11 Jun Quick legal tips to protect your Rent Roll and Real Estate Business
Ultimately, the value of a real estate agency is the value of its rent roll. A rent roll represents 80-90% of the entire real estate agency’s business. It goes without saying that the rent roll is the agency’s greatest asset. As a result it can be readily be sold and borrowed against.
A rent roll is readily valued by the application of a multiplier of between 2 and 4 to the management fee collected. A strong rent roll involves significant time, money and work. It is therefore critically important to take all necessary steps to protect this asset.
Unfortunately rent rolls are vulnerable to the threat of being reduced when agency staff, responsible for day to day management of the rent roll, leave the agency and attempt to poach away the hard won landlords.
At M A Legal at any one time, we have multiple cases against disgruntled property managers who have left an agency and commenced to contact landlords in an attempt to convince them to join their new agency.
Whilst the Code of Conduct of most Real Estate Institutes across Australia strongly discourages property managers poaching clients in someone else’s portfolio, the reality is it does happen frequently.
One of the most effective ways to protect your rent roll portfolio from rogue or disgruntled former property managers is by including an effective restraint of trade clause in their employment or contractor agreements.
Restraint clauses can prevent property managers from working for a competitor, using your confidential information, contacting your landlords and/or employees during or after their employment has ceased.
It is important to note that at law restraint clauses have traditionally been considered unenforceable. However, restraints are upheld if the real estate agency can demonstrate that the clause is reasonable. The three requirements for validity are as follows:
The employer must have a legitimate interest to protect;
The scope of the restraint must be reasonable in all the circumstances; and
The assessment of what is reasonable or not is made at the time the contract was entered into, not at the time of an employee leaving.
Careful consideration is required when preparing effective and enforceable restraint provisions in employment and contractor agreements to ensure they protect the real estate agency’s confidential information, landlords and ultimately the rent roll.
A further consideration is that even where the restraint clause applicable to a property manager is deemed enforceable, the real estate agency needs to prove the actual damage that was sustained as a result of the property manager breaching it. While industry insiders and estate agents could easily determine a value; convincing a judge or a jury of that value may face its own challenges.
At M A Legal, we encourage restraint provisions incorporating agreed damages clauses which allow the real estate agency and the property manager to agree in writing as part of their agreement that the damage sustained by the real estate agent for lost property is a multiple of the annual management fees collected; for example a 3.5 multiplier.
Another enforcement option available to real estate agencies against rogue property managers, where a valid restraint clause is entered into is an Anton Piller Order; which is a court order requiring one party to allow another party to enter their premises to inspect, remove or make copies of documents or other items which might form evidence in an action or proposed action.
We hope this quick synopsis highlights the importance of protecting your most valuable asset while highlighting the the relative ease with which it can be done.
For more information or for a complimentary, confidential and obligation free discussion, please do not hesitate to contact one of the principals of M A Legal, Rex Afrasiabi, who has extensive experience in assisting real estate agents with all aspects of their business. Rex Afrasiabi is well known in the real estate industry and was again selected as a judge for the prestigious REB Awards 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.