Problems inherent in a retention period and how to avoid them

Planning to sell your rent roll? Here are some common retention period confusions to be aware of before you get started. 

Working on a rent roll sale takes time, initially when you’re preparing to sell and then during contract negotiations. There are many elements to put in place and clauses to consider to ensure the sale has a positive outcome for all involved. 

Along with restraint of trade clause, an element of contract negotiations you can expect to deal with is retention periods. 

What is a retention period? 

Because some landlords may decide to find another property manager after being included in a rent roll sale, a retention period is the time when sale funds are ‘held’. Generally, landlords are given three to six months to make a decision to stay or move on. 

During this period, some landlords may decide to sell, while others may seek out a new property manager. Based on historic data, this number is usually quite low and sits at around five per cent. 

When the retention period is completed, the value of the rent roll is recalculated based on the remaining properties under management and the sale is made final.

Read more about retention periods.

Common issues and confusion with retention period settlements

If you haven’t sold a rent roll before or if it has been a while since your last transaction, it can be easy to get confused during the process. The following are two common issues which arise.

Supplementing properties

The agreement may allow the vendor to supplement properties during the retention period, this generally takes place before the retention period expires, and the vendor must supplement another property to replace the one who has left. 

If a property is supplemented during the retention period, it must be in the right area and the fees must align with the prices negotiated prior to the sale. 

Property sales during a retention period

Being transferred to another property management agency as part of a rent roll transaction may trigger some landlords to put their property on the market. As a result, nobody will be managing it. 

Again, this often causes confusion. The following caveats generally help diffuse this: 

  • If the buyer is the selling agent, they still pay for the property. This is not seen as a loss from the rent roll as they will claim commission on the sale

  • If the property is sold by a third party agent, it counts as a loss and is taken out of the sale

  • As the rent roll vendor, you cannot sell the property under any circumstances

  • If the property is sold by a third party agent during the retention period to an investor, the rent roll buyer may continue to manage it and will not lose out.

How to avoid confusion during a rent roll retention period

As the rent roll vendor, the last thing you want is to finish the retention period and get a shock because the negotiated price has dropped to a point where it impacts your next move. 

When you’re planning a rent roll sale, work closely with a specialist who will walk you through every clause and help you understand the process from start to finish. This person will be someone who has guided many other real estate business owners through the process of a rent roll sale. They will be able to work closely with your accountant and lawyer to ensure every box is ticked.

With the right advice on your side, you’ll be able to feel fully informed, sail through negotiations and enjoy the next phase of your career.