Common terms for a lettings sale
Terms you are likely to encounter when selling your residential sales/lettings business.
In our second instalment of Selling a Letting Business, Catherine Ripley explored the key legal issues and common legal pitfalls when running a lettings agency. Following on from this, we look at some of what the key terms are that will form part of the sale agreement:
Purchase Price
The purchase price is not usually paid in full on completion: typically a proportion of the purchase price will be held back and paid at a future date. The amount of the deferred consideration will normally be agreed in negotiations at the outset of the transaction and likely linked to the lettings portfolio remaining at an agreed level during a set period (typically 12-24 months) post-completion.
On a share sale there will also be a completion accounts mechanism to ensure that the financial position of the company at completion matches that which was used by the buyer to value the company. This will provide that a set of accounts are prepared shortly following completion to verify the net asset value as at completion. The buyer will then pay additional purchase price to the extent this exceeds the agreed target net asset value and the sellers will need to repay the buyer if there is a deficit against the target.
Pending Sales Instructions
Where the business includes a sales element then the sellers will want to be paid for sales where they done the leg-work of finding a buyer. Commissions received from properties where sales are agreed but not completed as at completion are typically added to the purchase price but only paid when the relevant sales are completed.
Indemnities
An indemnity is a promise to pay another party an amount equal to a loss suffered by the person the indemnity is given to. Normally indemnities will relate to specific risks identified by the buyer in the due diligence process however, when dealing with the sale of a lettings business, additional indemnities will likely be required by the buyer as lettings are a heavily regulated sector as identified in Cathrine’s article and the consequences of non-compliance can be severe. For example, indemnity such as compliance with the Tenancy Deposit Protection Scheme, gas safety regulations, EPC requirements, carbon monoxide alarm testing and Immigration Act rules relating to private rented accommodations for illegal immigrants are common even if no breach by the Seller have been identified.
Warranties
In all business and company sales there will be a suite of warranties in the agreement which are statements confirming the business and its affairs are in order. On a lettings sale there would typically also be bespoke warranties around the lettings contracts, tenancy contracts, compliance with applicable laws and regulations and holding of client funds. If a warranty is inaccurate and the seller fails to disclose that inaccuracy to the buyer then the buyer will have a breach of contract claim against the seller.
Restrictive Covenants
Personal relationships are key to all businesses and a buyer does not want to buy a business then find the seller has set up in competition nearby and recruited all the staff, convinced all customers to transfer their business and signed up with the same suppliers to the detriment of the buyer. Accordingly as a seller you should expect to sign up to restrictive covenants agreeing not to do this for a set period.
Hopefully the above and our previous articles have offered some insight into things to consider and be aware of when selling your lettings business. If you have any questions about the contents of this article, or corporate transactions more generally, please contact Penelope Garden and if you are interested in reading about some of the lettings transactions we have worked on recently, please refer to the deal announcements section of our website.
