Does the REIQ business sale contract really protect you? | 澳法评
作者：Ben Guo 郭潇宇律师
澳洲法律评论 | Auslaw Review
The REIQ Contract Business sale is the standard when clients are looking to buy or sell a small business in Queensland. However, this is actually a much more complex area of law than many realise. A business is not just a singular asset, it is a cumulation of several components: assets, liabilities, contracts, employees, premises, and licenses.As such, the direct application of the standard conditions is sometimes insufficient to properly protect client’s interests.
In this article, I will analyse the changing needs of business sales from the perspectives of both buyers and sellers.
Lawyers’ focus when their client is the buyer of the business is ensuring that what they receive is the same as their expectations and that they are able to terminate the contract if it is not. In a business sale contract, buyers are in a much more vulnerable position compared with sellers. The best way to protect the buyer’s interests is with the addition and/or variation of special conditions. Specific special conditions considered may include: material arrangement/ contract, license and permits, new lease, non-compete, due diligence and social media.Many of the conditions are not at all considered by the standard conditions.
01 Material Arrangement/ Contract
This relates to an arrangement with a third party that the business is reliant on. A special condition should be provided that allows some recourse if an arrangement between the buyer and the third party cannot be formalised.There should be some limits on this condition such as the buyer cannot act unreasonably or intentionally sabotage a relationship with the third party.
02 Licenses and permits
In most business sales, it is assumed that all licenses and permits required to run a business will be transferred to the buyer, however, there is not a provision in the REIQ which guarantees this.As such a special condition should be inserted to reflect this. The special condition may also benefit the seller as they would be able to clarify which specific permits they currently hold and therefore are actually able to transfer, instead of working of assumptions which give rise to a misunderstanding.
03 New Lease
Clause 25 of the REIQ contract does provide for new leases, however, is fairly vague and ambiguous about what a satisfactory lease is, going insofar as to include a letter of intent as satisfactory. As such, buyers are not protected in the event that a lessor decides to act unreasonably.A special condition in this instance would exclude standard condition 25 and provide that the contract is subject to the buyer obtaining such a lease on terms to their satisfaction.
Clause 12 does place restrictions on the seller’s competition, however, protection is limited to the area and period set out in the contract. It is not sufficient to solicit workers or customers from outside the geographical area and as such a special condition will be required.
05 Due Diligence
Due diligence under the contract is only granted for ensuring that the financial accounts of the business are substantially true and current under clause 37. As mentioned earlier, a business is a collection of different components and as such due diligence should not be restricted to only financials. Special condition should:
1. Not limit what the buyer may investigate;
2. Obligate the seller to co-operate with the buyer;
3. Provide a deadline for competing due diligence;
4. Allow the buyer to terminate by a set date if investigation is not to its subjective satisfactions;
5. State what happens if the buyer terminates by the due date; and
6. State what happens if the buyer does not terminate by the due date
06 Social Media
Social media platforms are growing to be more and more instrumental in the promotion of business as a marketing tool but can be an issue as most platforms don’t allow for the transfer of accounts, but the creation of a new account would lose all of the following and advertising power. A special condition would be necessary to ensure that the seller is obligated to do all things necessary to pass control of social media accounts to the buyer.
Not all of the special conditions listed are necessary depending on the client’s needs but they should be considered in order to prevent issues arising after completion.
In contrast, the focus of a lawyer when acting for a seller is to ensure that can deliver what is expected by the buyer and that they do not misrepresent something to a buyer. Sellers being the less vulnerable party subsequently require less protection. There are two special conditions to be considered: employee entitlements and warranties.
01 Employee entitlements
Clause 18 sets out the protocol in regards to employees of the business. Employee entitlements are specifically set out in s18.7 and 18.8 which state that the seller must allow 70% of the aggregate value of entitlements. However, most sellers are unaware of the extent that the employee entitlements are adjustable under the contract. Special conditions in this case may vary standard conditions 18.7 and 18.8 in a manner which provides the buyer with a windfall. An example of this would be an adjustment for personal leave from 70% to 40% where the prospects of it all being used is low.
Standard condition 8 provides protection to the buyer from unconscionable warranties, however, the protections may be too substantial to the point of damage for the seller. The wording of s8 may allow buyers to terminate or sue for damages over immaterial issues. This can be resolved by adding a special condition that allows the seller, upon notice, the opportunity to remedy the breach within a set period.
In conclusion, while the REIQ is a good base contract for a Business sale, care and consideration of special conditions which may be applicable must be used to ensure a client’s rights are protected and allows for a smooth transaction.