central to real estate agents and property managers. Many clients of ours do not do business with the brand, but the person. Buying a rent roll essentially means buying these relationships.

When buying a rent roll, not all landlords will want to stay in your portfolio. To address this churn, commonly known as lost managements’ you should put in a recourse mechanism by which you are given a refund’ for the managements lost. This is done by way of a retention period and a retention amount. If you lose managements in the retention period, you will be refunded part of the purchase price, generally up to the capped retention amount. This amount should be negotiated early to ensure there are no problems when it comes to the transfer of authority to you. This amount can be adjusted if properties are lost at settlement. This amount may also be required by your bank if you are planning to obtain finance for your rent roll purchase.

The retention amount will vary for every transaction and will be influenced by the type of rent roll and your area. However, as a rough guide a 3 6 month retention with 5% 20% of the purchase price at risk’ will form the retention amount. Currently though, retention rates have become increasingly high at 30%!

So, how do you go about ensuring you’ve addressed the issue of retentions and lost managements? Through your contracts! It is essential you have adequate retention periods and retention amounts stipulated in your contract, and this should include detailed rules around the process of how retention amounts will be released.

Also, it is important your contract clearly outlines what constitutes a lost management, as not all managements that leave the rent roll are generally considered lost’ with a refund available in the retention amount. As an example, if an owner moves back in, or the buyer sells the property and receives a commission for the sale then these aren’t considered lost’. The determination of what circumstances constitute a lost management need to be negotiated with the seller. As an example, other circumstances that are commonly negotiated to mean lost managements include buyer negligence, or any change in management fees or terms that make an owner leave. Your contract should also detail what happens if a dispute does arise when it comes to determining if a management has been lost.

HOW DO I PROTECT MY NEW RENT ROLL FROM THE SELLER & THEIR ASSOCIATES LATER?

A rent roll is an expensive purchase so you need to ensure you’re protecting it. Your first step? ensuring that the vendor won’t compete against you. Imagine paying for your shiny new toy, then having the former principal swoop in and take it from underneath you. Knowing that relationships are essential to the real estate business, you need to protect the new ones you’ve purchased. To do this you must ensure that the vendor will not steal their clients back. Following this, you’ll also want to stop the vendor from taking your new staff and luring them over to their new venture. You can do this with a restraint of trade in your contract.

What is a restraint of trade? Essentially, it is provision or clause, usually found in contracts, restricting the other party’s ability to perform a specific work activity for a specified time period. When buying a rent roll, a restraint of trade clause can restrict the seller from stealing back any managements they have sold to you. A restraint of trade clause is the best way to protect the goodwill of the rent roll after settlement.

If the seller is a company, then you will want the restraint of trade to apply to all the principals, directors, and other key staff members to ensure the seller doesn’t have a work around to your restraint clause. Remember to also consider any employees and contractors of the seller as they can also steal your new clients. To avoid this, ensure your contract obligates the seller to ensure their employees and contractors will not compete with you. However, before buying your rent roll it is always a good idea to check if the sellers employment contract will allow them to enforce a restraint of trade against their people once you take over.

There is always a possibility that the vendor will act in bad faith and ignore the restraint of trade provisions. What can you do about this? Your contract should include a damages provision which details how you will calculate the value of any restraint of trade breaches and obtain this from the vendor.

CAN I STILL BUY THE RENT ROLL IF I DON’T HAVE FINANCIAL APPROVAL?

Before buying your rent roll it is best to ensure you have unconditional financial approval. However, this may not always be the case. This means you may need to pull out of the purchase if your approval doesn’t come through. To do this legally, ensure your contract is subject to finance’. Not doing this can then mean you will be liable to go through with buying the rent roll, and when you can’t do it, dependant on the terms of the contract for sale, you may lose your deposit, be sued by the seller, or if the seller later sells the rent roll at a lower price, be obligated to pay them the difference.

It is also important to note that in recent times, financial approvals have become increasingly hard to get and the process longer. So, if you’re not careful with the financial terms of the contract you will end up losing a significant amount of money for nothing.

WHAT ABOUT SECURITY INTERESTS ON THE RENT ROLL PROPERTIES?

When buying your new rent roll, it is best to ensure that there are no security interests over it. Just like if you are buying a house you want to make sure that the vendor’s mortgage is discharged, the same happens with charges, or security interests’ over a rent roll. If there is a security interest over your new purchase, you could potentially lose the rent roll if the assets need to be called in. This can happen if the vendor has a loan and defaults. In this situation, the bank will seize the rent roll, regardless of who owns it. To avoid this, you need to conduct a Personal Properties Securities Register (PPSR) check. Through a PPSR check you will be able to identify if there are any charges or securities on the rent roll. This will allow you to either reconsider your deal or include a condition precedent in your contract that the purchase price will not be handed over and settlement will not occur until the securities over the asset have been cleared.

WHAT HAPPENS IF THE RENT ROLL IS OPERATING UNDER A FRANCHISE?

If the rent roll was operating under a franchise, and you wish to continue to do so after you have purchased it, then franchisor consent will be required. Remember, if you are taking this route, then adequate time needs to be included in the settlement process to allow for the consent to be granted. You will also need to ensure your contract for sale has provisions that cover this.

Example: Condition precedent for settlement is franchisor consenting to the assignment of the franchise agreement and associated rent roll to the purchaser.

WHAT HAPPENS IF THE RENT ROLL IS OPERATING FROM A PREMISES THAT IS LEASED OR VENDOR OWNED?

The premises, where the business is conducted, can sometimes form part of the asset being sold. This premises may be owned by the vendor, in which case, if you want to continue to operate from it you may have to purchase it, or include it in the rent roll transaction, or you may have to lease it from the vendor. To do this, the purchase or the lease, should happen in conjunction with the main rent roll transaction.

However, in some instances the vendor is leasing the premises from someone else. So, what happens with this existing lease if you buy the rent roll? If there is still time remaining on this lease then the lessor or owner of the premises can assign the lease to you, the purchaser. To do this, the lessor must grant consent, and this is usually a matter the vendor deals with, with the assistance of the buyer. As the lease will form part of the purchase asset and is being assigned, you will need to comply with the existing terms of the lease. However, variations to the lease may be permitted if the lessor allows/ accepts it. If the vendor’s lease has ended or near finishing, then you may have to enter into a new lease with the lessor. As this will be a new lease, you may be able to negotiate the terms with the lessor. You will also need to ensure your contract for sale has provisions that cover this.

Example: Condition precedent for settlement is the lessor consenting to the assignment of the lease the purchaser.