Is Your Buyer Up to Scratch?

Contributed by Michelle Lim, Senior Lawyer, Mahoneys - 22 December 2020

Is Your Buyer Up to Scratch?

In previous articles, we covered taking steps to prepare for your sale well in advance.

To recap:

1. Letting appointments – ensure they are assignable;

2. Management rights agreements – ensure that you have all the documents in order and all options exercised;

3. Term of agreements – ensure that they are as close as possible to the maximum term under the respective module;

4. Termination clause in agreements – though not as critical as it used to be 5 years ago, we still see instances where banks have insisted on having these Gallery Vie offensive clauses removed; and

5. Financial figures – ensure the figures are all up to date by getting and utilizing expert help.

Equally if not more important than those 5 points is the need to qualify potential buyers and where necessary, insist on appropriate training.

There is no doubt that obtaining body corporate consent to an assignment is becoming increasingly lengthy and arduous. The outgoing manager is expected to bear the costs of the body corporate’s lawyers engaged to advise on the assignment. It is unsurprising that many outgoing managers perceive that some lawyers acting for bodies corporate in assignments use the opportunity to gouge fees, particularly so if the buyers are not qualified. Just recently, we saw a body corporate’s lawyer issuing an invoice for more than $10,000 for a single scheme assignment. In another, albeit more complicated transaction involving a top up and an assignment, the fees claimed (but disputed) were some $35,000!

Whenever I speak with agents, sellers or buyers alike, there are 3 things I will always talk about. Educate, Acquaint and Training / Tuition, abbreviated E.A.T.!

Educate – Agents are usually the first ones to make contact with a prospective buyer and will usually try and ensure that a buyer is financially viable and has a reasonable understanding of the duties and expected standards to be met. Problems have arisen largely as a consequence of new entrants being poorly advised and lacking the understanding of the role a good manager plays, or the risks associated with such businesses and without the skills to deal with the complexity of the role and any conflict when it arises. It is important for any buyer to come into a business with eyes wide open and certain they understand and can deal with the ups and downs of the industry. Such an understanding facilitates the sale process.

Acquaint – Incoming managers need to be familiar with the caretaking and letting agreements as well as the by-laws of the scheme. Think about this – you wouldn’t be paying anyone top dollar and expect only average service. Likewise, it is fair and reasonable for your body corporate to be expecting a level of standard commensurate with the remuneration they are paying you. I acknowledge there are some members of the bodies corporate who are unreasonable and border on bullying, but that is a topic for another day.

Tuition and Training – It is gradually being accepted in the industry that new entrants must complete the ARAMA management rights induction training program, some regulatory compliance training and some practical hands on training for a reasonable period of time.

When a prospective buyer refuses to expend funds on training or insists that undertaking training is a mere opportunistic ploy for third party gains, this industry is probably not the right one for them. On the other hand, I tell my sellers to provide as much training as they can to the incoming manager and encourage them to undertake as much external training as possible, in order to prepare them for the interview. Do not hold back on imparting as much knowledge as possible. The more they know, the better they perform and the higher the likelihood of success at the interview.

New entrants should not see training as merely something they need to do (but otherwise ignore) just to get consent. They should embrace the training and use it to learn more about the business they are buying – it will help them enormously in the long term.

The selling process can be stressful and emotionally draining but with the right strategy and approach, it can be a lot easier.