NSW Business broker/seller refusing to allow buyers to organise a lease of business premises

[Multifaceted]

Hi there,

We are in the middle of due diligence (DD) for the purchase of an exiting business. The sellers agent has been very difficult (in numerous aspects - extremely unethical practices) and refused to include a DD clause in the contract, so we have had to outlay considerable funds for financial and legal DD prior to having the security of a contract. The sellers agent has threatened to gazump us may times, despite having a signed acceptance of our price and conditions, and being within the timeframe agreed upon. The agent just pushes and pushes for us to sign the contact (apparently they dismiss the entire requirement of our agreed upon DD timeframe and the timeframe also agreed for finance approval), and rarely provides the pertinent information we request for the DD.

The business is currently on a month to month lease. We have been told a new lease is on offer, though little information provided, and the rental figure was from pre-covid time, and the expiry of this offer has lapsed. The seller is paying significantly less than this proposed figure due to covid relief, which they say is ongoing, though how are we to know this? Due to the huge amount of commercial vacancies in the area most landlords are negotiating very competitive pricing, terms etc in order to secure tenants, so we would be looking to negotiate a rate that is more in keeping with the current economic climate and surrounding premises. We do not want to move the premises (long standing business in this current location and new fit out expenses are not budgeted for)

We have requested to meet with the landlord to view the premises (some of it we have no been permitted to see as of yet as parts of the premise are optional so we have only seen the main area), negotiate a new lease, rental pricing and terms. The sellers agent has outright refused us any contact with the landlord or the ability to negotiate to enter into a lease until we sign an unconditional contract.

Our accountants and lawyers have advised this makes it impossible to conduct their DD. Clearly we need to know if we can obtain a lease from the landlord, the rental price, terms and view the entire premises on offer so we can decide if we want to lease the entire premises or just the main area. Without this, and upon signing an unconditional contract we would be putting ourselves in the potential position of not having the business premises in which to conduct the business, and we cannot forecast cashflow etc without knowing rent, outgoings and terms. We are basically blind when it comes to the leasing of the premises, and this is a huge issue.

It is legal, or even common for agents/brokers/sellers to refuse a meeting with a landlord or to allow us to go through the process of setting up a new lease until we have a legally binging contract?We have signed an NDA which specifies we cannot approach the landlord. Considering the money we are paying to have the DD performed prior to the contract signing, as per their demands, we feel fed up with this refusal of the lease arrangements and find it to be a poor tactic to get us to sign a contract to buy the business, even if we don't have the premises in which to operate.

Due to the difficulty in dealing with the agent, and the constant threats of pulling the deal out to sell to the other buyer who apparently is still pushing to purchase, we are loathe to poke the bear even more and demand a meet with the landlord. In the same instance, we can't fulfil our full DD either financial or legal (as well as obtain finance approval) without having a lease in place.

I am just hoping to find out if this is something that is commonly done, or has anyone else been in this position? The contract would have a 30 day settlement so in that time we would have to get the landlord to agree to meet, negotiate the terms and pricing, get approval, draft the lease etc, and we know this can take weeks. On the face of it, it appears very unreasonable to refuse us our opportunity to conduct a full DD and to obtain the lease we require.

Sorry for the length. Any feedback would be greatly appreciated!

 

[Rob Legat - SBPL]

I am located in Queensland, and don’t practise in NSW. However, I imagine the situation is largely the same and I have done some cross-border business conveyances.

Firstly, forget about your gripe concerning the due diligence condition. The seller is under no obligation to put one in the contract. Many purchasers spend considerable time and effort without the security of a contract. By the same token, purchasers also use a due diligence condition as a means to find out whatever information about the business they can and then walk away – without giving a reason. It’s generally taken that if you’re buying a business, you have a bit of knowledge to you and have ‘done your homework’. Yes, there’s a cost involved in that.

You have to be prepared to take it or leave it. Determine what are your absolute necessities, and negotiate for them. If the seller or their agent won’t agree, be prepared to walk away. If you’re not prepared to walk away, be prepared to capitulate. The worst thing you can do is to be so set on getting the business that you’re do it at any cost. I’ve never seen that end well.

In terms of the lease, let me comment from both sides:

• From your side: I would not advise going through with the contract (at least not at the nominal price) without some security of tenure in the lease. Month to month? That’s nothing. Lease on offer? That’s next to nothing. Either there’s a lease in place that is capable of assignment, or there isn’t. My suggestion would be to either (a) require the lease to be in place as a pre-condition to settlement, or (b) re-negotiate price to factor in the possibility you may have to move. You’ll also need advice as to whether the business is still a going concern for GST without the lease in place (if that is a relevant consideration).
• From the seller’s side: They likely don’t want to bother the landlord unless they know you’re committed – i.e. an unconditional contract. They may not want to incur costs as the landlord is likely to charge them for consenting to the assignment of the lease/granting of a new lease, and they don’t want to run the risk of the sale falling through and them still having to pay that fee (I’ve had clients incur this before).

To answer your question: Is it legal, or even common, for agents/brokers/sellers to refuse a meeting with a landlord until you have a legally binding contract? Absolutely. NDAs mean nothing. It’s generally about incurring costs, and not wanting to annoy the landlord unless it’s a ‘certainty’ (although it will generally still be subject to landlord’s approval).

Ultimately you’ve got to negotiate your outcome.

 

[Multifaceted]

Thank you Rob for your feedback. We are certainly not emotionally attached to the business in that we will take it without proper consideration, and we are fully prepared to walk away if need be.

I understand the seller may not want to bother the landlord, however the landlord is aware of the sale and had already prepared a draft proposal for a lease to the new buyer (now lapsed in time). The seller was fine with setting up a meeting, it was the broker who stepped in to stop this from happening.

As our accountants and lawyers have both stipulated they are unable to complete their DD without the lease being in place (also citing as you mentioned the going concern of the business issues) as well as other factors, such as pricing and terms, we are at a bit of a crossroads, as the bank requires the full DD report in order to prove finance, as well as ourselves requiring the info in order to ascertain if the business is valued correctly in future forecasts. It's all a bit blurry with the current rent relief the seller is receiving, which we do not know if this will be available to us (the business is still recovering from covid decline in revenue so the rent relief plays an important role in future cash flow).

As you mentioned, our lawyers have also advised against signing a contract without the express clause of a lease being assigned (though they do not want us to sign a contract at all until the lease is sorted out and they can conduct their thorough DD). We will take upon your advice, and our lawyers/accountants and work out either we get the lease sorted prior to contract or place a condition in the contract of an acceptable lease being assigned.

Thanks again for your help.