Recent Update by the Real Estate Institute of Queensland (REIQ)

Written By Niall Powell, Legal Practitioner Director

The Real Estate Institute of Queensland (REIQ) has recently updated its business contract to better reflect current business practices.

The updated contract includes various changes in different areas, including social media account transfer, stock-in-trade, payment of deposit by electronic transfer, seller’s statements and warranties, restraint of trade, transfer of telecommunication services, employees, and seller’s assistance. In this article, we will discuss some of the most significant changes.

Social media

One of the notable changes in the updated contract is an amended to clause 6.1(q), which recognises the value in social media accounts and now addresses the transfer of them at settlement. According to this clause, social media accounts have an independent value and form a part of the goodwill of the business. Therefore, the Reference Schedule to the contract must include details of social media accounts belonging to the business that are intended to be transferred to the buyer at settlement. Additionally, the seller must provide the usernames and passwords for those accounts at settlement.

Removal of stock

Another important change in the updated contract is the inclusion of a new subclauses 4.1(c) and (e). The subclauses place the responsibility of removing excess items from the premises on the seller with the effect that, if a seller fails to remove rejected or excess stock by settlement, ownership in it will pass over to the buyer without cost. Therefore, care should be taken when nominating stock take timing to ensure that there is sufficient time allowed for the seller to deal with excess stock.

Electronic funds transfers

The updated contract also allows buyers to make payments of deposits electronically. If the buyer pays the deposit electronically, provides a payment confirmation to the deposit holder, and does not take action to defer the payment, then the buyer is considered to have paid the deposit on the date of transfer, even if it does not clear in the deposit holder’s account until a later date. However, the clause will not apply if the payment is not received by the due date, and the seller has given notice to the buyer requiring payment within two business days, which is also not satisfied. It is important to note that there is continuing and increasing cyber risk regarding transfers of money electronically, and cyber risk warnings should be included in all emails and a cyber risk policy should also be adopted for all transfers of funds.

Fair wear and tear

Clause 8.1, has undergone changes to ensure that all plant and equipment included in the sale must be in good working order and condition, save for fair wear and tear at the date of completion. The clause also not requires that the seller should not acquire assets or stock on terms where ownership does not pass until paid in full, unless done so in the ordinary course of business or with the buyer’s written consent. These changes should limit arguments where things break or reach the end of life before completion, and the business remains at the risk of the seller until completion.

Restraints

To protect the goodwill of the business, clause 12 has been expanded in the updated contract. The new changes include a prohibition on the seller, its directors, shareholders, and associates from being concerned with or having an interest in the business or a competing business, having any dealing with a customer of the business, interfering with or disrupting the relationship between the business and any customer or prospective customer, and soliciting any person who was an employee, contractor or agent of the business. These expanded actions that the seller cannot do in the restraint area and during the restraint period aim to protect the goodwill of the business.

Telecommunication services

Clause 14.2 has been extended to require that the seller remains obliged to assist with the transfer of telecommunication accounts following settlement to ensure a smooth transition.

Employees

Several changes have been made regarding employees. The buyer must now notify the seller of the names of employees it will offer employment to 5 business days before settlement, and offer employment to those employees at least 2 business days before settlement. The seller is responsible for employees who do not receive an offer of employment or do not accept the buyer’s offer of employment within 1 business day prior to settlement. If the seller terminates an employee because the buyer did not make an offer of employment in line with the requirements of the contract, the buyer is required to make the redundancy payment to the seller at settlement. The seller must provide the items under clause 18.6 to the buyer at least 2 business days before settlement.

Seller’s assistance

Clause 20.2 has a new subclause, which clarifies that the seller’s assistance under this clause does not constitute an employment agreement between the parties. The seller needs to ensure that they have their own Workcover and other insurance during any assistance period.

Consent to assignment of lease

Clause 24.5 has been inserted to cover situations where the parties choose to settlement before obtaining the lessor’s formal consent to the assignment of the lease. The buyer indemnifies the seller against any claims arising under the terms of the lease until the date that the lessor provides consent.  It ought be noted that such assignments are extremely risky and may result in default under the lease and, as such not recommended.  The clause will however allow the parties to progress to settlement where the lessor is not acting reasonably.

Retail shop leases act disclosures

Clause 25.3 now allows the buyer to terminate the contract if any disclosure required under the Retail Shop Leases Act 1994 (Qld) has not been validly given to the buyer or waived by the buyer before settlement.

Due diligence

Clause 32 has been extended to include a buyer’s warranty to the seller that the buyer has conducted its own searches and is satisfied itself of the type of business and permissible use under the relevant town planning scheme. This change makes it all the more important for buyers to conduct due diligence regarding any leased premises.

Verification of books and records

Clause 37 has been amended to increase the periods of time allowed for disclosure and verification of books and records of the business. The seller must disclose within 5 business days after the contract date, and the buyer must confirm it is satisfied within 5 business days from the contract date. The seller is also required to promptly provide reasonable responses to written questions posed by the buyer in relation to the business that an ordinary buyer would ask for in order to be satisfied with the accuracy of the books and records.

Entry into any business sale contract is complex and ought be the subject of legal advice.  JHK is fully able to assist both buyers and sellers in negotiating the complexities of those agreements to ensure a smooth and successful transaction.