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Restraints of trade

By Frank Higginson01 Sep 2008

Most owners of management rights businesses would be aware that, with the right licensing, they can sell lots in their (and others) buildings. Many managers have expanded beyond the scope of their resident letting agents licence and actively solicit listings in their buildings.

Valuers are still reluctant to ascribe any capital value to the income derived from sales activities, and in the current economic climate, this approach is not likely to change anytime soon. On that basis, the income derived from sales is, at present, a very good start to the annual holiday or Friday night dinner fund.

Of more importance is the changing nature of the standard contractual restraint clause in the management rights sale contract.
The typical restraint is that the seller of a management rights business will not solicit for lettings in the building for three years after the sale. A recent addition to the generally accepted standard conditions of sale extends this restraint to sales of lots in the scheme for the same period.

The extension of this restraint to soliciting for lettings and sales after settlement means that buyers of management rights businesses have an expectation that the vendor will leave them alone in every respect after settlement.

If you are selling lots in your scheme, and you have listings of sales when you are selling your management rights business, you need to be very aware of your contractual restraints. Nothing angers buyers more than having lots in their letting pool sold out from underneath them to owner occupiers, but what would rub salt into the wound is where the person making the sales is their vendor.

Management rights restraints are rarely, if ever, litigated. However, if the above occurred in direct contravention of a contractual term, it is quite possible that a claim could be filed.

So the moral of the story is that if you are selling your management rights business and have listings of lots for sale at the same time, it is well worth disclosing that to your broker and the buyer before you sign the contract. Disclosure will cure all, provided that the contract then reflects that disclosure.