Our client had successfully operated a residential real estate agency for many years, steadily expanding both its property sales and rental management divisions through organic growth.

The agency was presented with an opportunity to acquire a substantial rental property portfolio, with most properties located within its existing service area. The portfolio had been assembled through several acquisitions and consolidated under a single company structure before the company was sold to its current owner.

The proposed purchase price was considerably below prevailing market values. Both the management income and letting fees generated per property were also lower than those achieved by our client's existing portfolio in comparable suburbs.

Recognising the potential to increase revenue and expand its market presence, our client engaged us to negotiate a Heads of Agreement. We recommended acquiring the rental portfolio as an asset purchase rather than purchasing the company itself, helping to limit exposure to potential historical liabilities.

Our Role

One of the main challenges during negotiations was reaching an agreement on the retention and clawback arrangements. The vendor proposed retaining 10% of the purchase price for four months, while our client preferred a 20% retention over 12 months. The vendor's shorter clawback period and lower retention amount raised concerns about the quality of the portfolio and whether the existing property management agreements could be legally transferred. These uncertainties made withdrawing from the transaction a serious consideration.

To address these concerns, we proposed a practical compromise. Our client would accept the vendor's preferred retention and clawback terms, provided that due diligence covered 100% of the property files rather than the customary 10% sample.

We also recommended that settlement payments apply only to properties with valid, assignable management agreements clearly documented in their files.

We subsequently conducted a comprehensive review of every property file. As anticipated, the assessment revealed numerous issues with the accuracy and enforceability of the management agreements. Approximately 38% lacked suitable assignment provisions, largely because many agreements had been established years earlier. Previous ownership transactions had involved transfers of company shares rather than the underlying portfolio, meaning the management agreements had not required reassignment.

Resolving these issues would require dedicated administrative support throughout the clawback period, together with close cooperation between the purchaser's and vendor's teams to obtain updated agreements and secure landlord consent.

Despite these documentation challenges, our due diligence also identified significantly greater opportunities for rental income growth than initially expected. The potential additional revenue was sufficient to justify the administrative costs associated with correcting and replacing the management agreements.

We recognised that the success of the acquisition would depend heavily on having capable, motivated staff working collaboratively across both businesses. Clear communication, careful coordination and a shared commitment to retaining landlords were essential to achieving the transaction's full potential.

Following our assessment, the client elected to proceed with the purchase. The Contract of Sale included specific provisions requiring both parties to cooperate in obtaining as many new, assignable management agreements as possible before the clawback period expired.

Our involvement would ordinarily have concluded after arranging finance, preparing settlement documentation and coordinating the final transfer. However, this transaction required a more hands-on approach. With multiple settlements scheduled throughout the clawback period to accommodate payments for newly secured assignable agreements, we continued acting as a key communication link between the vendor's and purchaser's teams. This ongoing coordination helped maximise property retention and ensure that updated management agreements were obtained efficiently.

Outcome

The acquisition delivered a positive result for both our client and the vendor. By the end of the clawback period, only 1.23% of properties remained without assignable management agreements, while just 4% of property managements had been lost and became subject to clawback adjustments.

Through careful due diligence, ongoing coordination and effective transaction management, the 10% retention fund proved more than adequate to cover the required clawback payments. Our involvement helped protect the purchaser's investment while supporting a successful and mutually beneficial transaction.