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Commercial Law – Selling Your Business? Beware the Warranty

By Natalie Gosper, a Solicitor in our Commercial Law team.

The standard conditions contained in the Contract for Sale of Business 2015 edition contain a number of warranties or promises made by the vendor about certain aspects of the business.

As they are contained in the ‘fine print’, they can’t be that important, right?

Wrong.  The vendor’s warranties and promises must be carefully reviewed to ensure the vendor knows exactly what they are stating about the business and how they will conduct the business between exchange and completion.   If a vendor makes incorrect representations or warranties, the purchaser may be able to make a claim for damages, rescind or terminate the contract.

The vendor promises that ‘the equipment is proper working order’.  If some equipment is not in proper working order, this must be disclosed in the contract.  This sounds simple enough, but is easy to overlook especially for businesses using old or dated equipment.

There is no subsisting breach by the vendor of a lease’ This sounds straight forward, however the vendor should check rent payments, bond requirements and insurance obligations are up to date and any redecoration or other specific obligations under the lease have been met. During the period between exchange and completion the vendor must continue to comply strictly with the lease terms, including exercising an option to renew if applicable.
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Commercial Law – Selling your business? Consider the PPSR

By Natalie Gosper, a Solicitor in our Commercial Law team

Selling your business can be both exciting and stressful at the same time.  Once a purchaser is found the parties usually move as quickly as possible to exchange.

An area often overlooked by vendors is taking time to consider what security registrations under the Personal Properties Securities Act 2009 (PPSA) may exist encumbering vehicles, stock or plant and equipment included in the business sale.

Under the most recent Contract for Sale of Business 2015 edition, a standard clause is included requiring a vendor to provide a release of each security interest (or such other statements or documents confirming the security interest does not apply to assets being sold).

Often vendors believe the plant and equipment in their business is unencumbered and it can be quite a surprise to receive a PPSA search showing security registrations do exist despite the vendor not owing any money on the particular asset.   It is then necessary to contact the secured party and request a Financing Change Statement (release) which, depending upon the secured party, can take days or often even longer.   This can result in delays in completion and an unhappy purchaser.
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Implications – SMSF Record Keeping (or lack thereof)

Following on from the previous blog on record keeping, below is yet another example which highlights the importance of record keeping for SMSFs.

Where it can go wrong – another real life example

Lost Deeds 

L and M are members of the L & M Super Fund and are the original trustees.  In 1993 a newly incorporated company called LM Holdings Pty Ltd was appointed trustee.

In 1997 the Fund buys a property.  A title search for the property shows that ‘LM Holdings Pty Ltd’ is the registered owner.

In 2014 L and M divorce and M becomes the sole member of the Fund. A new trustee, Life after L Pty Ltd is appointed.

The appropriate forms are completed to change the name on the title of the property. An application is submitted to the Office of State Revenue (OSR) for concessional stamping.

OSR requests evidence that LM Holdings Pty Ltd owns the property as trustee of the Fund. The records showing that company’s appointment as trustee in 1993 have been lost.  The contract of sale (which showed ‘LM Holdings Pty Ltd as trustee for the L & M Super Fund’ as purchaser) has also been lost.
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Record Keeping (or lack thereof) for SMSFs

By Natalie Gosper, a Solicitor in our Commercial Law team

Most trustees of SMSFs are aware that record keeping is important to ensure their Fund remains compliant and eligible for tax concessions, but few trustees understand the actual ramifications of what happens when you don’t keep the right records.

The task of record keeping is often left to the Fund’s accountant or adviser, which should be a wise choice however there are records the trustees must retain which are often overlooked.

The ATO website contains a great deal of helpful information for SMSF trustees including the records a fund must keep. See https://www.ato.gov.au/super/self-managed-super-funds/administering-and-reporting/record-keeping-requirements/  For example, copies of annual returns must be retained for at least 5 years but records of changes of trustees and minutes recording investment decisions must be kept for at least 10 years.

Where it can go wrong – a real life example

Maintaining the chain of deeds

A and B set up the AB Super Fund in 1987.  They are the trustees of the Fund in their own capacity.
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Finally the Personal Property Securities Register is making its mark

We are starting to see an increasing trend in new registrations and searches being carried out on the Personal Property Securities Register (PPSR).  This is an encouraging sign as we hit the 2 year mark since the implementation of the Personal Property Securities Act (PPSA) on 30 January 2012.

The PPSA was introduced to streamline how we deal with and record security interests in personal property other than land. The PPSR brought together 23 separate registers to create one national public register of securities.

Recent PPSR statistics show that over the last 12 months there has been a steady increase in the number of searches being carried out on the PPSR. In the December 2014 quarter we saw 522,682 new registration listed on the PPSR and 1,004,883 registrations amended.

Interestingly in the December 2014 quarter there were only 345,216 registrations which were discharged or removed from the PPSR. Many registrations cover long-standing commercial relationships, so one would expect they would remain current on the register for a number of years. However, one further explanation for this is that many registrations are not properly removed after the security interest has fallen away, or the associated obligation or payment has been fulfilled. When searching the register you should consider whether the registrations shown are current or obsolete.
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Duty to Mitigate Damages for Purchaser’s Default

A decision by the Supreme Court of South Australia, in Murphy v Mitanovski [2012], reiterates the importance of a vendor attempting to mitigate loss from a reduced sale price following a terminated contract.

Facts

In the above case, a purchaser entered into a Contract to purchase land for the sum of $782,000. The Contract was subsequently terminated by the vendor as a result of the purchaser’s failure to complete. Following the termination of the Contract in July 2010, the vendor retained the deposit and decided to hold onto the property. In late September 2010 the defaulting purchasers offered to buy the property again. The vendor rejected that offer and put the property to auction in late October 2010. By that time, the property had reduced in value and was sold at auction for $750,000.

 

The vendor sued the defaulting purchasers for $32,000.

The court held that the vendor was not entitled to claim the difference of $32,000 between the two contract prices, as she had not attempted to mitigate the loss by contacting the initial purchasers regarding their offer following her decision to put the property to auction.
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The new Franchise Code of Conduct will come into effect 1 January 2015

The comprehensive review of the Franchise Code of Conduct has resulted in a new Code which will come into effect on 1 January 2015.

Some important changes include:

·         New penalties for breaches

·         Improved regulatory system

·         Improved disclosure obligations (particularly online)

·         New good faith obligation

·         Default arrangements for restraint clauses

If you are a Franchisor or a Franchisee and you would like a commercial lawyer to review your franchise documentation, please contact us to discuss. Our commercial lawyers can provide advice and ensure your franchise documents comply with the new Franchise Code of Conduct.

Phillip Brophy – phillipb@matthewsfolbigg.com.au or 9635 7966

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Calling upon a bank guarantee – not as simple as you think

The decision in Universal Publishers Pty Ltd v Australia Executor Trustees Limited [2013] NSWSC2021 suggests that the ability of a landlord to call upon a bank guarantee for the purpose of reinstating and remediating the premises depends upon the terms of the lease.

If the lease provides that the landlord can call upon the bank guarantee for an actual breach of the lease or an actual default by the tenant, however the landlord cannot call upon the bank guarantee where there is only claimed or alleged breach or default by the tenant.

If there is a dispute as to the breach or default, the landlord may be liable for damages to the tenant if they call upon the bank guarantee and the tenant is found not to have been in breach or default.

Whether you are a landlord or tenant you should seek the advice of a commercial lawyer before entering into a lease. Our commercial lawyers at Matthews Folbigg can provide comprehensive advice and assist in lease negotiations and preparation.
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