Baybridge’s very own Tanya Delkou sets out a list of pros and cons to help you make a decision.
There are two ways in which you can sell your rent roll. You can sell just the asset itself (Rent Roll Sale), or alternatively, you can sell the shares in the company that owns the rent roll (Share Sale).
Share Sale
Selling your rent roll by way of share sale agreement means that you will sell the shares in the company that owns the rent roll. There are many advantages with purchasing the rent roll via a share sale as it is easy to fit into your existing corporate structure, and you will not be required to have each Management Agency Agreement re-signed. However, an extensive due diligence process will need to be conducted given you are buying the shares in the company, and therefore will be inheriting any liabilities, issues, tax debts and claims associated with the company.
| PROs | CONs |
| There is a greater chance of retaining the majority of the rent roll, and a reduced risk of lost Management Agreements. | You must undertake an extensive due diligence process to ensure you do not inherit the liabilities of the company (including claims and debts). This can be addressed prior through the due diligence process. |
| As the rent roll will sit with the same company there will be less disruption to landlords and tenants. | You will need to conduct a thorough due diligence on the rent roll to ensure all Management Agency Agreements are compliant. |
| You are not required to enter into new employment agreements with employees as the employees remain employed with the company. | You will be required to take on all third-party contracts, leases and employees unless these are terminated prior to completion. |
| The acquired company can sit alongside your current structure and entities. | You may need to undertake corporate governance requirements with ASIC such as a whitewash procedure. |
| The rent roll is kept separate from your existing rent roll. This works well for succession planning purposes as you can separate rent rolls into geographical areas making the future sale of your rent roll / business more appealing. | The share sale agreement will need to include extensive warranties to ensure that you are protected against any legacy liabilities, debts and encumbrances held in the company. |
Rent Roll Sale
If you sell the rent roll asset, you will enter into a Sale of Rent Roll Agreement. This means that you will not acquire the company that is selling the rent roll and therefore, will not inherit any legacy issues such as debts, liabilities or tax issues. There are several matters to consider if you decide to sell only the asset.
| PROs | CONs |
| Due diligence is focused on the property management files and not the Management Agency Agreements themselves (as you will be getting the Management Agreements re-signed). | You cannot change the fee structure during the retention period. Therefore, you may need to consider the fees of the Management Agency Agreements that you acquire as it may differ significantly to properties that you already manage in your portfolio. |
| It is imperative that the agreement sets out what is required for the MAA to be compliant. By doing so you can ensure that you are only paying for quality managements and files. | A potential for a higher rate of lost management agreements. Given you are required to re-sign the Management Agency Agreements in your favour, owners may choose not to sign with you. |
| You will not inherit any liabilities of the company selling the rent roll. | If you purchase a company by way of share sale agreement, for any employee that comes across with the sale, you will get the benefit of any restraints in their employment contracts. However, if you purchase a rent roll asset, and employees do not come across to your company, it is difficult for you to enforce restraints as you do not employee that employee, meaning that those property managers not confined to any restraints can contact owners from the rent roll. |
| You do not need to acquire the employees of the company. This is at your discretion. | You may be required to pay GST on the purchase price if the sale is a sale of a going concern. |
| You are able to use your own processes, procedures, software and trust accounting from completion. | It is a risk that you may end up managing properties without a Management Agency Agreement at the end of the retention period. This is a breach of s55 of the Property and Stock Agents Act (NSW) and any management commissions may be challenged. |
If you have any questions or concerns please do not hesitate to contact us.
This article was written by Tanya Delkou, Partner and Melina Agostino, Senior Associate.
