Growing your real estate agency through rent roll acquisition: Key legal considerations

By Rex Afrasiabi | New Chapter Legal

Purchasing a rent roll is one of the most effective ways for a real estate agency to expand. A rent roll not only carries intrinsic value but also provides a steady and predictable income stream, making it a highly sought-after asset. However, acquiring a rent roll is a significant business decision that requires careful legal and financial consideration.

Having worked extensively with real estate agents as their lawyer, I have seen the benefits and pitfalls of rent roll acquisitions firsthand. To ensure a successful acquisition, real estate agents must be aware of key legal provisions in the purchase agreement, including retention provisions, warranties, restraints of trade, and employee obligations.

Retention Provisions: Safeguarding Your Investment

A retention provision is a crucial clause in any rent roll purchase agreement. It allows a portion of the purchase price to be retained in trust for a set period (typically three to six months) to protect the purchaser.

Why is this necessary? When purchasing a rent roll, there is always a risk that some landlords may not transfer their property management to the purchaser. Since the purchase price is calculated based on the number of properties under management, the purchaser should not be paying for properties that do not remain within the portfolio.

A well-structured retention provision ensures that if any landlords withdraw during the retention period, the corresponding portion of the purchase price is refunded to the buyer. This protects the purchaser from overpaying and aligns the transaction with the actual value received.

Warranties: Holding the Seller Accountable

Warranties are essential in any rent roll purchase agreement to ensure transparency and accountability. A seller should provide warranties covering:

• The accuracy and completeness of all financial records and management data

• Compliance with relevant real estate legislation

• The legitimacy of all agreements with landlords

• The quality and accuracy of tenant records and rent collection history

A well-drafted warranty clause not only reassures the purchaser but also holds the seller accountable for any undisclosed issues that may arise post-settlement.

Purchasers should also insist on an indemnity provision, which makes the seller financially responsible for any loss or damages resulting from a breach of warranties. This provides an added layer of protection against misrepresentation or non-compliance by the seller.

Restraint of Trade: Preventing Landlord Poaching

A restraint of trade provision prevents the seller and key personnel from soliciting landlords and tenants after the sale. Unfortunately, I have seen cases where sellers, their directors, or even former employees attempt to poach landlords from the rent roll they just sold—causing significant financial damage to the purchaser.

While courts may be reluctant to enforce overly restrictive clauses, a well-drafted restraint of trade provision can be enforceable. It should be:

• Reasonable in scope (covering the geographic area where the agency operates)

• Limited in time (typically one to three years post-settlement)

• Clearly applicable to key parties (including the seller, its directors, and key employees)

Additionally, an agreed damages provision should be included. This ensures that if the seller breaches the restraint, the damages are predetermined and enforceable, avoiding lengthy and costly litigation.

Employee Considerations: Managing Staff Transfers

Purchasers must carefully assess whether they want to retain the seller’s property managers post-settlement. If employees transfer to the new business, the purchaser inherits their entitlements, including accrued leave and potential underpayment claims.

To mitigate risks, the purchase agreement should contain cross-indemnity clauses that specify:

• The seller remains responsible for any pre-settlement underpayments or miscalculations

• The purchaser takes on responsibility for employee obligations post-settlement

This ensures fairness and protects the purchaser from unexpected liabilities related to employee remuneration.

Final Thoughts

Acquiring a rent roll can be a game-changer for real estate agents looking to grow their business. However, the success of such an acquisition depends on careful due diligence and strong contractual protections. Key provisions such as retention clauses, warranties, restraint of trade, and employee indemnities help safeguard your investment and ensure a smooth transition.

By working with experienced legal and business advisors, real estate agents can confidently expand their agency while mitigating risks.

If you’re considering purchasing a rent roll, make sure your agreement is structured to protect your interests—because in real estate, a well-negotiated deal is just as important as a well-negotiated sale.