Tips to ensure a smoother management rights sale
By Frank Higginson06 Aug 2012
Updated on 1 December 2014 to include reference the Property Occupations Act 2014.
If you are going to list your management rights business for sale, you need to make sure that it is in as healthy a position as possible.
To ensure that you have ticked off what we see every day in matters that become issues for the purchaser, we have set out below a quick checklist you can use when you are considering selling. If you have ticked all these items, your sale process will be a lot smoother.
Are your letting appointments signed by every owner?
Missing letting appointment are still the bane of every transaction. Without them you cannot charge commission. Purchasers (and their accountants) will ask for them. Be ready for that question if they are not all there and chase them down if you don’t have them..
Are those letting appointments assignable?
If they are in the final PAMDA current form (effective from 1 July 2009), has the assignment section (section 4.4) been ticked AND initialled by all of the owners? If not, it is not automatically assignable.
If you used earlier PAMDA forms (which is fine for appointments signed prior to 1 July 2009), have the owners agreed to making the appointment automatically assignable by a separate agreement or addendum?
If they are on a PoA Form 6 they are automatically assignable no matter what, and that then becomes something for the buyer of your management rights business to deal with after settlement.
Missing letting appointments, and those that are not automatically assignable, remain the single biggest issues on every sale.
Are there any outstanding due diligence issues from when you purchased?
Were there certain things that your lawyers recommended should be corrected in the agreements? Have you done these? If not, be ready to have that same conversation with the purchaser.
What is the status of the term of your management rights agreements?
Do you know the term remaining on your agreements? This is very important to any purchaser. Do you need to top your agreements up as part of the sale?
Have you exercised your options and documented that with the body corporate? Failing to exercise an option can have diabolical consequences.
Do you have up-to-date sales figures?
We cannot stress the importance of having up-to-date sales figures. Most purchasers require a verification of records to within at least two months of the date of the contract. It is very rare to find a financier that requires any less.
Having sales figures that are (say) six months old means that there is more than likely going to be a discrepancy between what you think the net profit is and what it verifies to when done by the purchaser’s accountant. This will more than likely lead to a price renegotiation (or you selling for less than you might otherwise have to if the profit has gone up!).
Are there any body corporate issues?
Are you having a ding dong battle with the committee? Are there building defects that have not been dealt with?
These issues will normally be revealed in the purchaser’s due diligence when they look at the body corporate records. Our experience is that if these type of issues are managed up front and disclosed to the purchaser before the contract is signed, then the outcome will be a lot different to the position where the purchaser identifies it during due diligence and then asks the question as to what they were not told in the first place.
Are you being realistic on your settlement timing?
Almost all management rights contracts are subject to verification of figures, legal due diligence and finance approval. These usually take about 28 days from the day the contracts are signed to complete. You then need to seek body corporate approval.
A body corporate is allowed up to 30 days from when it gets everything it needs to consider an assignment to make a decision on the assignment itself. This can happen more quickly if the committee agrees.
Signing a contract and expecting settlement in under 2 months (unless you have a great working relationship with your committee), is potentially unrealistic. Making sure you have the right timeframes from the start of the transaction will usually save a lot of panic at the end.
There are a lot of moving parts in every management rights transaction and the unfortunate reality is that it is rare to have a management rights transaction that is straight forward. That said, if you make sure you have sorted all of the above items we can guarantee it will take some of the immediate issues off the table from the start.