Looking to sell your rent roll? You will more than likely have a restraint of trade clause in your Contract of Sale. Find out what this means.
If you’re contemplating selling your rent roll, it’s important to be across everything involved with the transaction.
One element is known as restraint of trade.
What is restraint of trade?
A restraint of trade clause is put in place to protect the buyer of a business or rent roll. It acts to prevent the vendor from immediately establishing a competing business in the same area.
This type of clause is generally valid for a specific time frame (usually three years) and within a specific geographic area. It can be difficult to find a buyer for your rent roll or agency if you don’t have a restraint of trade clause because banks are unlikely to lend without one in place.
Most sale contracts include a restraint of trade clause, but the details can be negotiated depending on circumstances.
A standard sale of business agreement usually contains a restraint of trade in the general conditions. However, the parties may amend the clause through negotiation. For example, the parties will commonly negotiate over how long the restraint lasts and the geographical area where it applies.
Take a look at some scenarios where a restraint of trade clause would be applied in a rent roll transition or sale:
Selling the entire agency
If you’re looking to sell your agency, you can expect to be restricted from trading in the same geographic area for a period of three years. If you sell your rent roll, the contract will restrict you from starting a new business in the area or taking back your former landlord clients for three years.
The exact terms of a restraint of trade are negotiated during the sale period.
Keep this in mind when you’re preparing to sell and plan your next moves in accordance with this clause.
Selling a rent roll and staying with the business
Let’s say ‘Bob the Landlord’ is part of the rent roll for sale and he wants to stay with you as the vendor because you plan to keep operating. This can be made possible by creating a ‘swap’ arrangement. For example, ‘Bill the landlord’ may not be on the rent roll you are selling but can be added in exchange for Bob.
Another option if landlords don’t want to be ‘sold’ is to reduce the number of properties on the roll and change the price accordingly.
You will need the help of an experienced rent roll transition broker and a good lawyer to help you negotiate these types of specific terms.
It does make sense for landlords to be resistant to working with a new representative after a rent roll sale, particularly if they have been happy with the service they have received to date.
However, during the restraint of trade restriction period, if a landlord has failed to negotiate a way to stay with you as the vendor beforehand, they do not have an option to return to you after the sale. This is why it is important to communicate clearly with landlords about their options during the negotiation phase. It will give them the opportunity to decide what to do during the retention settlement period.
Enforcing restraint of trade law
According to findlaw.com.au, “to enforce a restraint of trade clause, the business purchaser will need to apply to court. The court will only enforce the restraint to the extent that it is ‘reasonably necessary’ to protect the legitimate business interests of the purchaser.
Whether a restraint will be ‘reasonable’ will require examination of some of the following factors:
nature of the business;
location of the business;
amount paid for the business;
goodwill and assets of the business;
negotiations between the parties; and
the terms of the agreement.”
To make sure you don’t inadvertently breach a restraint of trade clause or end up with one which doesn’t suit your planned next steps, work closely with an experienced advisor and a lawyer who understand the requirements of your rent roll sale contract.