Selling A Rent Roll
SELLING A RENT ROLL FOR YOUR BUSINESS: LEGAL GUIDEThe selling process isn’t simple, and without careful consideration, you may just end up jeopardizing your greatest asset - your real estate business. That’s why we’ve put together this legal guide to ensure you know exactly what to do when it comes to selling your next rent roll.
About O*NO Legal: We help real estate agency principals to sell their rent roll the right way so that they can maximize the value of their sale asset and increase the value of their agency a whilst knowing their a*rse is actually covered.
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INTRODUCTION.
You’ve worked hard to build and grow your real estate agency and now it may be time to cash in on all your hard work. This includes taking advantage of one of your biggest assets – your rent roll portfolio. Whether you’re looking for a financial injection, want a change in your career or business, are downsizing, moving geographically, or simply retiring, it may be time to sell your rent roll. However, unlike other business transactions, rent roll sales are unique to the real estate industry, and this can make the process a little complicated to navigate. Without careful consideration of several factors you may just end up jeopardising your greatest asset – your real estate business. Knowing the importance your rent roll sale will have on your future, why leave it up to chance and guesswork. That’s why we’ve put together this legal guide to ensure you know exactly what to do when it comes to selling your next rent roll. I mean you wouldn’t perform your own heart surgery right? So why not tag in our team of rent roll sales specialists and tackle your transaction with confidence.
CONTENTS.
Infographic summary of the rent roll purchase process.
The benefits of selling a rent roll. How you can get your rent roll sale ready and maximise the sale price.
The factors that you should consider when selling a rent roll - are multipliers, employee details, lost management, asset protection, financial approval, security interests, franchises, leases, etc.
The actionable steps involved in the sale process and the key parts/documents you need for the transaction.
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WHO WE ARE.
O*NO Legal are Australia’s leading business lawyers who help real estate agencies like yours to shield your assets, future proof your business relationships, expand faster and plan your exit so that you can increase the value of your real estate agency and have peace of mind knowing your a*rse is actually covered.
Our team is dedicated to helping real estate agencies expand and shield their assets. As a specialized firm, we provide advice tailored to our clients to achieve their objectives effectively and efficiently. We are genuinely interested in helping our client’s future proof their relationships with their clients, partners, and staff to create a legally unbreakable agency.
OUR FOUNDING DIRECTOR
Kristen Porter, has real estate in her blood. As third generation, she was born into the industry and has a passion for it that no other lawyer has. Servicing almost exclusively real estate industry clients across Australia, she understands the pressures and pain points of the industry. With her unique industry insight, Kristen is dedicated to providing clients with solutions that are timely, flexible, and innovative.
WHAT ARE THE BENEFITS OF SELLING A RENT ROLL?
Rent rolls are more than just documents, they are an important business asset that can be sold, bought and borrowed against. Your rent roll sale transaction can have versatile application from aiding your growth process to strengthening your exit strategy. Selling a well-managed and valuable rent roll could lead to unparalleled benefits for your bottom line, agency, savings, and/or even your retirement fund. There are several ways a rent roll sale could positively affect you, your future, and your business.
One major benefit of selling a rent roll is the injection of income into your business or bank account. This is most important in times of financial need such as paying off debt or investing in a different project or part of the agency. Your rent roll can also be an asset that can be borrowed against. This way, your rent roll can act as a security, making it easier to borrow money to fund your growth or investment plans. For growth purposes, you are also able to use the equity in the rent roll to expand your already existing agency.
In general, it will be easier to sell your rent roll as opposed to other parts of your agency, such as the sales department. Your rent roll portfolio(s) can act as independent, sellable assets. The value of your real estate agency is predominantly found in your rent roll. In comparison, sales agencies are often worth very little, and this too is generally just in the form of goodwill and any exchanged yet unsettled sales commissions. This goodwill is also often tied to you as the agency’s principal – so your departure means a departure of that goodwill, leading to a decrease in value.
Best of all, your rent roll will become a valuable business asset for you. When it comes time to exit your agency or sell it down the track, a sales only business may not be worth as much as you think it is. Your main selling point will be your rent roll – especially if you’ve managed it well and expanded it. Your rent roll can also be an asset that can be borrowed against. This way, your rent roll can act as a security, making it easier to borrow money to fund your growth or investment plans.
Selling your rent roll may also form an integral part of a successful exit strategy. When it comes to retiring or exiting from your agency, you will want to have financial security for your future. This can be achieved by cashing out the assets you’ve worked to build. Selling your rent roll the right way will allow you to reap the benefits of all the hard work you’ve put in.
HOW CAN YOU MAXIMISE THE VALUE OF YOUR RENT ROLL
AND GET IT SALE READY?
As you’d know, a rent roll is a significant commitment, and this means prospective buyers will be very cautious about the portfolio they purchase. Therefore, you should aim to present a well-managed, profitable, and clean rent roll portfolio to ensure you are getting the best price for your asset.
The first step? Market research. This includes looking at how the current rent roll sector is performing, what buyers in the market are looking for, how much other rent rolls in the area have sold for, and how you can go about dressing up your portfolio to meet market needs. Selling your portfolio ‘as is’ may mean you end up taking a heavy, and unnecessary, cut off your sale price, which could have been avoided with a few tweaks to your portfolio and properties. You wouldn’t try to sell a house as is right? Your aim would be to renovate, style and present it to meet the needs of the buyers in a pretty package – that’s exactly what your rent roll requires to achieve maximum value.
To make your sale efficient and effective you need to consider the administrative side of your rent roll. This relies heavily on your organisation of the portfolio. To successfully achieve this, you need to have a good understanding of the properties in your rent roll, including the total number, fees and weekly rent amounts, vacancies, rental arrears, outstanding issues of properties, inspection details, landlord to property ratios, and general business and operational aspects of the portfolio. A thoroughly organised and well-presented rent roll will make it difficult for a buyer to poke holes in it and reduce your sale price.
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BEFORE YOU SELL IT FOR LESS & MISS OUT.
GET YOUR BEST SALE PRICE BY WORKING
WITH A RENT ROLL LEGAL EXPERT TODAY.
CONSIDERATIONS WHEN SELLING YOUR RENT ROLL.
The following will detail the various factors you should be considering making an informed, profitable, and safe rent roll sale.
HOW WILL BUYERS ASSESS MY RENT ROLL?
HOW CAN I PROTECT THE INFORMATION I DISCLOSE?
Potential buyers will check the condition of your rent roll by performing a due diligence check.
But what does due diligence mean in relation to a rent roll? Essentially, due diligence refers to checking whether the claims being made as to the state of the rent roll are true. This process is commonly taken by buyers to determine if the vendor’s asking price is fair. For this reason, contracts for sale will often have adequate due diligence periods giving the buyer the ability to either pull out of the deal or make a new offer of price/multiple. Therefore, to test whether your asking price is reasonable you can also undertake your own due diligence check. This check will also allow you to assess the condition of your portfolio and identify areas of concern that could lead to a reduction in your sale price or deal falling off the table.
A due diligence check by a buyer will obviously mean allowing them to look under the hood of your rent roll. This means disclosing information and details about your portfolio that you’d rather not have widely publicised.
So, to ensure your sensitive information remains confidential, remember to put a non-disclosure agreement, or NDA, in place. An NDA is a legal contract which creates a confidential relationship between you and the buyer by which they agree to not disclose the sensitive information they have obtained from you. However, as we all know a contract won’t stop everyone from doing the wrong thing. Therefore, an NDA also outlines what will happen and what you are entitled to if the buyer does breach their confidentiality obligations.
MULTIPLIERS AND VALUING:
DO YOU KNOW WHAT PRICE YOU SHOULD BE SELLING YOUR RENT ROLL FOR?
When selling your rent roll, and any asset really, you need to make sure that you aren’t miscalculating or underestimating its sale price. Generally, the value of a rent roll is determined by applying a multiplier to the annual management fee income. The multiplier is the magical number that determines the value of the rent roll. You then times the gross annual management fees by the multiplier to get your sale price.
Example: $148,680 (annual management fees) X 2.85 (multiplier) = $423,738 (rent roll value)
Now you may be asking, how is the multiplier determined? In a nutshell, the multiplier is determined by way of valuation and takes into consideration many factors, such as:
Averages of annual rents and management income.
Terms left to run on any management agreements.
The geographical location of the rent roll properties – especially in relation to the desirability of the area, distance from you and/or your office and other properties.
The ratio of landlords to the number of properties under management.
Relationships between the vendor and their landlords – especially if there are special circumstances/allowances.
The types of properties, for example whether they are houses or units or a mix, and their condition.
Operational details, such as the systemisation of rent collection or other management tasks.
The type and duration of the leasing authorities.
It may also be influenced by regular supply and demand principles.
Beyond this calculation, there are also other factors that may influence the total sale price of your rent roll. The main one to consider is the exclusion of some managements from the calculation, such as vacant properties, properties that are uninhabitable, or circumstances where the tenant is in arrears and there is no payment plan. Often, these are excluded from the calculation of the price on settlement. However, if they are ‘made good’ in the retention period, then they are added back into the purchase price and adjusted for at the same time as the lost management in the retention period.
You will also need to consider the operational side of the rent roll when determining its value. A rent roll that is utilising systems and processes will increase its overall value. This is because, as you’ve probably experienced, using systems and processes significantly impacts your rent rolls productivity and profitability. To a potential buyer this will improve the appearance of your rent roll and incentivise them to take on your operational aspects of the portfolio too. When referring to systems and processes, we are actually looking at how systematised the collection of rent and other management tasks are performed. Systematised doesn’t necessarily mean automated, however you should still have streamlined procedures in place, especially when it comes to dealing with arrears.
READY TO GET YOUR BALL
ROLLING ON SELLING YOUR
RENT ROLL THE RIGHT WAY?
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. When someone buys your rent roll, they are also buying those relationships you’ve created.
When selling a rent roll, not all landlords will want to stay in that portfolio. This churn is most commonly known as ‘lost managements’. To maximise the value of your rent roll sale price you need to keep your lost managements to a minimum. There are few ways you can attempt to reduce this churn. This includes introducing all landlords to the buyer prior to the completion of the transaction. Doing this will set the way they will relate and interact with the buyer in the future. If the landlords perceive the buyer in a positive light they will be less likely to jump ship.
There are several ways to do this, and we’ve seen some exceptional examples in the industry. The most effective, and efficient, method of introducing the buyer to the landlords was through a video. The client talked up the buyer, and showcased why they will do a great job and be a good fit. This allowed the landlords to start off their relationship with the buyer with a positive perspective. We also recommend personally calling each landlord in the portfolio. Most clients often complain about the amount calls this will take, and would prefer sending a mass email instead. However, if each landlord is considered as a ‘management’ which is worth $2500, then each call you make is potentially making you $2500, then how many calls are you willing to make for that much?
To address this churn buyers may put in a recourse mechanism by which they will be given a ‘refund’ for the managements lost. This is done by way of a retention period and a retention amount. If the buyer loses a management in the retention period, then you will need to refund 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 transferring the authority to the buyer. This amount may also be adjusted if properties are lost at settlement.
The retention amount will vary for every transaction and will be influenced by the type of rent roll and 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% in some markets that have very high multiples! To maximise the value of your sale, your aim will be to negotiate a lower retention amount and retention period so only a small part of your purchase price is at risk.
So, how do you go about ensuring you’ve addressed the issue of retentions and lost managements? Through your contracts! 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 may need to be negotiated with the buyer. 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. Doing this earlier will save you headaches later.
WHAT HAPPENS TO EMPLOYEES AND THEIR ENTITLEMENTS WHEN I SELL THE RENT ROLL?
In some instances, the buyer may want to take on some of your employees when purchasing the rent roll. This may assist in the transition process as well as reduce churn and lost managements. However, before this can occur there are a few factors you need to consider.
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.
Generally, when the buyer takes on your staff, they will inherit their leave balances and other entitlements if the employees transfer across. The transferring employees won’t be considered new employees, and this also means they won’t have a probationary period. In this situation, you won’t be responsible for dealing with the employees accrued entitlements.
However, things can get a bit more complicated, and expensive, if the buyer wants to take on your employees and wants them on probationary periods. For this to occur, they will need to restart the employees service and hire them anew. Therefore, you will first have to terminate the employee. Upon termination, you are legally obligated to pay out any leave entitlements the employee has accrued and may need to deal with redundancy payouts.
It is also important that the buyer is made aware of any special work arrangements you have with transferring employees. This is because in some circumstances the buyer may be required to honour work arrangements that you have made with the employees, such as those with carer responsibility having flexible working conditions.
GET YOUR EMPLOYMENT
MATTER SORTED CAN BE
STRESSFUL & COMPLICATED.
ENSURE YOU’RE ON TOP
OF THEM TO AVOID HEFTY FINES
& LOSING YOUR SALE PRICE.
So, with all of the above to consider, will leave balances and entitlements affect the sale price of your rent roll? Absolutely. Buyers will require 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%, depending on your company’s actual tax rate. Generally, adjustments are not made for sick/personal leave. This will therefore, decrease the total selling price of your asset.
To avoid leave balances and entitlements causing significant financial strain on your business, the best approach is to manage your employee entitlements and leave balances over time, rather than consider all of it at the sale of your rent roll. Reduce this risk by keeping track of your employees leave balances and having conversations about it with them. You may also enforce forced leaves, or company shutdowns. You are able to insist staff take annual leave when you think it may be reasonable. Reasonable conditions generally include holiday periods, such as Christmas or Easter, or quieter periods such as New Years. You can also direct staff to take annual leave if they have accrued an excessive amount. Under the Real Estate Industry Award, if an employee has accrued more than eight weeks of annual leave then it is considered an excessive amount. In this case you need to talk to that employee about how and when that leave balance will be reduced.
CAN I BE SUBJECT TO A RESTRAINT OF TRADE EVEN THOUGH I’M SELLING A RENT ROLL?
A rent roll is an expensive purchase – so it is understandable that the buyer will aim to do everything to protect it.
This includes prohibiting you, the seller, from competing against them. In pursuit of this, the buyer will want to ensure that you will not steal your clients back or lure your old staff to your new venture. The buyer can achieve this with a restraint of trade clause in the contract you sign.
What is a restraint of trade? Essentially, it is a provision or clause, usually found in contracts, restricting the other party’s ability to perform a specific work activity for a specified time period. For the buyer, a restraint of trade clause can restrict you from stealing back any managements you have sold to the buyer. A restraint of trade clause is the best way to protect the goodwill of the rent roll after settlement.
However, if you’ve never sold a rent roll before – this area can get a bit complicated and is easily overlooked. But it is best you think about this before jumping into your transaction, and later finding out about the things you are unable to do.
Therefore, you need to first know what it is you want to be doing after you sell the rent roll, then construct/adapt the restraint of trades to fit those plans.
Beyond this, make certain that the restraints are practical, and the other side isn’t overreaching. Again, to avoid mistakes here we recommend engaging a legal expert with rent roll experience because they would accurately be able to guide you about what is normal and fair in these situations. But what happens if a buyer is set on wanting more restrictive or harsher restraints? You are more than able to continue with the sale but don’t have to do it at a disadvantage – you can charge them a premium for it, where the buyer essentially ‘buys’ a bigger restraint against you to keep you out of the market for longer.
If you, the seller, are operating as a company, then the restraint of trade may apply to all the principals, directors, and other key staff members to ensure you don’t have a work around to the restraint clause.
WANT TO KNOW IF THE RESTRAINT
OF TRADES IN YOUR ARE FAIR,
NORMAL, OR OVERREACHING?
The buyer may also restrain your employees and contractors to ensure you don’t steal your old clients back through them. For this, the buyer may obligate you to ensure the contracts you have with your employees and contractors will restrain them from competing with the buyer. This can only be done if the employment contracts you have in place will allow you to enforce this restraint of trade.
You also need to have a clear understanding about the type of restraint you are agreeing to. These can be very specific, so be aware of what they are before signing anything. Generally, these include being restrained from competing against them, most often from operating another rent roll in the same location, stealing managements, which involves luring the landlords from the sold rent roll to a new venture, or stealing relationships, which involves engaging with owners and their properties that were not a part of the sold rent roll.
Remember, most contracts contain provisions to address breaches of restraint of trade provisions.
If you act in bad faith and breach the restraint, then you may be liable for paying the buyer damages.
WHAT ABOUT SECURITY INTERESTS ON MY RENT ROLL PROPERTIES?
Generally, when you sell a house, you need to discharge the mortgage over it so the buyer doesn’t inherit it – the same applies to any business assets you sell. However, many sellers are unaware of the security charges over their business assets, and this can be on anything from your physical office to a photocopier in it. Therefore, you should 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.
A buyer will be wary of taking on a rent roll with charges or ‘security interests’ over the properties. This is because if there is a security interest over their new purchase, they could potentially lose the rent roll if the assets need to be called in, which can happen if you as the seller have a loan and default. In this situation, the bank will seize the rent roll, regardless of who owns it. To address this, the buyer will either reconsider the entire 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. This can really hinder your transaction and decrease the value of your asset – therefore it is best to manage and discharge any security interests over your rent roll before offering it for sale or have a plan to have them discharged on settlement.
The Selling Rent Roll Expert
Ready to sell a rent roll the right way so that you can increase the value of your agency and know your a*rse is actually covered?
CAN I SELL MY RENT ROLL TO BUYER WITHOUT FINANCIAL APPROVAL?
It is best to sell your rent roll to a buyer that has unconditional financial approval. However, this may not always be the case. This may mean the buyer needs to pull out of the purchase if their approval doesn’t come through.
The buyer is legally allowed to this if your contract is ‘subject to finance’. The key to protecting yourself here is to make sure this ‘get out’ clause isn’t open ended. This means enforcing a time period, and rules about financial approval from any bank rather than a specific bank ensuring the buyer has ample ability to pursue approval. Also, to avoid buyers taking advantage of this, it is best to include provisions by which they have to show evidence of a banks refusal rather than taking their word for it.
However, if your contract does not contain this condition, then the buyer is liable to go through with buying the rent roll. Following this, when the buyer is unable to do so, dependant on the terms of the contract for sale, there are several courses of action you can take to your advantage. Generally, you can keep the deposit given by the buyer, or if you end up selling the rent roll to a different buyer at a lower price, the initial buyer may be obligated to pay you the difference.
WHAT HAPPENS IF THE RENT ROLL IS OPERATING UNDER A FRANCHISE? CAN I STILL SELL IT?
You can sell your rent roll even if it is operating under a franchise – but generally only if the franchisor consents to it. If the rent roll was operating under a franchise, the sale of the rent roll will essentially allow the buyer to continue operating it under the same brand. With the sale, the franchisor may require the current franchise agreement be transferred to the buyer or require the buyer to sign a new franchise agreement for the remaining period of your franchise term. This will also depend on your franchise agreement, which generally contain clauses to obtain consent and allow transfers.
There are some considerations that must be noted when it comes to obtaining franchisor consent to sell a franchised rent roll. This includes consent being subject to conditions that must be met as per the franchise agreement. Most commonly this includes having to pay an assignment fee or rectifying issues on the asset, such as security interests or damaged properties. Most other considerations are prescribed under the Franchising Code of Conduct. A summary of the most pertinent matters is provided below.
A request for the consent of transfer of the franchise must be given to the franchisor in writing. You must also provide the franchisor any information that they would reasonably be required to have in order to make an informed decision. For example, they may require information about the buyer to determine whether they would make a suitable franchisee.
The franchisor is able to revoke the consent of transfer. They may only do this within 14 days of giving the consent. They must also provide this revocation to you in written with the reason(s) as to why it has been revoked. Therefore, ensure you allow at least 14 days after consent has been given to finalise any rent roll transactions.
Also, you can assume consent has been given by the franchisor to transfer the franchise if they haven’t advised you in writing within 42 days of either, you making the request or, if the franchisor has requested information, the date that information has been provided, with the period beginning from the date of whichever occurs later of the two. If consent is received in this manner, then it cannot be revoked within the above mentioned 14 day period.
The franchisor is not allowed to unreasonably withhold consent for the transfer. However, there are reasons that declining consent is reasonable, and this includes:
The buyer being unable to meet the financial obligation required under the franchise agreement
The buyer not meeting the franchisors selection criteria
The buyer not meeting a reasonable requirement of the franchise agreement
The buyer informing the franchisor that they will not comply with the obligations of the franchise agreement
If the buyer does not, in written, inform the franchisor that they have received, read, and had a reasonable opportunity to understand the disclosure documents and the Franchise Code of Conduct
If you, the franchisee, has not remedied a breach of the franchise agreement, paid or made reasonable provisions to pay money owed to the franchisor
Following this, you should ensure that you have eliminated any possible reason the franchisor may refuse consent, such as paying them any money they are owed prior to requesting consent for a transfer. You should also consider the buyers circumstances and how appropriate they would be as franchisees as this may impact obtaining consent for franchise transfer.
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As the above makes clear, obtaining consent for transfer can be a tedious and lengthy process. Therefore, if you are selling with the franchise in operation, 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. This is generally included as a ‘condition precedent’ which refers to a pre-condition or any step that must happen before settlement can occur.
Example: Condition precedent for settlement is franchisor consenting to the assignment of the franchise agreement and associated rent roll to the purchaser.
But what happens if you’re under a franchise agreement and the buyer doesn’t want to take it on with the rent roll? Well, this can cause some trouble for you. This will generally happen if the buyer is already operating under a different brand, and therefore will not need the franchisors IP. In this situation, you will still have to continue the franchise agreement for the remainder of the term.
This also means you will be responsible for paying any minimum fees required. To avoid this, you could negotiate for an early exit – but granting this is up to the franchisor. Therefore, you should always consider the duration of your franchise agreement, especially when you are renewing it. This is most important if you are considering selling your business in the near future, because you don’t want an unwanted franchise agreement eating into your sale profit.
REAL LIFE
O*NO!
SITUATION
An agency went through an almost seamless transaction to sell their rent roll. However, in the end they suffered a huge blow to their sale price and their retirement funds. Their first mistake?
Assuming they were selling the rent roll with the franchise. The agency had recently renewed their franchise agreement and had a minimum annual fee of a few hundred thousand dollars. With 4 years left of their term, they assumed the buyer would take on the franchise with the rent roll. They didn’t. Their second mistake? Going through with the deal without careful consideration or expert advice. To get out of this mess, they had to negotiate for an early exit with the franchisor – which cost them in excess of $200K. A simple error that could have been avoided if they had pre-planned their exit strategy and carefully considered every part of their sale.
MORE THAN JUST YOUR FRANCHISE GIVING YOU TROUBLE
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WHAT HAPPENS IF THE RENT ROLL IS OPERATING FROM A PREMISES THAT IS LEASED OR YOU OWN? WHAT IS YOU HAVE LEASES ON OTHER PROPERTY (EG. MACHINES)
The premises, where the business is conducted, can sometimes form part of the asset being sold. This premises may be owned, in which case, if the buyer wants to continue to operate from it they can either purchase the premises from you, include it in the rent roll transaction, or lease it from you. To do this, the purchase of the lease should happen in conjunction with the main rent roll transaction.
What happens if you are leasing the premises from someone else? If there is still time remaining on this lease then the lessor or owner of the premises can assign the lease to the purchaser. To do this, the lessor must grant consent, and obtaining this consent is your responsibility as the seller. As the lease will form part of the purchase asset and is being assigned, the buyer will need to comply with the existing terms of the lease. If your lease has ended or is near finishing, then the buyer may have to enter a new lease with the lessor in order to operate from the same premises.
You will also need to ensure your contract for sale has provisions that cover this. This is generally included as a ‘condition precedent’ which refers to a pre-condition or any step that must happen before settlement can occur.
Example: Condition precedent for settlement is the lessor consenting to the assignment of the lease the purchaser.
The above similarly applies to other property under a lease, which commonly includes office furnishings, machinery, such asphotocopiers, and other property used for your business, such as cars. To remember, if the buyer is willing or wanting to take on any leases for such property, then these will form a part of the sale price.
As a long-term consideration, if you are planning on selling your rent roll in the future it is probably best you don’t enter into any long term leases. Buyers with their own agency’s will most commonly not want to take on any of your leases. Like with unwanted franchise agreements, you will end up having to continue the lease until the end of the term if the lessor does not grant you early release.
Absolutely. When you sell your rent roll, or even your agency, there may be a host of digital assets associated with it that you may not need going into the future. Most importantly, this includes any associated social media accounts, websites and IP. Rather than starting from scratch, the buyer may wish to take ownership of these digital assets. These can then form part of your sale price, especially your website and IP assets, such as logos or ads.
When it comes to website and IP you generally own them. Therefore, they can form a part of the asset you are selling. However, if you are not the owner of these assets, such as when you are operating under a franchise or IP licence, then you cannot sell these unless you have permission from the owner to do so. Also, dependant on the terms and conditions of the different platforms, not all accounts can be sold or transferred legally. Here is a summary of what can and can’t be sold from your social media arsenal:
CAN I ALSO SELL ANY DIGITAL ASSETS ASSOCIATED WITH MY RENT ROLL?
You are not allowed to sell or transfer any aspect of your Instagram account or any data obtained from your account including your username.
As Facebook pages are controlled by administrators, you are able to change administrators of a page and therefore transfer ownership this way. However, under their T&Cs you can only transfer an account if you obtain permission from Facebook.
If your YouTube account is linked to a brand account then it can be transferred by selecting the ‘Transfer Ownership’ option in the settings. However, if it is not a brand account (ie. A personal account instead), then it cannot be transferred.
Any attempts to sell or solicit other forms of payment for Twitter usernames, which are essentially your account, will result in the permanent suspension of your account.
Prohibits the transfer of any part of your LinkedIn account. However, if you have a company page then you are able to transfer ownership by assigning administrator access.
So, what’s the best course of action here? You obviously don’t want to lose all the followers and work you’ve put into your social media accounts. In this case, you may want to update the details of the accounts, so the purchaser has the ability to operate the accounts. However, best practice would be to obtain consent from the relevant social media platform.
Book A Free 10 Min Chat
Unlike other law firms, we specialise in serving real estate businesses, where we help Real Estate Agents like you sell rent rolls the right way without jeopardising your Agency. So if you are in the market to sell a rent roll, click on the link below to schedule a free 10-minute chat with one of our Senior Rent Roll Lawyers.
IS THERE A RIGHT BUYER TO SELL TO? WHO MAKES THE BEST BUYER?
REAL LIFE
O*NO!
SITUATION
An agency decided to sell to a buyer that offered them the highest multiple without consideration of their other attributes. Turns out, they weren’t the dream buyer the agency thought. Due to their poor engagement with the landlords, the buyer lost a high number of managements, which meant the agency forfeited the entire retention amount as they didn’t have tight rules in the contract around what actually constituted a lost management. Now, if they had sold to someone who offered x3.1 rather than x3.2 multiple, but dealt with the management better – they would have ended up with more in their pocket at the end of the day.
On the face of it, the best buyer would the one offering to pay you highest price for your rent roll, right? Not always. This is because the buyer offering you the highest price or multiple upfront, could end up costing your sales bottom line later in the transaction. As explored above, this buyer may not be one who is willing to take on your franchise, or they may not meet the requirements of the franchisor leading to a refusal of consent. The same applies to your lease of a premises. If this happens, you may end up having to pay to fix these issues – such as paying hefty annual fees for the remainder of your franchise agreement. Some buyers who are big spenders early, can be problematic in the later stages. Most commonly, we’ve seen buyers leading to an increase in lost managements due to their negative handling of landlords. This means at the end of it all, you get less than what you thought for your rent roll. Therefore, to ensure you’re selling to the right person you should consider one who operates similar to you, has similar or better work standards and values, and will be a suitable replacement for any franchise agreements or leases you may want to pass on.
THE SALE PROCESS:
WHAT TO DO, WHAT YOU
NEED, & WHAT YOU
SHOULDN’T FORGET.
CHECK & EXIT
PLANNING
Before going out to sell your rent roll, your first step should be to investigate the quality of your rent roll, or in other words, perform a health check of your business asset. A health check will provide you with valuable insights into your rent roll, specifically areas of issue, how much it’s worth, and what you can to do improve your sale price.
So, what should you be considering when undertaking a rent roll health check? Best practice would be to investigate the aspects of your rent roll potential buyers will also be considering. Generally, buyers will conduct a due diligence check before they sign the contract for sale. You should prepare your rent roll in advance to avoid the buyer poking holes in your sale price.
A few aspects to think about for your health check include:
You should check if your rent roll is ‘clean’ by reviewing the trust account and trust account audits.
Review all your managing agency agreements and authorities to ensure they are all complaint as this is one main area where sale price can be reduced for what looks like an otherwise ‘clean’ rent roll.
If buyers have the option on taking on your staff with the purchase, then ensure you have dealt with any leave and entitlements they have. This may be done by having the staff transfer over as continuing employees, in which case the service provided to you will carry on and any leave entitlements will then be the responsibility of the buyer. This must be agreed upon with the buyer and set out in the contract for sale. However, if this is not the case and the buyer wants to take on the employees with new employment contracts, you need to terminate their employment and pay out any accrued leave entitlements they have.
If you are operating your rent roll through a franchise, and want this to transfer to potential buyers with the rent roll ensure you have obtained consent for transfer from the franchisor. Similarly, if the buyer wishes to take on the lease of the premise, which you do not own, from which you are operating – ensure you have obtained consent for assignment from the lessor. Though this step generally takes place after contracts have been exchanged, it is best to start the process early so you don’t end up losing potential deals due to roadblocks (eg. franchisors/lessors unwilling to provide consent) during more critical stages.
This is probably also the best time to consider how your sale will affect your exit strategy. Whether it be right after your potential sale or years down the track, you need to have an exit plan prepared to ensure you aren’t leaving your agency in trouble, are set up for retirement or your next adventure, and are maximising the value of all your efforts. Therefore, before jumping into hasty deals it may be worthwhile to sort out your exit planning in the start so you don’t suffer later.
Our tip to avoid O*NO! moments: Engage a consultant to do this for you. Unless you have sold many rent rolls before, not only is a health check extremely time consuming, but this is where you uncover the value of your asset as well as what is hurting its price and how you can make it better - you don’t want to make a mistake in this step! A legal expert can also help guide your exit plans by helping you understand all the moving pieces you need to consider for your future endeavours.
It is best to determine the value of the rent roll before putting it up for sale – so you know exactly what you deserve for your business asset and when you’re being shorted. Your valuation is also important as a potential buyer will most probably request it when making their purchase decision. Therefore, it is paramount your rent roll valuation is done accurately. The easiest way to ensure your valuation will be handled carefully is by engaging an experienced rent roll valuer or broker.
Our tip to avoid O*NO! moments:
Again, it is always best allowing the experts to handle something so important and avoiding the stress and guesswork of doing it yourself.
Want to get your valuation right? Our team can help introduce you to a trusted rent roll broker or valuer in your area - contact us today to get started.
AGREEMENT (NDA)
Now it’s time to prepare your pre-contractual documents – your NDA and term sheet.
When it comes to selling your rent roll, or any business asset really, you will have to divulge sensitive business information to potential buyers. However, you probably don’t want the buyer to then broadcast these details to others, especially if the deal doesn’t go through. To prevent this, an NDA is put in place to ensure your sensitive information remains confidential.
Our tips to avoid O*NO! moments:
Your NDA should be structured so buyers agree to not disclose any sensitive information they receive during the transaction, and if they do, how you will be compensated for.
Why not get a real estate agency lawyer to draft your NDA and make sure you, your rent roll, and agency are protected - book in for a slice of advice to get your custom NDA.
Want to do it yourself instead? Get your hands on our rent roll specific NDA template here (ps. you can always book us in for a legal consultation to review your document later).
SHEET
Your term sheet will highlight the basic terms and conditions of the rent roll transaction you and the buyer have agreed to. The term sheet can be binding or non-binding, but essentially covers the most important elements of the deal.
Sounds simple enough, right? However, the biggest mistake we’ve seen in this space is clients who, prior to working with us, agreeing to high level terms, and signing the term sheet without receiving advice. Generally, after this, we are given the executed term sheet and asked to then help draft or review the rent roll contract for sale. In most instances we end up finding unfavourable terms for the seller, especially if they are a first time rent roll seller. However, since these terms have already been agreed to in a term sheet it is very hard to then try and change them in the contract. This is true even if the term sheet is not binding. It is always hard to back away from something once you have agreed to it in writing.
Our tips to avoid O*NO! moments:
Ensure you are not signing term sheets without professional advice – so you can avoid getting locked into certain terms that you may later find out aren’t ‘usual’ or are ‘unfair’.
Work with an expert in the area for advice like a rent roll lawyer who specialises in rent roll sales and get advice before signing anything.
To ensure your deal is on your side you and nothing is amiss, book in with us for a slice of advice and we can draft your term sheet with you in an online consultation. If you've already got a term sheet, then book in with us for a consultation before you sign so we can advise you if what your signing is in line with industry norms or if you're signing up to a bad deal.
DUE
DILIGENCE
Generally, a buyer will conduct their own due diligence of your rent roll. This step usually occurs before contracts are signed. It may also take place after exchange if the contract is made ‘subject to due diligence’. The main thing the buyer is checking? Whether the claims you’ve made about your rent roll are true.
The buyers due diligence will involve the buyer having a look at your rent roll in detail, including the portfolio, finances and operational aspects, asking you questions about the asset and then you providing them with the answers.
This is when the buyer will try to negotiate a better deal for themselves – which means lowering your sale price. However, if you’ve completed step 1 by performing a thorough health check, you should have a good understanding of your rent roll. This will also mean you’ve probably fixed any issues identified in step 1, restricting the buyer from having any grounds to negotiate a lower sale price.
Our tip to avoid O*NO! moments:
Don’t skip out on performing a health check before beginning the sale process. Figure out the issues and winning points of your rent roll early so you can make the necessary changes to maximise value.
Want to know what a buyer will be looking for when performing a due diligence check of your rent roll? Why not have a look through our rent roll specific due diligence checklist our legal experts have made - download your FREE copy here!
WHETHER YOU’RE PERFORMING AN ASSET
HEALTH CHECK OR SETTING UP YOUR EXIT
PLAN - DO IT RIGHT WITH AN EXPERT!
SALE TO EXCHANGE
The contract for sale will set out all the terms of the sale such as price, multiplier, retention amount and period, what constitutes a lost management, how employees are dealt with, securities to be released, if there is a lease or franchise to be taken over, if there is a sales part of the agency being sold, how commissions and listings are to be handled, plus other legal elements to ensure a smooth transition. As the seller, the preparation of this contract is usually done by your lawyers, whilst the purchaser, and their lawyers, are responsible for reviewing it. Much like what happens in a conveyance, you will first enter into a contract, then there will be a period between exchange and settlement. A deposit is paid on exchange, usually around 10% of the purchase price.
To note, this contract will generally contain the seller warranties – these could include warranties pertaining to full disclosure, accurate information, the businesses assets, its accounts, compliance with the relevant Real Estate Agents legislation and the property management records. Following this, the buyer may also include an indemnity clause in the agreement – this way you can be held liable for the damages/loss that result from a breach of the seller’s warranties.
High priced purchase dealings can be rife with tension and stress, and this can unfortunately lead to disputes. This is more so because part of the purchase price may be held back due to settlement and retention periods. To mitigate any fall out from this, your agreement should detail processes to be taken for dispute resolution – usually including provisions for negotiations, at first, and then referral to arbitrations or mediations, later.
Our tip to avoid O*NO! moments:
Selling business assets can be difficult to get right and selling rent rolls are even more complicated – especially with all the moving parts you need to consider. So, make sure you use a rent roll lawyer who is familiar with rent roll sales so they can advise you if something is ‘unusual’ or off about the deal and protect your agency and the rent roll you are selling.
Before you prepare/start your contract, book in for a free 10 minute consultation with us today and talk to us about whether we are the right rent roll lawyers to help draft your contract and protect your rent roll sale.
Want to prepare your own contract for sale? Grab our rent roll sale specific contract. Remember to book in for a slice of advice so you can talk your completed contract through with a legal expert to avoid costly mistakes in your transaction.
SETTLEMENT
PERIOD
This step deals with lost managements. The buyer should keep a record of lost management in their new rent roll and evidence from the owners/landlords as to the reasons why they have taken their managements away. Remember from above, not all managements that leave the rent roll will be classified as ‘lost managements’ for the purpose of the retention calculation. At the end of the retention period, you should receive this list/record from the buyer. You will then need to make an adjustment to the purchase price that takes into account lost managements. The retention amount is then released between you and the buyer as per the adjustment above.
Our tip to avoid O*NO! moments:
There can be multiple times you adjust for lost managements in the retention. If the retention period isn’t too long, only have one point for adjustment so you save on time, admin and fees.
This is when we get the rent roll/agency ready to be handed over to the purchaser. This includes:
Having any employment agreements signed – only if the buyer is taking on your employees
If the buyer is taking on a lease or franchise, then this is when you obtain consent for the assignment from the lessor or franchisor.
Having agreements signed for new managements or assigned, depending on the state or territory you are in – but only starting once the contract is exchanged unconditionally and commencing on and from completion.
If there are any charges over the rent roll/agency (like a mortgage over a house), those may need to be released so the buyer does not inherit any of the debts of the agency.
Settlement figures being prepared and payment directions issued to the purchaser or their financier.
Handing over all of the records and data that form part of the sale, usually via data migration between your CRM and the buyers, unless they are taking over your CRM or other software accounts.
The retention amount being put into trust on settlement for safe keeping to deal with lost managements at the end of the retention period.
Our tip to avoid O*NO! moments:
It is essential that you ensure authority to manage properties is transferred upon settlement – the efficiency of this will be dependent on the transfer provisions in your contract. In some states and territories, the managements and authorities are capable of assignment, in others, new management agreements and authorities will need to be signed. Make sure you call owners/landlords in the rent roll to introduce the buyer before sending notices about the sale – this will help with the transition and result in fewer lost managements.
After you’ve exchanged contracts, there’s still a lot to get done before you can reach settlement for the rent roll – ensure you’re considering all the essential details with our rent roll completion checklist!*
*if you have engaged us to assist with your rent roll sale, this checklist will be included in your package with us.
Yes, I want to chat with a legal
consultant about Selling a Rent Roll
Del Copeland is a Senior Legal Consultant and an expert at advising real estate agency principles on how to safely sell a rent roll. Have a chat and see how she can help you.
KEY TAKEAWAYS.
Get familiar with the rent roll process – so you know exactly what to do and what you need at each step.
Engage advisors and experts that understand and deal with rent roll sales on a daily basis.
Do a thorough rent roll health check – this is the best way to ensure you’re informed and know the condition of your asset.
Remember – when it comes to assigning or transferring a franchisee or lease you need to obtain consent from the franchisor or lessor before you can proceed with any sale.
Don’t sign anything, including term sheets, without first receiving advice – it is always harder to backtrack once you’ve agreed to something in writing.
CONCLUSION.
It’s easy to see where things can go wrong with a rent roll sale – whether it be a rent roll with hidden problems, undervaluing or miscalculating your rent roll and its asking price and only discovering its true worth after you’ve sold it, an unfavourable term sheet you’ve signed thinking it’s not binding, a contract for sale that isn’t up to scratch and making the transaction complicated and drawn out, or wasting time and effort on pursuing deals that ultimately fail due to franchise transfer consent issues.
As real estate agency law experts, we’ve regularly been engaged because the above have occurred. It may sound simple, however even a slight mistake with your rent roll transaction could cause an avalanche of issues for you and your real estate agency. The team at O*NO Legal provide legal services tailored exclusively to the real estate industry – it is for this reason we deal with rent roll transactions daily.
We understand the intricacies of your industry like no other lawyers will and will ensure the key aspects of your sale are comprehensively addressed – making the process easier to navigate and stressless.
SO WHETHER YOU’RE LOOKING TO SELL A
RENT ROLL OR ARE ALREADY IN THE
PROCESS OF SELLING ONE - WHY NOT
TALK IT OUT WITH A LEGAL EXPERT?
BOOK A FREE 10 MIN
CONSULTATION WITH US TODAY
TO GET STARTED!
Boring legal stuff: This article is general information only and cannot be regarded as legal, financial or accounting advice as it does not take into account your personal circumstances. For tailored advice, please contact us.
PS - congratulations if you have read this far, you must love legal disclaimers or are a sucker for punishment.