Corporate & Commercial Practice Exam Notes
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Take 1.1 Drafting the Contract Task 1.2 - Preparing for Settlement Task 2.1 Letter to client
Task 2.2 Settlement Agenda ● Task 1
● Key Clauses - The Standard Contract
● Overview of Key Clauses
● Independent representation
● Buyer beware - Caveat Empor
● Goodwill
● Key Assets of the business
● Other things
● Goodwill and the standard contract (clause 17 - restriction on Vendor’s Competition)
● Clause 17 of the standard contract
● Restriction on vendor’s competition, key person nand people, restraint times and deeds to sign
● Goodwill and Common Law
● Things to consider in the contract with ‘Goodwill’
● Local vs Personal Goodwill
● PURCHASE PRICE AND ITS APPORTIONMENT (Clause 13)
● Clause 13 of the Standard Contract (GST)
●
● Plants, Chattels and Equipment
● Vendor’s Laywers obligations (Clause 10)
● EQUIPMENT
● Disclosure of security interests, ensuring unencumbeered (cl 10.1.2 and 10.1.3)
● Registered Security Interest Obligations of Vendor Releasing of security interest (cl
36.4.1)
● Leased Equipment Procedure/Obligations of Vendor
● Vendor’s Promises (Clause 10)
● Purchaser’s Lawyers Obligations (CLAUSE 10)
● Due Diligence Searches for Purchaser’s lawyer
● Fixtures
● Selling both Free hold and business
● What to do when premises are leased in sale (Fixtures)
● STOCK IN TRADE (Cl 4)
● Issues with Stock in Trade
● Valuation of stock in trade
● Extra clauses you need from the Vendor (Stock in Trade)
● Standard Contract Clause 4
● The Deposit (Clause 2 & 3)
● Clause 3 in full (Deposit)
● Completion Date (Clause 19)
● Clause 19 in full
● New Lease or transfer of existing Lease
● What to look out for
● Negotiation for a new lease (Standard contract 27 and 29)
● Existing Lease (CL 27 and 30)
● Due diligence with leases
● LIability of Vendor and Purchaser on and after exchange of lease
Deed of assignment of lease (Cl 27.3.2 for fees regarding assignment of lease)
Fees for assignment of lease 27.3.2
Retail Leases
Mortgagee’s Consent (cl 27.4 and 27.5)
Other important things with mortgages
Restraint of Trade/Restriction on Vendor’s competition
Cl 17
Difficulties restraining
Full wording Clause 17 Restriction on the Vendor’s competion
Key Person’s Restrictions
VENDOR’S WARRANTIES AND OBLIGATIONS
Managing the Business as going concern
Adjustment of employee expenses (Clause 18, 32-35)
Annual Leave
Personal/Carer’s Leave
Long service leave (cl 35)
Notices affecting the business cl 16
Lawful use of premises s 10.7 Planning Certificate
Clear and unencumbered title cl 10.1.2, 10.1.3, 10.2
Taking warranty (10.1.12)
PURCHASER’S PRE-EXCHANGE DUE DILIGENCE
Searches to conduct
Searches of the vendor
Title Searches
Search the assets being sold:
Inspeciton of books and contracts
EXCHANGE OF CONTRACTS
REQUISITIONS ON TITLE (Cl 14.1)
Pre Settlement
Purchaser’s obligations during settlement
Consumer law and the contract cl 12
Tuition Period cl 26.2 and cl 26.4
Business Name Transfer cl 20.1.2
Service of documents cl 24.4
Settlement
Take-over of existing arrangements cl 20.5.2
Settlement Agenda
Rent Adjustment cl 18
Lease outgoing adjustments
Employee entitlements cl 29, 34-35
Vendor Finance
Payments to outgoing mortgagee (release of securit cl 36.4.1)
Post Settlement
Vendor’s Lawyer’s obligations
Purchaser’s Lawyer’s obligations
PAYMENT OF DUTY
Capital Gains Tax
GST
ACTIVITY 2 Commercial Leases
See also Task 2.1
Retail Leases Act
DRAFTING AND NEGOTIATING COMMERCIAL LEASES
Most important part of leases
Role of a lessee’s solicitor
Independent representation
Suggested Leasing Practice
Acting for the Lessee when the lease should be registered
Considering the lease
Searches
Negotiations and amendments of draft lease
Closing Stages
Lease Guarantees
Formal Requirements of a Guarantee
Protection of Guarantors
CONTENT OF A LEASE
Parties
Subject matter of the lease
Lease term
Assignment of Lease
If the lease is registered
Assignor’s Disclosure Statement (required for RLA)
Terminating a lease
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Referrals to Experts, Loans & Security Arrangments
Referral To Experts
Lawyer’s cannot give independent tax advice
Loan Arrangements
Key terms of loans
What is a security?
Priorities on the PPSR register
Professional Duties
Professional Responsibility
● Task 1
●
Review of Task 1 – the standard contract, special conditions and steps between contract and settlement (vendor)
● Key Clauses - The Standard Contract ●
Overview of Key Clauses
●
●
1 Definitions (a term in italics is a defined term)
●
2 Deposit and other payments before completion
●
3 Investment of deposit
●
4 Trading stock
●
5 Passing of risk
●
6 Confidentiality
●
7 Certificates and inspections
●
8 Audit
●
9 How the vendor must conduct the business until completion
●
10 Vendor's promises
●
11 Foreign Acquisitions and Takeovers Act 1975
●
12 Restrictions of rights on purchaser
●
13 Goods and services tax (GST)
●
14 Requisitions
●
15 Rescission by vendor and termination by purchaser
●
16 Compliance with work orders
●
17 Restriction on vendor's competition
●
18 Adjustments
●
19 Completion date
●
20 Completion
●
21 Book debts
●
22 Purchaser's default
●
23 Rescission of contract
●
24 Miscellaneous
●
25 Time limits in these provisions
●
26 Training before and after completion
●
27 Lease of premises – general provisions
●
28 Electronic transaction
●
29 Grant of new lease
●
30 Transfer of existing lease
●
31 Consent to transfer of franchise
●
32 Employees – notices
●
33 Proposed transfer of employees
●
34 Employee entitlements – terminating employees
●
35 Employee entitlements – transferring employees
●
Independent representation
●
It is important that both the vendor and purchaser are separately represented (unless they choose to represent themselves). Lawyers run a great risk of being negligent and/or guilty of professional misconduct when acting for both parties due to the definite
possibility of an actual conflict of duty to act in the best interest of each client; see Farmer v McGregor (1988) Q ConvR ¶54-281 and Blackwell v Barroile Pty Ltd (1994) 51 FCR 347.
●
Buyer beware - Caveat Empor ●
The purchaser’s lawyer must warn the purchaser that despite the legal protection given by legislation such as the Australian Consumer Law (set out in Competition and Consumer Act 2010 (Cth) Sch 2), the maxim of caveat emptor (let the buyer beware) still applies in the purchase of a business. The purchaser’s lawyer must use their best efforts to protect the purchaser at every stage of the purchase of a business.
●
Goodwill
●
In legal terms, goodwill is a type of intangible personal property similar to intellectual property: see Inland Revenue Commissioners v Muller & Co’s Margarine Ltd [1901] AC 217. Goodwill is the “drawcard” that attracts customers to the business – it is the lifeblood without which there is no business. It is the reputation of the business and, accordingly, can be difficult to quantify. In fact, the “value” of goodwill can only be determined when a business is sold; it is the cost to purchase the business minus the value of the net tangible assets, intellectual property and identifiable intangible assets.
○
●
Usually, goodwill is sold with the business it is connected to. However, it is not legally
impossible to sell goodwill or a portion of the goodwill independently from the business
it is attached to. This is particularly the case where customer patronage depends in large part upon trade marks, trade names, packaging or other separate and distinctive features of the business. As to the legal nature and meaning of goodwill, see the High Court’s decision in Commissioner of Taxation v Murry (1998) 193 CLR 605; [1998] HCA 42; and ‘Murry: ending the mysteries of goodwill or creating new commercial pitfalls’ (1999) 73 Australian Law Journal 659.
●
Key Assets of the business
●
Goodwill;
●
plant and equipment (whether leased or owned);
●
premises leased or freehold land owned; ●
employee details and contract; ●
intellectual property (such as patents and trade marks); ●
licences affecting the business; ●
business name; ●
phone numbers, including landline, fax and mobiles; ●
email addresses, domain name, webpages and social media accounts; ●
know-how and customer lists; ●
stock-in-trade (SIT); ●
work-in-progress; ●
debtors; and ●
current (and significant) contracts with key customers
●
Other things ●
Plant and equipment is usually fully detailed in an inventory attached to the contract. The vendor’s lawyer will also attach the relevant tax depreciation as a schedule. Additional conditions may be required to accommodate other assets of the business being sold. ●
If the purchaser is to take over anyliabilities of the business, these must be clearly set out and any conditions for taking over the liabilities clearly drafted. ●
The description of the business is very important to the purchaser, who must acquire the vital components of the business, including the use of the business names and the
exposure (if any) afforded by the premises, to preserve the goodwill of the business and gain full value for the purchase price.
●
Plant and equipment is usually fully detailed in an inventory attached to the contract. The vendor’s lawyer will also attach the relevant tax depreciation as a schedule. Additional conditions may be required to accommodate other assets of the business being sold. ●
If the purchaser is to take over any liabilities of the business, these must be clearly set
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out and any conditions for taking over the liabilities clearly drafted. The description of the business is very important to the purchaser, who must acquire the vital components of the business, including the use of the business names and the exposure (if any) afforded by the premises, to preserve the goodwill of the business and gain full value for the purchase price.
●
Goodwill and the standard contract (clause 17 - restriction on
Vendor’s Competition)
●
The purchaser’s lawyer must ensure that the sale contract places proper
●
restrictions against the vendor’s ability to “interfere” with goodwill sold to the purchaser: see standard contract cl 17
●
Clause 17 restricts key people. ●
Restricts them from operating business
●
Makes key people sign a deed forcing a restraint of trade (Cl 17.4)
●
●
Clause 17 of the standard contract
●
Restriction on vendor’s competition, key person nand people, restraint times and deeds to sign
●
●
Goodwill and Common Law ●
Unless the vendor has entered into a restraint of trade covenant, it is not precluded from carrying
●
on a similar business to the one sold, even in close proximity.
●
The vendor is allowed to advertise having set up or continued in business but should not represent
●
they are continuing with or relocating a business that has been sold.
●
The vendor should not canvass the customers of the business and may be restrained by injunction
●
from approaching those customers.
●
The purchaser is entitled to use the vendor’s name in conducting the business but must not hold
●
out the vendor as the present owner of the business or expose the vendor to any personal
●
liability.
●
Things to consider in the contract with ‘Goodwill’
●
any patents, trade marks, designs or other distinguishing logos (which may or may not be
●
intellectual property or identifiable intangible assets) should be included in the sale and
transferred
●
on completion;
●
the status of the business name – whether registered or not – must be established;
●
the business name, any domain name and email addresses, key phone numbers and licences
●
must be transferred to the purchaser;
●
the vendor can agree not to use a particular business name for a specified period;
●
restraints of trade by the vendor or key personnel associated with the business must be created;
●
tuition of the purchaser by the vendor before completion of the sale;
●
introduction of the purchaser to customers and handing over customer lists on completion;
●
maintaining the goodwill between exchange and completion;
●
transfer of contracts that allow the continued use of the name (such as licences or franchises);
●
and
●
securing the employment of key employees after completion of the sale.
●
Local vs Personal Goodwill
●
There is a clear distinction between “local” goodwill and “personal” goodwill. The local goodwill of a business is dependent on the physical location of the business, whereas the personal goodwill depends on the proprietor’s skills, personality and reputation and
the proprietor’s ability to retain existing customers and attract new ones.
●
●
PURCHASE PRICE AND ITS APPORTIONMENT (Clause 13)
●
The price to be apportioned for the plant and equipment on which the vendor has claimed depreciation is most important: Income Tax Assessment Act 1997 (Cth) (ITAA
1997) Subdiv 40-D. Careful consideration is required of the possible application of ITAA 1997 s 40-285 in relation to the sale of equipment for which the vendor has been
claiming depreciation. ●
Careful consideration is also required by the vendor of the possible application to the sale transaction of the CGT business concessions and/or the CGT 50% discount
●
Both the vendor and the purchaser will need to consider carefully cl 13 of the standard contract and how the goods and services tax (GST) legislation may affect the sale transaction. Generally, parties acting at arm’s length are entitled to minimise the revenue impact on the transaction and it is vital to confer with a vendor’s accountants before apportioning the price.
●
Clause 13 of the Standard Contract (GST)
●
Supply of going concern is exempt from GST (13)
●
GST ACT section 38/325(1)
●
Under 13.4.2 the purchase promise that by the completion date, the purchaser will be registered. ●
Under 13.4.3 and 13.4.4. There are rules on what happens (i.e. adding 10% to the price, contacting the ATO etc. )
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●
●
●
Plants, Chattels and Equipment
●
In Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) 72 ALR 601, Wilcox
J found the phrase “plant, fittings and chattels” should be interpreted as a composite
phrase meaning all things, whether attached to the business premises or moveables,
which are used in the operation of the business. For convenience, this practice paper
will refer to all three components as “plant”. In the standard contract it is referred to as
“equipment”. ●
Plant may include common equipment items such as mobile phones, copying and
scanning machines, chairs and computers, as well as more specialised equipment
used in particular businesses (for example, printing presses and die-casting machines
or excavators, cranes and similar mobile plant).
●
Vendor’s Laywers obligations (Clause 10)
●
EQUIPMENT
●
Disclosure of security interests, ensuring unencumbeered (cl 10.1.2
and 10.1.3)
●
The vendor’s lawyer should obtain a full list of plant to be included in the sale from the vendor or the vendor’s accountant. This list should be attached to the agreement. Often the vendor’s latest depreciation schedule is attached to identify each piece of plant by its registration details (if applicable) or salient features and the associated price being paid for the plant.
●
The vendor’s lawyer should ascertain the nature of any encumbrances or security interests over the items of plant (which is personal property) being sold. ●
A PPS Act s 174 grantor search of the vendor should be made of the Personal Property Securities Register (PPSR) to find details of any registrations of security interests over the plant.
●
The vendor should disclose any security interests in the contract as the vendor warrants that the plant is unencumbered: see cll 10.1.2 and 10.1.3. ●
A copy of the search attached to the contract would be sufficient
●
Registered Security Interest Obligations of Vendor Releasing of security interest (cl 36.4.1)
●
cl 36.4.1 of the standard contract provides that the vendor will give to the purchaser, at
or before completion: ○
a release of the security interest; ○
a statement from the lender setting out that the amount secured is nil; or ○
an approval or correction indicating that the property sold is not the subject of the security interest.
●
The vendor may be required to provide at completion an undertaking from the lender to discharge any personal property security registrations within an appropriate time period, and a special condition should be included in the contract of sale and purchase
of a business to effect this.
●
Some items of plant may not be owned by the vendor but leased from a third party.
Such a lease must either be paid out by the vendor or transferred on completion to the
purchaser. ●
Refer to the “Vendor’s promises” in cl 10 of the standard contract, particularly cll 10.1.2, 10.1.3, 10.1.4 and 10.2. ●
Leased Equipment Procedure/Obligations of Vendor
●
A lease of plant may be a security interest under the PPS Act and, if registered on the PPSR, the release procedures outlined above apply. ●
An alternative way of dealing with a lease on plant is to arrange for a transfer of the lease
from the vendor to the purchaser, but this requires the approval of the lender and appropriate documentation.
●
When acting for a vendor and a lease of plant is being transferred to a purchaser, it is important to release the vendor from any continuing legal obligations under the lease if
the lender agrees.
●
Vendor’s Promises (Clause 10)
●
●
●
10.1.1 -the vendor has full authority and capacity to enter into this contract and sell the
business;
●
10.1.2 the vendor has absolute title to the business;
●
10.1.3 the business is not subject to any charge, encumbrance, lease, mortgage, security interest under the PPS Act or other liability or security;
●
10.1.4 the equipment is in proper working order;
●
10.1.5 the business does not include any stock-in-trade acquired on terms that property in it does not pass until full payment has been made (for example, stock-in-
trade acquired on consignment);
●
10.1.6 there is no subsisting breach by the vendor of a lease, franchise agreement, or other agreement with a third party which would entitle the lessor, franchisor or third party to terminate the agreement or refuse to grant an option to renew the agreement or refuse to transfer the benefit of the agreement to the purchaser;
●
10.1.7 the vendor has complied with all requirements under legislation relating to the business;
●
10.1.8 there is no current dispute or litigation relating to the business between the vendor and any other person (for example, any lessor, franchisor, supplier of goods or services to the business, current or former employee, trade union, council, government
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department, or the Fair Work Ombudsman);
●
10.1.9 each superannuation fund named in this contract – is fully funded and solvent; and
●
complies in all other respects with legislation;
●
10.1.10 the vendor does not have any other superannuation fund;
●
10.1.11 there is no superannuation guarantee charge or liability accrued or payable to employees of the business;
●
10.1.12 anything attached to this contract is accurate and complete; and
●
10.1.13 there are no workers compensation claims by any employees of the business for the past three years.
●
10.2 - These promises are made as at the contract date and are also made as at completion.
●
10.3 -If the vendor becomes aware before completion of any fact which makes a promise in clause 10.1 incorrect or misleading, the vendor must disclose that fact to the purchaser promptly and before completion.
●
●
●
●
●
Purchaser’s Lawyers Obligations (CLAUSE 10)
●
If the purchase of the business includes the acquisition of plant, the purchaser’s lawyer
should recommend an inspection of the plant being offered for sale before exchange
of contracts to ensure it is suitable to the purchaser’s needs and in proper working
order. ●
The standard contract provides a vendor promise that the plant is in proper working
order (cl 10.1.4) and that it will be maintained in that condition by the vendor until
completion (cl 9.1.3).
●
The purchaser’s lawyer should ensure that the vendor has clear title to plant being
sold with the business. It is usual practice to register a financing statement for a lease
of plant, equipment or chattels of any kind on the PPSR.
●
Due Diligence Searches for Purchaser’s lawyer
●
a PPS Act s 174 grantor search of the vendor for security interests over personal property on the PPSR. ●
The vendor should disclose any security interests in the contract as it warrants that the
plant is unencumbered: see cll 10.1.2 and 10.1.3. ●
The vendor is also obligated do everything reasonable to enable the purchaser to ascertain whether there are any security interests in personal property included in the sale of the business: cl 36.3; ●
for individuals, a bankruptcy search on the National Personal Insolvency Index maintained by the Australian Financial Security Authority. A search can also be made at the Federal Circuit and Family Court and the Federal Court of Australia to find any bankruptcy proceedings filed but not yet recorded on the National Personal Insolvency
Index; ●
for companies, a current company search from the Australian Securities and Investments Commission (ASIC) as to insolvency; and ●
court searches for causes, writs and orders.
●
If there are financing statements for security interests registered on the PPSR, a purchaser’s lawyer will require the vendor to provide (at or before completion) either a release of the security interest or a statement under PPS Act s 275 from the lender setting out that the amount secured is nil or that the property sold is not the subject of the security interest: standard contract cl 36.4.1.
●
The lender or lessor can discharge or amend the financing statement of a security interest on the PPSR. The purchaser’s lawyer may require a special condition be added to the standard contract obliging the vendor to also provide an undertaking from
each lender or lessor to promptly alter the PPSR. ●
If this is not done in a reasonable time, the purchaser can apply to the Registrar of the PPSR to lodge a financing amendment statement to effect the change.
●
Fixtures
●
If the sale includes fixtures, the purchaser’s lawyer must establish that the vendor has title to those fixtures and the ability to pass the title to the purchaser under the relevant
lease.
●
Fixtures attached to land are excluded from the operation of the PPS Act as, at law, they form part of the land.
●
Generally, fixtures belong to the lessor of the business premises, not the owner of the business. If they are the “tenant’s fixtures” (as they belong to the tenant and the tenant
can remove them subject to repairing any resultant damage to the premises), they are treated as “plant” (or, in the contract, “equipment”).
●
Careful consideration needs to be given to the issue of whether there may be a mortgage or other security over the fixtures being sold as part of a business. A lawyer will need to consider whether such fixtures are: ○
the landlord’s property – if so, does the landlord’s mortgagee have a land mortgage that is effective security over the fixtures; or ○
because of their method of attachment, the tenant’s fixtures and therefore the
tenant’s personal property under the PPS Act – if so, is there any security interest over this personal property under the PPS Act?
●
Selling both Free hold and business ●
Where the vendor is selling both the business and the freehold title to the business premises, the normal conveyancing procedures for the sale of land will apply to the freehold business premises and there is no restriction on the vendor’s right to sell the fixtures. There is still a need to do an agreement for the sale of the business. ●
When both standard land and business contracts are used, it is usually necessary to insert a special condition into each contract referring to the other contract and any necessary inter-dependent obligations in the particular circumstances of the transaction.
●
When acting on a transaction that involves both the sale of the freehold business premises and the business, it is possible that a lender has a security interest in fixtures
attached to the land. A search of the PPSR should be carried out to reveal any security interest in the fixtures that will need to be discharged and to ensure that any mortgage over the land is discharged on completion
●
What to do when premises are leased in sale (Fixtures)
●
It is more common for the business premises to be leased by the vendor. When a lease exists, it is necessary to determine what items are tenant’s fixtures and if the vendor has power to sell those fixtures.
●
Leases and Mortgages
●
The purchaser’s lawyer must exercise particular care where the freehold of leased business premises is subject to a mortgage. ●
Whether the purchaser is taking the transfer of an existing lease or a new lease, it is important to confirm that the mortgagee of the freehold has consented to the lease or transfer. ●
This is to ensure that the mortgagee is bound by the lease and, in particular, to ensure
that the lessees right to remove fixtures also binds the mortgagee.
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●
STOCK IN TRADE (Cl 4)
●
Stock-in-trade refers to goods that are available for sale and that generate the primary income of the business: see standard contract cl 4
●
It is a “current” and “circulating” asset of a business, unlike non-circulating assets such
as plant, fittings or goodwill, which are fixed assets. The reason SIT is a circulating asset is that the SIT circulates as it is routinely being sold and replaced by new SIT in the day-to-day operation of the business.
●
Issues with Stock in Trade
●
A key problem in defining SIT in a contract for sale of a business is to determine what stock the purchaser can reject. Although the SIT may be of good quality, it may be slow moving, out of date or out of fashion. It is not commercially sensible for a purchaser to pay full value for these items when there is no prospect of quick sale and recovery of full value on the open market.
●
The description of stock as good, saleable or marketable does not adequately deal with this aspect of the transaction. A special condition must be drafted to cater for the circumstances of SIT of the business being sold. ●
If the purchaser is familiar with the relevant industry, they should examine the SIT to determine its value and saleability. If the purchaser is not so familiar, the purchaser’s lawyer should suggest arranging this.
●
Valuation of stock in trade
●
In a business sale agreement, the SIT component is often shown as an estimate, which will later be valued by a stocktake to determine the actual price to be paid by the
purchaser. ●
Clause 4 of the standard contract provides that the vendor and purchaser are to agree on the sum to be paid for the good and saleable trading stock of the business and, in the event that they do not agree on the value of the stock, sets out a process for the parties to nominate a stockholder to count and value the stock.
●
A SIT maximum sum is also nominated, above which a purchaser does not have to purchase the SIT and the purchaser can nominate what stock to reject. Payment for the stock will be required usually on or within 7 days of completion. The stocktake
takes place on the day of completion to avoid disputes relating to removal of stock.
●
Occasionally, a sale proceeds on a “walk-in/walk-out” basis where the value of the SIT
is included in the purchase price and accepted on its face by the purchaser. In these circumstances it is useful to have a special condition in the contract to protect the purchaser from the vendor running down the SIT below a particular level
●
Stock-in-trade can comprise a significant part of the overall business. It is therefore important to have an accurate SIT valuation before completion of the sale. Usually, the
value of SIT is determined by agreement between the parties.
●
If there is disagreement, an independent valuer appointed by either party will determine the final price to be paid for the stock. The valuation will be binding on both parties unless there has been an obvious error. Other items that also require special consideration in determining the value of SIT include raw materials and partly finished goods
●
Extra clauses you need from the Vendor (Stock in Trade)
●
A suitable clause in the contract should prevent a vendor from:
●
purchasing large amounts of trading stock before completion outside the normal course of business; and
●
selling stock at a discount between exchange of contracts and completion, without the purchaser’s prior written consent.
●
Standard Contract Clause 4
●
4 Trading stock
●
4.1 The vendor sells and the purchaser buys the good and saleable trading stock of the business for the sum agreed on by both parties or determined under this clause.
●
4.2 Normally, t
he purchaser must pay for the trading stock on completion in addition to the price.
●
4.3 If this contract states the business i
s sold on a stock inclusive basis
, the price includes the value of the trading stock.
●
4.4 If the value of the trading stock is greater than the trading stock sum
, the purchaser does not have to purchase the part of the trading stock in excess of the sum
, and the purchaser can serve a notice identifying the part of the trading stock which the purchaser wants withdrawn from the sale.
●
●
DISPUTE PROCESS (4.5)
●
4.5 If the parties do not agree on the sum payable for trading stock or if any other dispute arises about trading stock –
●
4.5.1 the dispute must be finalised by a stocktaker appointed by the parties or, if an appointment is not made within 28 days of completion, by a stocktaker appointed by the President of the Real Estate Institute at the request of a party;
●
4.5.2 each party must pay half the cost of the appointment and determination of the stocktaker; and
●
4.5.3 a party does not have to complete until the date 7 days after the purchaser receives written notice of the decision of the stocktaker and clause 25.3 does not apply
to this provision.
●
●
CONDUCT OF BUSINESS UNTIL AFTER COMPLETION (CLAUSE 9) ●
9.1 - It is an essential provision of this contract that the vendor must, between the contract date and completion –
○
9.1.1 maintain the goodwill of the business
and carry on the business in a proper and business like way;
○
9.1.2 -
stay in possession of the business and the premises
, ensuring the business is run as a going concern;
○
9.1.3 - m
aintain the equipment in the same state of repair
as at the contract
date (except for any fair wear and tear); and
●
9.2 It is an essential provision of this contract that the vendor must not, without the prior written consent of the purchaser –
○
9.2.1 o
ffer stock-in-trade for sale in any way
other than in the usual course of business (for example, by advertising a closing down sale
or by selling stock-in-trade at less than the prevailing retail price);
○
9.2.2 c
ancel any existing franchise arrangements, leases
(including the lease of the premises), l
icences, services
or other similar facilities of the business referred to in this contract, or breach any of those facilities in a way which would allow the supplier to cancel the supply contract; or
○
9.2.3 grant or vary any employee entitlements
(unless required to do so under legislation or in accordance with the rules of a superannuation fund the existence of which is disclosed in the contract).
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The Deposit (Clause 2 & 3)
●
The deposit is generally 10% of the purchase price (excluding the SIT figure). If the
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deposit is less than 10%, it should be enough to show a commitment by the purchaser to purchase the business. (
Standard Contract, cl 2)
●
The deposit is normally paid in full on exchange of contracts, but it may be paid later or
by instalments: standard contract cl 2
●
The deposit is usually paid by personal cheque to the agent
or, if there is no agent, to the vendor’s lawyer
. The receiving party holds the deposit as stakeholder, so it is paid into a trust account
but may be invested to earn interest between the exchange and completion with an agreed financial institution. ●
it should be clear where and how the deposit is to be invested and how the interest should be shared: standard contract cl 3
●
Clause 2 in full (Deposit and other payments before completion)
●
2.1 The purchaser must pay the deposit to the depositholder
as stakeholder.
●
2.2 The purchaser must pay the deposit on the making of this contract and this time is essential.
●
2.3 If this contract requires the purchaser to pay any of the deposit b
y a later tim
e, that time is also essential.
●
2.4 The purchaser can pay any of the deposit only by unconditionally giving cash (up to $2,000)
or a cheque to the depositholder or to the vendor, vendor's agent or v
endor's solicitor for sending to the depositholder.
●
2.5 If any of the deposit is not paid on time or a cheque for any of the deposit is not honoured on presentation, the vendor can terminate
. This right to terminate is l
ost as soon as the deposit is paid in full.
●
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Clause 3 in full (Deposit)
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Completion Date (Clause 19)
●
An agreement for sale of a business will usually specify a date for completion and should make it clear whether time is essential:
standard contract cl 19
●
Frequently, the agreement is not exchanged until the purchaser has undertaken all due diligence as to the business. As such, there may only be a short period of time between exchange and completion
●
In practice, the circumstances of the sale may require time to be essential. Often, the parties will want the transaction to be completed urgently and may request a specific date for completion. If completion is dependent upon an “outside” event (such as lessor’s approval to a lease transfer or licensing court approval to a transfer of a liquor licence), it is hazardous to make time an essential condition.
●
Clause 19 in full
●
19 Completion date
○
19.1 The parties must complete by the completion date
and, if they do not, a
party can serve a notice to complete
if that party is otherwise entitled to do so.
○
19.2 If a consent is required from a franchisor, landlord or landlord's mortgagee, t
he purchaser does not have to complete earlier than 7 days after service of the consent
(and if more than one, the last of the required consents) and clause 25.3 does not apply to this provision.
○
19.3 This clause applies only if this contract says there is an interdependent contract –
■
19.3.1 the completion date will be the later of the completion date and the completion date in the interdependent contract;
■
19.3.2 if the interdependent contract is rescinded by the purchaser or the vendor, this contract is also rescinded; and ■
19.3.3 if the interdependent contract is terminated by the purchaser or the vendor, this contract is also terminated by that party.
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New Lease or transfer of existing Lease ●
What to look out for ●
Unless the purchaser is buying the freehold where the business is being conducted, security of tenure is crucial and is dependent on the nature of the available lease. This is particularly important where there is substantial goodwill associated with the location
of the business.
●
Purchasers and their lawyers should ensure that the term of the lease is of sufficient duration (including options for renewal) and that the other terms are commercially acceptable.
●
Lawyers for both parties should consider whether the provisions of the Retail Leases Act 1994 (NSW) apply to the lease. If so, the lease must be read subject to the terms of that Act, and the procedures for entering into and assigning the lease followed.
●
Negotiation for a new lease (Standard contract 27 and 29)
●
Whenever a new lease is required, it will involve direct negotiations between the purchaser and the lessor or via their respective lawyers. ●
However, the negotiations might not be finalised before exchange of contracts.
●
In this case, a purchaser’s lawyer must ensure that the contract is made conditional on
the landlord agreeing to grant a new lease on the required terms within a specific time after exchange: standard contract cll 27 and 29
●
Existing Lease (CL 27 and 30)
●
If the business premises are subject to an acceptable existing lease, a transfer of the lease will be arranged. ●
The purchaser’s lawyer must obtain a copy of the lease, check it and advise the purchaser on all important aspects of it before exchange of the agreement.
●
The lawyer should discuss with the purchaser all important, onerous or unusual conditions in the existing lease.
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●
The contract should also be made conditional on the landlord’s consent to the lease transfer being obtained within a specific time after exchange: standard contract cll 27 and 30.
●
If there is a transfer of an existing lease, then there is no reason why the terms cannot be renegotiated. Where the request is reasonable and the purchaser appears to be a valuable tenant, a landlord may oblige.
●
Due diligence with leases ●
Whether a lease is being transferred or a new lease is being obtained, the purchaser’s
lawyer must search the title to ensure that the existing lease is registered and that there is no mortgage or caveat that may prevent the lease being transferred or a new lease being granted. ●
It is also likely that the consent of any mortgagee to the assignment of the lease will be
required.
●
If the lease is a sublease, both the sublease and the head lease should be carefully examined. ●
The head lessor’s consent will normally be required for a transfer of the sublease.
●
LIability of Vendor and Purchaser on and after exchange of lease
●
The liability of the vendor and the purchaser following the transfer of the lease will be covered by the sale agreement and deed of assignment of the lease.
●
The contract should contain warranties by the vendor as follows:
○
that the lease is valid and subsisting;
○
that the vendor has observed the terms of the lease and will do so up till the date of completion;
○
that the vendor is not in breach of the lease or that any breach has been waived or rectified;
○
that there is no litigation (past or pending) between the vendor and the lessor concerning the lease;
○
that the vendor has the right to use the premises for the purposes indicated in the lease and that
○
there is no dispute concerning such use;
○
that there is no dispute between the vendor and the lessor concerning any rent review or a right
○
to exercise an option to renew the lease;
○
in the case of a sublease, the above warranties should cover the head lease;
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and the vendor will obtain the consent of any mortgagee to an assignment of the lease.
●
Refer to cll 9.1.4, 10.1.6 and 10.1.8
of the standard contract.
See below: ●
9.1.4
- comply with the lease of the premises and exercise any option to renew the lease of the premises which is required under the lease to be exercised before the date of completion.
●
10.1.6
there is no subsisting breach by the vendor of a lease,
franchise agreement, or other agreement with a third party which would entitle the lessor, franchisor or third party to terminate the agreement or refuse to grant an option to renew the agreement or refuse to transfer the benefit of the agreement to the purchaser;
●
10.1.8
- there is no current dispute or litigation relating to the business between the vendor and any other person (for example, any lessor, franchisor, supplier of goods or services to the business, current or former employee, trade union, council, government
department, or the Fair Work Ombudsman);
Deed of assignment of lease (Cl 27.3.2 for fees regarding assignment of lease)
The deed of assignment should deal with liability after the date of assignment. Normally the following is included: The following matters are usually covered: ●
the vendor will perform and indemnify the purchaser in relation to the lease covenants up to the date of completion; ●
the purchaser will perform and indemnify the vendor in relation to the lease covenants after the date of completion; and ●
the purchaser usually covenants with the lessor to perform the lease covenants after the date of completion.
Other matters that may be contained in the deed are:
●
adjustment of rent and outgoings;
●
any agreed amendments to the lease covenants; and
●
execution of a deed of guarantee by any new guarantor of the incoming lessee.
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Fees for assignment of lease 27.3.2
●
It is usual for the vendor to pay the lessor’s and mortgagee’s legal costs on the assignment while the purchaser will pay any duty and registration fee on the transfer of
lease: standard contract cl 27.3.2.
Retail Leases ●
For leases subject to the Retail Leases Act 1994 (NSW), s 41A provides that the assignor of the lease is not liable for any payments to the lessor after the date of assignment provided that the provisions of that section are followed.
Mortgagee’s Consent (cl 27.4 and 27.5)
Whenever a mortgage exists over leased premises, the granting of any new lease or
transfer of an existing lease will usually require the consent of the lessor’s mortgagee:
standard contract cll 27.4 and 27.5.
Other important things with mortgages
When the lease is registered over Torrens title land, it is not binding on the mortgagee unless the mortgagee consented in writing. ●
If a lease is granted without the mortgagee’s consent, there are usually two consequences: ●
the lessor mortgagor has breached the mortgage conditions which may give the mortgagee the right to call up the debt by reason of the default; and
●
if the mortgagee exercises its powers on default, it is able to recover possession of the
premises from the lessee.
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●
If the purchaser’s lawyer’s title search discloses a mortgage, steps should immediately
be taken to obtain the mortgagee’s consent to protect its client.
●
When obtaining a mortgagee’s consent, the purchaser’s lawyer should carefully read any attached conditions and ensure the consent covers not just the initial term of the lease but all further option terms under the lease. ●
The clause in the purchase contract dealing with the transfer or grant of a lease should
also make the contract conditional on obtaining such mortgagee’s consent.
Restraint of Trade/Restriction on Vendor’s competition Cl 17 ●
In practice, the most common way to protect the goodwill is to require the vendor (and other “key” persons involved in running the business) to agree not to engage in any specified activities; that is, competin with the business, within a particular geographic area and for a period of time after completion.
●
The standard contract contains such a restraint in cl 17 and on Page 8. ●
Clause 17.5 requires the vendor to have every “key” person sign a deed of restraint with the purchaser in similar terms to cl 17. ●
It is advisable to attach a schedule of “key persons” to the contract.
Difficulties restraining
●
The difficulty of determining whether a restraint in trade is against public policy led to the enactment of the
Restraints of Trade Act 1976 (NSW), which provides that a restraint of trade is valid to the extent to which it is not against public policy: s 4(1). The Supreme Court may determine the validity or otherwise of a restraint. If the clause will permit, it may be “written down” to the point that the court determines it is valid.
●
There have been instances where it has been alleged that a conflict exists between restraints created in accordance with the common law and the operation of the Competition and Consumer Act 2010 (Cth).
●
However, that Act does not affect the operation of the law relating to a restraint of trade insofar as that law
is capable of operating concurrently with the Restraints of Trade Act 1976 (NSW): Competition and Consumer Act 2010 (Cth) s 4M
Full wording Clause 17 Restriction on the Vendor’s competion
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Key Person’s Restrictions
●
A key person may be a principal, an employee of the business or a person named in the sale contract: standard
contract cl 17.
●
Where the vendor is a corporation, a key person is an officer of the corporation, a majority shareholder of the corporation or a person who can exercise substantial control over the corporation. ●
Often, the key person is not a party to the sale agreement and, therefore, any restriction to be imposed on
that person must be contained in a separate deed of restraint, executed by them.
VENDOR’S WARRANTIES AND OBLIGATIONS
Managing the Business as going concern
●
A carefully drafted special condition will ensure that the vendor will maintain the assets
of the business, not run-down stock and not hold any closing down sales: standard contract cll 9.1 and 9.2.
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Adjustment of employee expenses (Clause 18, 32-35)
●
Employee expenses are paid out and/or adjusted on completion. Relevant items include wages, superannuation, annual leave, personal/carer’s leave, redundancy payments, long service leave and any other remuneration or entitlement arising out of employment or termination of employment: standard contract cll 18 and 32–35.
●
The purchaser decides which employees it will offer employment to and, if accepted, the employees’ services continue and are deemed not to be affected. The remaining employees are terminated and paid out by the vendor on completion.
●
Under the Fair Work Act 2009 (Cth) (FWA), on the transfer of a business (other than to
a related entity), the purchaser as new employer must elect whether or not to recognise the transferring employees’ previous service for accumulated annual leave, personal leave and redundancy entitlements
●
If not recognised, the vendor pays out these items to the employee on completion: standard contract cl 34).
●
If recognised, these items are mostly adjusted on completion by partial vendor allowances to the purchaser and the vendor pays out any remaining entitlements to the employee: cll 34 and 35.
●
Accumulation of long service leave governed by state legislation must be recognised by the purchaser and adjustments made.
●
Other adjustments such as outstanding commission payable to employees will be the subject of negotiation between the parties
Annual Leave
●
Employees who are employed by a corporation, or are otherwise covered by the FWA,
have an entitlement to 4 weeks’ paid annual leave (5 weeks for certain shiftworkers): FWA s 87. ●
This leave accrues progressively throughout a year of service and can be accumulated. The amount of annual leave owing to an employee is calculated up until the date of completion. ●
This annual leave is either paid to the employee by the vendor on completion or, if recognised by the purchaser, a part allowance is paid to the purchaser on completion with the balance owing paid to the employee: standard contract cll 34 and 35
●
For employees covered by the New South Wales industrial relations system, the Annual Holidays Act 1944 (NSW) also entitles workers to 4 weeks’ leave on ordinary pay.
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Personal/Carer’s Leave
●
Where the FWA applies, a full-time employee is entitled to 10 days (cumulative) of personal or carer’s leave each year: Ch 2 Pt 2-2 Div 7. A purchaser will require the vendor to adjust accumulated personal/carer’s leave for transferring employees to the completion date.
●
Full-time employees covered by the New South Wales industrial relations system are entitled to 10 days of paid personal/carer’s leave per year, which can be accumulated for 3 years
Long service leave (
cl 35)
●
The vendor must make an adjustment in favour of the purchaser for a portion of the
value of any long service leave entitlement of each of those employees: standard
contract cl 35.
●
On the sale of a business, if the employees are being re-employed by the purchaser
, service continues
for the purpose of the Act and service with the vendor is regarded as service with the purchaser. ●
Under the Long Service Leave Act 1955 (NSW), employees who have been in continuous service in a business for at least 5 years are entitled to long service leave entitlements; broadly, 2 months’ leave on ordinary pay after 10 years. An employee has a pro rata entitlement to long service leave if their employment is terminated after 5 years’ continuous service either:
○
by the employer by way of redundancy; or ○
by the employee as a result of a pressing domestic need. Notices affecting the business cl 16
●
The vendor must comply with all such notices “made on or before the contract date”: standard contract cl 16.
This means a purchaser is responsible for any such notices issued by a statutory authority after the contract date. The purchaser should rely on its own searches and enquiries to establish if such notices have been issued.
●
If a purchaser has to comply with any work order (that is, one issued after the contract date) and if the cost of complying with that work order exceeds 10% of the purchase price, the purchaser has an option to rescind the agreement:
cl 16.2.
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Lawful use of premises s 10.7 Planning Certificate
●
The purchaser should require a warranty that the premises are lawfully used for the purposes of the business, although a vendor will often respond that the purchaser should rely on its own enquiries. It is good practice for the purchaser to obtain a planning certificate under Environmental Planning and Assessment Act 1979 (NSW) s 10.7 or to contact the relevant local council to ascertain the zoning of the land on which the business is located, to ensure that the premises from which the business is conducted complies with all necessary regulations.
Clear and unencumbered title cl 10.1.2, 10.1.3, 10.2 ●
The purchaser should receive clear title to all the assets being sold in the business, unless there are arrangements for the transfer of equipment finance leases. The purchaser should make searches and requisitions to ascertain that the title is clear and
is capable of being transferred in full and without encumbrance: standard contract cll 10.1.2, 10.1.3 and 10.2. ●
Searches of the PPSR should be made to check for registrations in relation to security interests, in addition to any other searches and requisitions/enquiries to ensure that unencumbered title is being transferred.
Taking warranty (10.1.12)
●
A vendor will usually warrant that the financial statements provided are accurate and complete: standard contract cl 10.1.12.
●
Assuming that no warranty is given, purchasers should carry out their own investigations, obtain the financial records for at least the last 3 years and have their accountant assess them to advise on the financial viability of the business. ●
A purchaser’s lawyer should ensure the purchaser has had the financial records checked by an accountant before exchange of agreements
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PURCHASER’S PRE-EXCHANGE DUE DILIGENCE
Searches to conduct
Searches of the vendor
●
If the vendor is a company, search the ASIC records to ascertain the officers of the compan to make sure the people carrying on the negotiations have power to bind the company.
●
If the vendor is a sole trader or partnership or if guarantees are being taken from directors of the vendor company, a bankruptcy search should be carried out against the people involved.
●
Carry out a causes, writs and orders search against the vendor.
Title Searches ●
Title searches:
●
Obtain
a title search of the business
premises to check if the lease is registered and for any conflicting lease, mortgage or caveat.
●
If there is a l
ease, obtain a certified copy
from the vendor or NSW Land Registry Services.
●
Check the business is approved under the local council’s zoning regulations. This is done by obtaining an Environmental Planning and Assessment Act 1979 (NSW)
s 10.7
certificate to check the present zoning and permitted uses, as well as a copy of the Development Approval from the local council that approved the particular use by the business.
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Search the assets being sold:
●
Carry out a PPS Act s 174 grantor search of the PPSR for any registered financing statements for security interests over the assets of the business being sold including any leased plant, equipment, chattels or intellectual property. The vendor must do everything reasonable to enable the purchaser to ascertain whether there are any security interests in personal property included in the sale of the business:
standard contract cl 36.3.
●
If there is intellectual property such as trade marks, patents, registered designs and copyright, also search the relevant IP Australia register.
●
If there is intellectual property such as trade marks, patents, registered designs and copyright, also search the relevant IP Australia register. ●
schedule attached to the business sale agreement; however, it is prudent to conduct those searches to check the details are correct and identify any additional registrations
that might have been overlooked. ●
Identify the domain name and email addresses and who holds their registration. There are multiple domain name registers that may be searched free of charge (for example, “Whois” and “Ausregistry”). ●
Identify key phone numbers, social media and licences that need to be transferred on sale. ●
If a business name is to be sold, search the national business names register administered by ASIC. It is ASIC’s responsibility to register, renew and administer business names for all Australian businesses
Inspeciton of books and contracts ●
The purchaser should inspect the books and financial records of a business to ascertain the viability of the business and to check if the earnings to date justify the purchase price.
●
A purchaser should have an accountant look through the books to ascertain its true financial position and viability. A thorough analysis will often reveal debts, which need to be taken into consideration when negotiating the purchase price, particularly if they impact profitability.
EXCHANGE OF CONTRACTS
●
Once preliminary negotiations have been completed, preliminary searches done, all special conditions and amendments negotiated and the client fully informed and advised, the agreements are signed and a time and place is arranged for exchange of
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signed copies.
●
Exchange usually takes place at the offices of the vendor’s lawyer, where the deposit cheque is handed over to the vendor’s lawyer or the agent who then holds the deposit on trust until completion, when authorisation to release the deposit is obtained from the purchaser.
●
Once exchange has taken place, the contracts become legally binding.
REQUISITIONS ON TITLE (Cl 14.1)
●
Requisitions on title to the business assets must generally be sent by the purchaser’s lawyer to the vendor’s lawyer within 10 days of exchange: standard contract cl 14.1. The answers to requisitions bind the vendor. ●
Requisitions are a useful tool in obtaining information from the vendor and offer protection if any answers prove to be false or misleading.
Pre Settlement ●
Executing all necessary documents to allow full transfer of title to those assets being sold with the business;
●
conducting the business in its normal manner and not doing anything to adversely affect the goodwill or value of the business before settlement;
●
discharging any existing mortgage, security interests, charges or other encumbrances over the Business;
●
obtaining any lessor’s consent to any transfer of lease; and
●
notifying staff of the sale and attending to staff terminations as required.
Failure of the vendor to perform its obligations may allow the purchaser to rescind the contract.
Purchaser’s obligations during settlement The purchaser will similarly be bound by the terms of the agreement after exchange. If the purchaser defaults in the performance of its obligations under the contract, such as failing to meet time limits or to pay money due, the vendor may sue the purchaser for breach of contract or, in case of serious default, cancel the contract and keep the deposit money as a forfeit.
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Consumer law and the contract cl 12
●
The purchaser can rely on a vendor’s contractual representations as to the business.
●
A prudent vendor’s lawyer will include a clause in the agreement to specifically negate
any warranties or representations that may have been made to the purchaser during
the contractual negotiations and that are not repeated in the signed agreement:
standard contract cl 12.
●
Note however, For example, a purchaser may have remedies under Australian Consumer Law ss 18 or 29 for any misleading and deceptive conduc
t and for any false and misleading statement or representation
by the vendor
Tuition Period cl 26.2 and cl 26.4
The timing and duration of a tuition period is normally set by the contract: see standard
contract cl 26.2 and Page 1
Vendor’s assistance cl 26.4
●
The necessity for the vendor’s assistance after settlement and the length of the assistance period will depend on the purchaser’s knowledge and the type of business
Business Name Transfer cl 20.1.2
●
On completion, the vendor must give to the purchaser a “consent to transfer number” and any other information needed to enable the purchaser to become the registered name holder: standard contract cl 20.1.2.
●
The process for a transfer of a business name on the national business names register
requires the existing name holder (the vendor) to apply to transfer the business name. ASIC then issues a “consent to transfer number” that is provided to the proposed name holder (the purchaser) who can apply to register the business name
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Service of documents cl 24.4
●
Time for delivery of documents by mail or document exchange should be realistic and provisions should be made for weekends or public holidays: standard contract cl 24.4.
Settlement ●
The process of settlement (that is, completion of the contract) should be performe with care. ●
Settlement will generally occur at a place nominated by the vendor (although cl 28 now
provides for electronic conveyancing).
●
This will be communicated to the purchaser’s lawyer by the vendor’s lawyer, who will arrange a suitable date and time
●
The lawyers for both parties should ensure that they have all the relevant documents signed, that correct cheques have been drawn and that all necessary parties will be present.
●
Take-over of existing arrangements cl 20.5.2
●
The parties should have obtained all necessary consents before settlement to a transfer of an existing service agreement. It is good practice to provide in the agreement that the vendor will indemnify the purchaser against any claim or action arising after completion relating to any default by the vendor before completion. The vendor will seek a corresponding indemnity from the purchaser:
standard contract cl 20.5.2
Settlement Agenda ●
It is useful to draw up a settlement agenda before attending on settlement. The agenda will set out what is to be handed over and will help avoid any omissions or oversights that might delay or prevent settlement. If there are missing items, settlement should not be completed unless the defaulting party provides satisfactory written undertakings. A lawyer must take extreme care when drafting or accepting such undertakings
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Rent Adjustment cl 18
●
All income and outgoings of the business must be adjusted between the parties to the date of settlement. Adjustments should always be made unless special conditions in the contract say otherwise: standard contract cl 18.
●
Rental adjustments are calculated when there is a lease being transferred. If there is a
new lease, the vendor must meet all obligations under the pre-existing lease
●
If a lease is being transferred, a special condition should be included in which the vendor indemnifies the purchaser against any claims arising from a breach of the vendor before completion
Lease outgoing adjustments
In addition to rent adjustment, there are often contributions by lessees to the running costs
of the building that must be adjusted on settlement. The outgoings are usually calculated on an area percentage basis and are set out in the schedule to the lease. Before settlement, the landlord’s lawyer should confirm in writing the date to which the vendor has paid rent and outgoings.
Employee entitlements cl 29, 34-35
●
Under the standard contract, cll 32–35 apply to the adjustments required to be made in
relation to the entitlements of employees (both transferring and terminating). They can be complex, and usually an accountant will calculate employee adjustments for the lawyer
●
Generally, it is the vendor’s responsibility to give written notice terminating employees if they are not transferring to the purchaser: cl 32. ●
The vendor is also responsible to pay the employee entitlements due to each terminating employee: cl 34.
●
If the purchaser wishes to offer employment to existing employees, the purchaser must notify the vendor at least 15 days before settlement or a period specified in the FWA or a period specified in the employee’s contract of employment and must promptly make a written offer of employment to those employees: cl 33.2
●
If employees are transferring to the purchaser, the purchaser must elect whether to recognise the transferring employees’ service with the vendor for the purpose of the FWA for annual leave, personal/carer’s leave and redundancy: cl 35.2. This election does not apply to long service leave, which is covered under the Long Service Leave Act 1955 (NSW).
●
If the purchaser makes an election not to recognise service or does not make an election, the vendor must pay the entitlements set out in cl 34 as for terminating employees, except for any long service leave entitlements.
●
If the purchaser elects to recognise the service, the vendor must pay or allow the purchaser adjustments for accrued annual leave, personal/carer’s leave and redundancy as if it had occurred pursuant to cl 35 and the vendor pays the employee
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any remaining entitlements: cl 35.4.2.
●
For transferring employees, no election is made for long service – service continues and service with the vendor is deemed to be service with the purchaser. The vendor must allow the purchaser on completion an amount equal to the nominal accrued long service leave entitlement in respect of transferring employees: cl 35.4.2
●
The value of any employee’s long service leave entitlement is “varied” by using the “Long Service Leave Adjustment Table”: cl 35.10.
Vendor Finance
●
The vendor may have agreed to provide finance to the purchaser on terms contained in the sale agreement. The terms of the finance may simply allow the purchaser to pay
the balance of the purchase price by instalments, following completion, usually subject
to the payment of interest. Because title to the business will be transferred to the purchaser, the vendor will usually require security for any outstanding purchase price. This will often take the form of a security interest over some or all of the assets of the business. If the purchaser is a company, a personal guarantee by the directors of the purchaser is also customary.
●
In such circumstances, the purchaser must deliver to the vendor on completion the duly executed security documents. Where the purchaser grants a security interest in personal property, the vendor’s lawyer must ensure that the requirements of the PPS Act are met and a financing statement for the security interest is promptly registered on the PPSR to gain the benefit of priority and protection in the event of insolvency or bankruptcy of the purchaser.
Payments to outgoing mortgagee (release of securit cl 36.4.1)
●
The purchaser is entitled to obtain (at or before settlement) either a release of the security interest or a statement under PPS Act s 275 from the lender setting out that the amount secured is nil or that the property sold is not the subject of the security interest: standard contract cl 36.4.1.
Post Settlement
Vendor’s Lawyer’s obligations
●
account to the vendor for the settlement proceeds;
●
if required, send the order on the business agent for release of the deposit to the vendor;
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●
in the case of vendor finance, register the securities and advise the vendors as to the loan instalments from the purchaser (due dates and amounts);
●
cancel any insurance and licences held in the vendor’s name in connection with the business and request a refund of premiums to the vendor;
●
if there has been a change affecting a vendor company (such as a change to the principal place of business), notify ASIC of those changes by lodging the appropriate forms within specified time limits to avoid late fees; and
●
if acting as agent for the vendor’s mortgagee or lender at settlement of the transaction,
account to the lender for funds paid to discharge the vendor’s secured debts and,
●
where appropriate, advise the lender to promptly discharge any registrations for security interest on the PPSR using their online account.
Purchaser’s Lawyer’s obligations
●
send settlement statement figures and final statement of account to the purchaser;
●
lodge the business purchase contract and any associated document for stamping at
Revenue NSW (for business sale agreements entered into after 1 July 2016, this is only necessary if the sale includes land);
●
l
odge the transfer of lease
for registration at NSW Land Registry Services and, if the lease contains an option for renewal, advise the client in writing that it must exercise the option strictly within the period and in the manner specified by the lease;
●
if a
new lease
has been entered into and registered, send the stamped and registered new lease to the purchaser. If the lease contains an option to renew, advise
the client in relation to exercising the option;
●
lodge all forms for transfer of statutory licences
with the various authorities;
●
apply on the ASIC national business names registe
r using the discrete “consent to transfer number” advised by the vendor at settlement to transfer the registration of the business name(s) to the purchaser; ●
advise the client to renew the registration of the business name when the current registration expires; ●
if the purchaser has assumed any of the vendor’s rights and liabilities, write to the financing body to record the purchaser as transferee; ●
check the PPSR about 10 days to 2 weeks after the transaction has settled to ensure that any registration for security interests paid out at settlement have been removed from the register by the vendor’s secured party (in accordance with their undertaking given at settlement); ●
if there has been a change affecting a purchaser company (such as a change to the principal place of business), notify ASIC of those changes by lodging the appropriate forms within specified time limits to avoid late fees;
●
send a copy of the contract for sale of business to the purchaser to refer to their accountant to assist with the preparation of business activity statements (BAS) and income tax returns; and ●
suggest to individual purchaser that they make new wills to ensure the continuity of the
business. ●
Order on vendor’s solicitor as deposit holder authorising release of the deposit to the vendor.
●
If necessary, apply to IP Australia for transfer of trademarks
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PAYMENT OF DUTY
●
Duty is paid on all documents executed in New South Wales. Revenue NSW is responsible for the stamping of documents.
●
Time limits are imposed, and penalties accrue if a document is not stamped within a certain time after the date of its execution. Warn clients about time limits if they are in possession of documents liable to duty
●
Duty applies at various rates depending on the transaction. Generally, duty will apply at an ad valorem rate when there is a transfer of a legal or equitable interest in land. Where there is no such transfer, the document should attract no duty or a nominal duty
of $10.
●
Duty on the agreement for sale - Abolished in NSW ●
when business assets and land or an interest in land (excluding a leasehold interest and fixtures) are sold as part of one transaction, ad valorem duty is also payable on goods sold. ○
This includes chattels, plant and equipment but excludes SIT and materials and goods under manufacture. ●
Duty on transfer of lease - If the transfer of lease is pursuant to the sale of dutiable property, the transfer will be charged with duty of $10
●
Duty of deed of assignment - A deed of assignment should only attract nominal duty of $50 plus $10 for each additional copy
Capital Gains Tax ●
Normally, assets acquired before 20 September 1985 are not subject to CGT.
●
Since 21 September 1999, only 50% of a net capital gain is taxed in the hands of individuals and trusts (but not companies). This is referred to as the “CGT discount”: ITAA 1997 s 115-5. This applies only
●
where the asset sold has been held for more than 1 year.
Small Business Concession ●
Taxpayers who sell a business may also claim (in addition to the CGT discount) one or
more “small business concessions”. The main small business concession is the “50% active asset reduction”: ITAA 1997 Subdiv 152-C. In these circumstances, a taxpayer would then be able to claim the CGT discount and the “50% active asset reduction”, meaning CGT would be payable on a maximum of 25% of the capital gain in question.
GST
For exemption, sale is the supply of a going concern, and thus is
exempt from GST under clause 13.1 - 13.2.
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The following preconditions for this sale to be considered GST-free are:
●
a “written agreement” referred to in s 38-325(1)(c) of the GST Act: see cl 13.4 and “GST Promises” on page 2 of the standard contract.
●
the “registration” requirement for the “recipient” of the “going concern”: s 38-325(1)(b);
as a factual matter, whether the sale of the business included all of the things that are necessary for the continued operation of the business
ACTIVITY 2 Commercial Leases See also Task 2.1
Retail Leases Act If the proposed lease is considered a retail lease, the lease provisions will be governed by the RLA and contradictory clauses in the lease would be void: RLA s 7.
If retail lease question go to Page 8 of this: https://warehouse.collaw.edu.au/file/fe1f1df4-
a487-4e15-81a7-b6ade42d27f4/8/Practice%20Paper%20P204%20Commercial
%20Leases.pdf
DRAFTING AND NEGOTIATING COMMERCIAL LEASES
●
For lessees, the lease is an asset that is an integral part of their business. A sufficiently lengthy and satisfactory lease is relevant for the lessee’s ability to continue to trade in the premises and to sell the business in the future. It should be appreciated that:
Most important part of leases What is, or is not, important in particular lease transactions will vary. The more significant topics on which solicitors need to obtain instructions are:
●
the subject matter of the lease, including the premises covered by the lease, rights of access including loading zones, use of additional amenities, parking, storage cages, and common portions of the building; the term of the lease;
●
the permissible use of the premises; the existence of any option for renewal, including its terms, that it binds successors and assigns to the lessor and the lessee, the basis of fixing rent during the option period;
●
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●
rent and rent review;
●
entitlement to affix and to remove fixtures;
●
entitlement to assign and the conditions of that entitlement;
●
the lessee’s ability to sublet the premises, and the process for obtaining consent;
●
obligations involving the doing of work or the expenditure of money, including fit-outs, payment of
●
rates, insurance and other outgoings, to repair and maintain the premises, and periodically
●
redecorating the premises;
●
any make good clauses or the condition of the premises when the lessor gives up possession;
●
restrictions on use and ability to change use; and
●
any provisions entitling the lessor to terminate the lease for any reason or to relocate the lessee
●
to another part of the building.
Role of a lessee’s solicitor The principal role of the lessor’s solicitor in a commercial lease transaction is to:
●
promptly submit all the documents;
●
attend promptly to any queries or requests for amendment by the lessee’s solicitor; and
●
have the lease or agreement for lease finalised and executed as quickly as possible.
When preparing leases, or engrossments for execution, the lessor’s solicitor must ensure that:
●
the agreed amendments are all incorporated accurately in the lease;
●
the engrossed lease does not contain errors or omissions due to computer error, such as the inclusion of an inappropriate lease provision;
●
when leases in the building are required to include a particular provision because uniformity is required, the provision is included in each lease (for example, a demolition clause); and
●
if it is intended to prohibit the use of premises for a competing use by one or more lessees,because of an arrangement with one of the lessees to whom exclusive use was promised, this prohibition is inserted in all other leases (or at least those with a similar use).
Independent representation
Generally, the same solicitor should not act for the lessor and the lessee in a commercial lease transaction.
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Suggested Leasing Practice
The following recommendations of the Council of the Law Society in the Law Society Journal
(November 1989) focused on the way lease transactions should be conducted between solicitors:
(1) The original and required number of copies of the draft lease be submitted to the lessee or the lessee’s
solicitor for approval.
(2) A complete copy of the draft lease be retained for execution by the lessor.
(3) Any amendments be agreed upon and incorporated in all copies.
(4) The lessee executes the original and all submitted copies of the settled lease, and the lessor executes
another copy.
(5) The lessee’s solicitor delivers to the lessor’s solicitor the original and all submitted copies of the settled
lease, duly executed by the lessee with payment for proper costs, disbursements and any other agreed
payments in exchange for a counterpart copy (which need not be in registrable form) executed by the
lessor.
(6) The lessor’s solicitor promptly seeks to obtain execution by the lessor of all the lease documents which
have been delivered to the lessor’s solicitor. The lessor’s solicitor should advise the lessee’s solicitor
when the documents have been executed, or of any delay in obtaining execution.
(7) Where registration of the lease is required by either party, it is the obligation of the solicitor acting for
the party having the carriage of the stamping, registration and obtaining the consent of any necessary
consenting party, to seek to attend to all such matters with due expedition.
Acting for the Lessee when the lease should be registered ●
If the RLA applies, the lessee’s solicitor needs to check that the lessee has supplied to
the lessor the disclosure statement required by s 11A.
●
SOlicitor will look at draft lease, n any event, the lessee’s solicitor must obtain detailed instructions and seek any amendments to the draft lease after that document is received in its settled form. ●
The lessee’s solicitor’s activities are similar irrespective of whether the lease is governed by the RLA
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Considering the lease
●
The lessee’s solicitor must discuss the lease with the lessee and obtain instructions. That is a significant and time-consuming step. Most clients are not able to analyse the detailed lease provisions and require the solicitor’s explanation, advice and guidance. The instructions need to range over the topics covered by the lease, the lease provisions and numerous extraneous matters, including the need for technical and legal enquiries to be conducted on the lessee’s behalf
Searches The lessee’s solicitor should conduct several searches and enquiries relating to:
●
the title,
●
the lessor and the premises, including zoning and environmental matters
The title search should be considered with regard to prior leases of the premises, which may still be recorded on the title. If there are prior leases still recorded, then the lessee’s solicitor must ask the lessor’s solicitor to have them removed. The title search should also ascertain the existence of mortgages and therefore any need for mortgagee’s consent. Generally, searches and enquiries should be delayed until after obtaining instructions from the lessee (which should include instructions relating to the searches and enquiries)
Some searches can be delayed to save costs
Negotiations and amendments of draft lease
●
If the lease requires amendment as a result of the solicitor’s examination of it and the lessee’s instructions, the solicitor should write to the lessor’s solicitor setting out the amendments the lessee requires and negotiate the final form of the lease. This may require redrafting clauses and/or inserting new clauses effecting deemed alterations to
the filed memorandum. ●
It is courteous and time-saving for the lessee’s solicitor to redraft clauses the lessee requires amended, rather than saying “Clause 4 should be limited to minor repairs only”. The lessee’s solicitor should redraft the clause as the lessee wants it and seek approval of the lessor’s solicitor.
Closing Stages
●
The lessee’s solicitor arranges for the lease to be executed (or in the case of a corporate lessee, sealed or signed in accordance with the company’s requirements) by
the lessee and by any guarantor.
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●
NSWLRS will register a lease signed by the lessor’s solicitor whether within or outside PEXA. If not operating in PEXA, the lessor’s solicitor would expect a lessee to sign personally so as to be bound by the personal covenants.
●
The lessee’s solicitor returns all copies of the lease to the lessor’s solicitor, together with a cheque for costs and estimated disbursements, if required, and evidence of required insurances. ●
The lessee’ssolicitor also usually sends the lessee’s cheque for the first instalment of rent and any security bond required, unless these are to be collected independently by
the lessor or the lessor’s agent. Where the lease is under the RLA, any cash or cheque received as a security bond must be lodged with the Secretary of the NSW Department of Planning and Environment: Pt 2A. The lessee wants to be sure the lease is enforceable before the lessee relies on the lease.
●
When there is a binding lease or agreement for lease, the lessee usually makes arrangements direct with the lessor or the lessor’s agent as to fit-out, possession and moving into occupation.
Lease Guarantees
●
In commercial transactions a guarantee is usually required where the lessee is a company.
●
Guarantors are often the principal directors or shareholders, usually individuals but occasionally other corporations. ●
The lessor may feel that the company lacks sufficient asset backing or is merely “a corporate veil” and the lessor will usually demand that the lease be personally guaranteed by the company’s directors
Formal Requirements of a Guarantee
●
●
The guarantee can be prepared as a separate instrument or can be incorporated in the
lease. If the latter: ○
The guarantors should become parties to the lease (or agreement for lease); and ○
the guarantee should either: –
○
be in the form of a deed; or – (for Torrens title land) have the effect of a deed on registration of the lease.
●
The guarantee needs to be executed by each guarantor. Before execution, each guarantor should be made aware of the meaning and effect of the guarantee and the obligations undertaken. Each guarantor should receive independent legal advice when
entering into the guarantee.
●
The lessee’s solicitor should not act for a guarantor unless the lessee and the guarantor have the same interest. Generally, the lessee and the guarantor will not have the same interest unless the lessee is a corporation having a single director and shareholder who is also the guarantor. Acting for a lessee and guarantor in other situations is fraught with risk of breach of fiduciary duty: see Legal Profession Uniform
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Law Australian Solicitors’ Conduct Rules 2015 (NSW and Vic) r 11.
Protection of Guarantors
Without specific provisions in guarantees, the guarantor has no protection in case of lease
default. The guarantor can be provided with some protection by:
●
providing for the guarantor an express indemnity from the lessee, or from a third party,
in respect of the guarantee;
●
allowing the guarantor to take a transfer of lease, when the lessee is in default or has repudiated the lease;
●
allowing substitute guarantors, for example, if a guarantor ceases to be a director of the lessee, or if the lease is assigned or renewed;
●
imposing some obligations on the lessor towards the guarantor, for example:
●
– that the lessor take reasonable steps to enforce the lease against the lessee (that is,
before
●
acting against the guarantor);
●
– that the lessor forward to the guarantor copies of formal and informal notices (or
●
correspondence) relating to breaches or non-payments by the lessee (so that the guarantor
●
becomes aware and can rectify the breach);
●
– that the guarantor be entitled to participate in a rent review; and
●
– that the lessor not consent to an assignment of the lease without notifying the guarantor of
●
the application for consent and taking into consideration the guarantor’s representations and comments.
CONTENT OF A LEASE
Parties
Lease should clearly identify parties, with ABN/ACN if necessary
Subject matter of the lease
-
If the premises comprise the whole of the land described in the title, then reference to that title only is sufficient
-
In commercial leases, the premises often form part of a larger block, for example, a shop in an arcade or an office in a high-rise building. The solicitors must ascertain with
absolute precision the exact description of the premises to be leased so there can be no ambiguity. -
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-
The description should identify: -
the identity and full street address of the premises;
-
he unique way it is designated in any plan attached to the lease or a registered dealing; and -
the plan used to define the boundary of the premises being leased
-
The plan used to identify the premises leased must comply with the provisions of the Registrar General’s Lodgment Rules Sch 4.
Include what is excluded in lease It is also important to describe what is excluded from the leased premises, such as load-
bearing columns that may be physically situated within the leased premises.
Other things to take into account
The parties’ solicitors may also take a wider approach to what is the subject matter of a commercial lease, and include:
●
entitlements of access and use by the lessee, its employees and customers, of common portions of the building, such as passageways, stairways, elevators, toilets, car parking;
●
the lessee’s entitlements to services and facilities provided by the lessor, such as air-
conditioning;
●
the lessee’s entitlement to service pipes and connections that pass through the lessor’s property or other leased premises, and the lessor’s entitlement to use service pipes and connections traversing the leased premises;
●
the lessor’s fixtures and chattels that may be used by the lessee and are included in the lease;and
●
the lessor’s rights of access and interference with the leased premises and rights reserved to the
●
lessor that may infringe on the lessee’s use and enjoyment of the leased premises or facilities provided by the lessor.
Lease term
●
The lessee’s solicitor should seek instructions and provide advice to the client on the adequacy of the lease term and option, having regard to the nature of the business, costs of installation and fit-out and the difficulty and costs of relocation.
●
This is important for security of tenure and in the event of a sale of the lessee’s
business. The lessee’s solicitor, subject to instructions, can negotiate:
●
to secure a longer lease term or additional options for renewal; and
●
when the lease covers the whole property or a substantial portion of it, or one or more strata title lots, to seek a right of pre-emption (that is, a right of refusal if the lessor desires to sell the property) and, less frequently, an option to purchase the property.
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The duration and preconditions of an option for renewal should be clearly specified, as additional options are extremely valuable rights for the lessee. The preconditions are usually a period during which to exercise the option and compliance with lease obligations by the lessee. The period should be sufficiently long and prior to the end of the lease term so that each party knows in advance whether the lessee intends to continue in the premises (usually 12 to 6 months or 6 to 3 months before the end
of the lease term).
Assignment of Lease If a lease prohibits an assignment without consent:
●
In the case of a retail lease, consent can be withheld only in certain circumstances: RLA s 39(1); or
●
in the case of a non-retail lease, consent cannot usually be unreasonably withheld: Conveyancing Act s 133B.
●
A lessee can assign the lease. However, an assignment without the lessor’s consent may be a breach of the lease, subject to RLA s 39(1) and Conveyancing Act s 133B(1). ●
If the lease is mortgaged, an assignment without the mortgagee’s consent will usually be a breach of the mortgage. A non-retail lease may contain an absolute ban on assignment or transfer.
●
An assignment usually forms part of a sale of the lessee’s business, or at least sale of the lessee’s fixtures, fittings and chattels. There is often an agreement for sale of business or agreement for assignment of lease. This includes the conditions of sale and renders the transaction subject to obtaining the lessor’s consent. The conditions and criteria for consent depend on the lease covenant restricting assignment of the lease.
If the lease is registered
●
If the lease is registered, the lessee is the proprietor of land under the RPA (the leasehold interest) and can therefore transfer the lease under s 46. ●
If a folio of the Register has been created for the leasehold interest (under RPA s 32(3)), see instead the normal NSWLRS transfer form and its instructions for completion.
●
The lessor consents, the lessor usually requires a covenant by the transferee to perform and observe all the covenants and conditions of the lease. Some covenants and conditions will automatically bind the assignee (see, for example, RPA s 51) but others might be argued to be personal to the original lessee. ●
When the transfer is lodged for registration, there is no need to arrange the production of the lessor’s certificate of title or to lodge the lease with the transfer. If a folio of the Register has been created for the leasehold interest (under RPA s 32(3)), presumably
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you have checked the electronic title as to ownership.
●
Assignment of retail leases is dealt with under RLA Pt 5
Assignor’s Disclosure Statement (required for RLA)
●
Under the RLA, when the assignment is in connection with the lease of a retail shop that will continue to be an ongoing business, there is provision for the lessee (assignor) to give an assignor’s disclosure statement, according to the form in Sch 2A, to the proposed assignee and to the lessor: s 41.
●
The benefit of the assignor giving the statement to the lessor and to the assignee is that the assignor and guarantors will not be liable to pay the lessor any money payable
by the assignee to the lessor: s 41A(1). ●
However, that benefit ceases if the assignor’s disclosure statement contains information that is materially false or misleading: s 41A(5).
●
The prescribed form of the assignor’s disclosure statement is set out in RLA Sch 2A. The statement is available from the website of the NSW Department of Planning and Environment.
Terminating a lease
The main grounds of termination of the lease are for:
●
breach of lease covenants;
●
breach of an essential term; or
●
Repudiation.
These topics should be covered in the lease and proper notices need to be prepared and served on the lessee, including (when required) a notice of breach of covenant: Conveyancing Act s 129.
The lessor’s rights to terminate a lease for breach of the lease by the lessee will depend on the terms
of the lease and the nature of the breach, and be subject to legislation, for example:
• Bankruptcy Act 1966 (Cth) s 301(1);
• Conveyancing Act ss 129, 130, 133, 133A and 133B, which apply to the RPA; and
• Conveyancing Act s 116.
Where a lessor provides instructions to “lock-out” a lessee, the procedure is covered by law, the terms
of the lease and any other documents related to the lease. The decision to lock-out a lessee is a serious
one and amounts to a termination of the lease. If the lock-out is not done lawfully, the lessor may be
liable to a damages claim. If the lease is registered and the lessor lawfully re-enters and
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recovers
possession, the lessor can apply for the recording of the lease to be cancelled: RPA s 55.
Referrals to Experts, Loans & Security Arrangments
Referral To Experts Accountant
●
An accountant and/or tax advisor or financial planner: to analyse the financial viability of the business, including the cash flow, balance sheet, profit and loss statements and tax assessments. This is critical if the purchaser intends to rely upon the vendors’ warranties and indemnities
●
to advise on the optimal way of structuring the purchase for tax purposes; for example,
through a company or a trust, including considering the purchaser’s personal circumstances, and
●
in the event that the purchaser is borrowing funds to purchase the business, to advise on the purchaser’s ability to meet the loan repayments from the cash flows of the business being purchased, as well as alternative ways to structure the loan
Valuer
●
a valuer, to provide a valuation of the business assets and cash flows and the price to be paid, and/or Indepentent consultant
an independent industry consultant familiar with the industry in which the business operates. This could be important if a purchaser has no prior experience in the particular industry. The consultant can advise as to the standing of the target business in the marketplace and current industry issues and trends.
Lawyer’s cannot give independent tax advice
Citicorp Ltd v O’Brien [1996] NSWSC 514
Loan Arrangements Secured term loans
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Secured terms loans are typically paid off at a fixed interest rate over a pre-agreed term, and
they require borrowers to provide some sort of collateral (e.g., a property asset) to the lender.
If the borrower defaults on a secured loan, the lender recoups their losses by selling the
collateral and keeping some percentage of the sales price. Secured term loans are best suited to more established businesses, who generally have
assets to offer as collateral. Because these loans are relatively low risk for lenders, they tend
to be for larger amounts, making them suitable for asset finance purchases, such as
vehicles, major equipment and property. Unsecured business loans
Unsecured business loans do not require the borrower to secure the loan with collateral.
Instead, the lender assesses applications on the basis of the borrower’s financial position
and credit history.
The application process for unsecured loans tends to be faster than for secured loans.
However, because the risk is higher for lenders, they are usually for smaller amounts. This
means an unsecured loan may be right for you if you need working capital in a hurry – for
example, to pay wages, buy inventory, or just to give yourself some financial breathing
space.
Overdrafts
A business overdraft is nearly identical to a personal overdraft. Getting an overdraft on your
business’ bank account allows you to run a negative balance and spend more money than
you currently have.
The amount you can borrow through an overdraft depends on the current and past state of
your finances. Typically, overdrafts are useful as a back-up for times when you need working
capital to cover day-to-day operational costs.
Business credit cards
Business credit cards work like personal credit cards. They allow you to make purchases in
the present with money you will pay off in the future. Credit accounts are commonly used to
get hold of working capital.
An advantage of putting your loan on a credit card is that you may be eligible for rewards
programs. A disadvantage is that credit cards tend to have high interest rates, so take
caution if you can’t pay your debt off quickly.
Lines of credit
A line of credit works similarly to a credit card. In fact, all credit cards are technically lines of
credit – that is, channels for spending money you will pay off in the future. A “pure” line of
credit, however, is not linked to a card.
This means lines of credit don’t provide access to rewards programs, but also that they tend
to come with lower, fixed interest rates and longer repayment terms. These features make
lines of credit better suited as asset finance for larger purchases (e.g., vehicles or
equipment) than credit cards are.
Merchant cash advances
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A merchant cash advance is where you borrow a sum of money that you pay off as a
percentage of future EFTPOS sales. For example, you could borrow $20,000 and pay off a
small amount of this total sum each time you process a transaction on your EFTPOS
machine.
For obvious reasons, merchant cash advances suit retail businesses with an EFTPOS
machine and consistent cash-flow, providing a useful source of working capital. Debtor financing
Debtor financing involves “selling” debt – in the form of unpaid invoices – to a lender.
Suppose you are owed $10,000 by a customer. With debtor financing, a lender would “buy”
this unpaid invoice from you, giving you slightly less than $10,000 now and claiming the full
$10,000 from your customer over time.
As this example suggests, debtor financing suits businesses who receive delayed payments
from customers.
How to know what type of loan is best for you?
Now that you have a general steer on the type of loan that will suit you best, you may want to
talk to an expert.
At Zembl, we know the Australian business loan market. With access to over 80 bank and
non-bank lenders, we work with businesses to find the loan that best suits their individual
needs and financial position.
Key terms of loans
Purpose what will the facility be used for? ●
Loan amount – is the loan to be advanced or drawn down in a lump sum or in instalments/tranches? ●
Interest rate and margin – what is the cost to the financier in providing the facility and what return on its investment does it require? ●
When is interest payable? ●
Repayment terms – when and how should the facility be repaid – interest only, or principal and interest? ●
Fees and charges – what establishment fees and ongoing fees will be charged by the financier? ●
Security – how will the facility be secured? ●
Conditions precedent – what does the financier need the borrower to do before allowing it to draw down on the facility? ●
Representations and warranties – what promises is the borrower making to the financier before the loan is made and what continuing promises are made and repeated during the life of the facility? ●
Undertakings from the borrower – what must the borrower do (or not do) during the term of the life of the facility? ●
Default provisions – what events will trigger the obligation to make early repayment? ●
Legal costs and duty – what costs and duties apply and are these to be paid by the borrower?
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What is a security? A secured loan for your business requires security. This may be property, inventory, accounts receivables or other assets. If the loan can’t be met, the lender may rely upon these
assets to clear the outstanding balance, interest or fees.
An unsecured loan for your business doesn’t require physical assets (such as property, vehicles or inventory) as security. Instead, your lender will often look at the strength and cash
flow of your business as security.
Common forms ●
Security over land ●
Security interest over personal property
Priorities on the PPSR register ●
A perfected security interest has priority over an unperfected security interest in the same collateral: s 55. In Re Maiden Civil (P&E) Pty Ltd; Albarran v Queensland Excavation Services Pty Ltd [2013] NSWSC 852, a lessor-secured party (and owner) of mining equipment failed to register a financing statement. The lessee-grantor gave a security interest in the equipment to its financier who registered a financing statement. In resolving a dispute between the parties in the same collateral, the court held that the lessor’s interest in the mining equipment was a security interest and the lessee’s (financier's) perfected security interest prevailed over the lessor’s (owner’s) unperfected security interest.
●
In a competition between two or more security interests perfected by registration in the
same collateral, priority is determined by the earliest registration time: s 55.
●
A PMSI perfected in the relevant time frame has “super” priority in the collateral over security interests with the same grantor: s 62.
●
In a competition between PMSIs, a seller’s, lessor’s, or consignor’s PMSI prevails over
a lender’s PMSI if registered in the relevant time frame: s 63.
●
A security interest perfected by possession or control (but not as part of an enforcement action) will prevail over a security interest perfected by registration (including registered PMSIs): s 57.
●
If there are two or more unperfected security interests in the same collateral, priority is determined by the order of attachment of the security interests: s 55.
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Professional Duties Professional Responsibility Certain issues that arise
Whether you can act for both parties
Where you have clients signing document
Consqeuqences of Proper instruction from clients
Property transactions - clients who do something to stuff to get out of paying transaction. Rule 11 Conflicts between current clients in property transactions
11 Conflict of duties concerning current clients
11.1 A solicitor and a law practice must avoid conflicts between the duties owed to two or more current clients, except where permitted by this Rule.
11.2 If a solicitor or a law practice seeks to act for two or more clients in the same or related matters where the clients' interests are adverse and there is a conflict or potential conflict of the duties to act in the best interests of each client, the solicitor or law practice must not act, except where permitted by Rule 11.3.
11.3 Where a solicitor or law practice seeks to act in the circumstances specified in Rule 11.2, the solicitor or law practice may, subject always to each solicitor discharging their duty to act in the best interests of their client, only act if each client:
11.3.1 is aware that the solicitor or law practice is also acting for another client, and
11.3.2 has given informed consent to the solicitor or law practice so acting.
Giving Undertakings…
6.1 ASCR
A solicitor who has given an undertaking in the course of legal practice must honour that undertaking and ensure the timely and effective performance of the undertaking
Rule 7.1 7 Communication of advice
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7.1 A solicitor must provide clear and timely advice to assist a client to understand relevant legal issues and to make informed choices about action to be taken during the
course of a matter, consistent with the terms of the engagement.
8.1 A solicitor must follow a client’s lawful, proper and competent instructions. (i.e. if you cook a property transaction. 3.1 A solicitor’s duty to the court and the administration of justice is paramount and prevails to the extent of inconsistency with any other duty.
4.1 A solicitor must also—
4.1.1 act in the best interests of a client in any matter in which the solicitor represents the client,
4.1.2 be honest and courteous in all dealings in the course of legal practice,
4.1.3 deliver legal services competently, diligently and as promptly as reasonably possible,
4.1.4 avoid any compromise to their integrity and professional independence, and
4.1.5 comply with these Rules and the law.
30 Another solicitor’s or other person’s error
30.1 A solicitor must not take unfair advantage of the obvious error of another solicitor
or other person, if to do so would obtain for a client a benefit which has no supportable
foundation in law or fact.
4 Dealing with with other persons
34.1 A solicitor must not in any action or communication associated with representing a client—
34.1.1 make any statement to another person—
(i) which grossly exceeds the legitimate assertion of the rights or entitlements of the solicitor’s client, and
(ii) which misleads or intimidates the other person,
34.1.2 threaten the institution of a criminal or disciplinary complaint against the other person if a civil liability to the solicitor’s client is not satisfied, or
34.1.3 use tactics that go beyond legitimate advocacy and which are primarily designed to embarrass or frustrate another person.
10 Conflicts concerning former clients
10.1 A solicitor and law practice must avoid conflicts between the duties owed to current and former clients.
10.2 A solicitor or law practice who or which is in possession of information which is confidential to a former client where that information might reasonably be concluded to
be material to the matter of another client and detrimental to the interests of the former client if disclosed, must not act for the current client in that matter UNLESS—
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10.2.1 the former client has given informed consent to the disclosure and use of that information, or
10.2.2 an effective information barrier has been established.
In any event, the provision of legal services to friends and family is risky and may lead to unforeseen difficulties and conflicts. Please particularly note the Australian Solicitors’ Conduct Rules – Rule 4.1.4 4.1.4 avoid any compromise to their integrity and professional independence, and
(Compromise and professional independence) and Rule 17 (independence – avoidance of personal bias).
17.1 A solicitor representing a client in a matter that is before the court must not act as
the mere mouthpiece of the client or of the instructing solicitor (if any) and must exercise the forensic judgments called for during the case independently, after the appropriate consideration of the client’s and the instructing solicitor’s instructions where applicable.
Clients falsely witnessing a document
Witnessing documents is a fundamental aspect of legal practice and a failure to do so
properly whatever the circumstances requires a significant sanction and this is reflected in the protective orders that we make,” the tribunal submitted. Witnessing the signature
Confidentiality s 9 ASCR
9
Confidentiality
9.1 A solicitor must not disclose any information which is confidential to a client and acquired by the solicitor during the client’s engagement to any person who is not—
9.1.1 a solicitor who is a partner, principal, director, or employee of the solicitor’s law practice, or
9.1.2 a barrister or an employee of, or person otherwise engaged by, the solicitor’s law practice or by an associated entity for the purposes of
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delivering or administering legal services in relation to the client,
EXCEPT as permitted in Rule 9.2.
9.2 A solicitor may disclose information which is confidential to a client if—
9.2.1 the client expressly or impliedly authorises disclosure,
9.2.2 the solicitor is permitted or is compelled by law to disclose,
9.2.3 the solicitor discloses the information in a confidential setting, for the sole purpose of obtaining advice in connection with the solicitor’s legal or ethical obligations,
9.2.4 the solicitor discloses the information for the sole purpose of avoiding the probable commission of a serious criminal offence,
9.2.5 the solicitor discloses the information for the purpose of preventing imminent serious physical harm to the client or to another person, or
9.2.6 the information is disclosed to the insurer of the solicitor, law practice or
associated entity.
Unsatisfactory Conduct (s 296 LPUL)
It includes the behaviour of a lawyer in connection with the practice of law that 'falls short of the standard competence and diligence that a member of the public is entitled to expect of a reasonably competent lawyer.'
Professional Misconduct (s 297) ●
Requires ‘substantial or consistent failure to reach or maintain a reasonable standard of competence and diligence’ (s 297(1)(a)
●
Would justify that they are not ‘not a fit and proper person to engage in legal practice.’ (s 297(1)
(b)
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●
Considered the more serious form ofdeparture from the relevant standards of conduct
Examples
●
Gross delay and deception of the client
●
Breach of fiduciary obligation in borrowing from the client
●
Misuse of trust funds
●
Failing to perform an undertaking (Law Society of New South Wales v Hinde)
●
Acting for two parties where there is a conflict of interest
●
Failing to adequately supervise bill preparation
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