3 FAQ's from Victorian retail leasing tenants

The following are typical of the FAQs we receive from tenants:

1. I have been given a Letter of Offer to lease retail premises by the landlord’s real estate agent.  What should I do now?
   

   Ideally, you should not sign the Letter of Offer before:

   1. conducting physical due diligence of the building structure and the landlord’s fixtures, plant and equipment contained within it.  In this regard, we recommend a building report be obtained from a qualified tradesperson.  Similarly, a suitably qualified tradesperson should inspect all landlord fixtures, plant and equipment within the premises, such as air-conditioning, for example.  Any problems arising out of those reports should be dealt with as amendments to the Letter of Offer, requiring the landlord to rectify those problems prior to the commencement of the Lease; and
   2. speaking to a retail leasing lawyer.  The lawyer should conduct legal due diligence of the premises and the landlord and advise you on the terms of the proposed Lease as described in the Letter of Offer.   If necessary, the lawyer may be able to negotiate any changes you may require to the Letter of Offer before it is signed.   The lawyer should also advise you on whether the Letter of Offer constitutes a binding agreement to enter into the proposed Lease. Many Letters of Offer we see require tenants to pay significant deposits to the landlord’s agent. Those deposits may be jeopardised if the tenant does not proceeding with the Lease after having signed the Letter of Offer.
2. After signing a Letter of Offer, I have been given copies the landlord’s Disclosure Statement signed by the landlord and Lease documents for execution.  What should I do now?
    
   Ideally, you should provide the documents to a retail leasing lawyer to:
   
    
   1. ensure the terms of the documents correspond with what you have agreed to in the Letter of Offer and to check the terms of the documents against the requirements of the Retail Leasing Act 2003 (Vic) (RLA);
   2. advise you on the wider legal terms of the Lease which were not mentioned in the Letter of Offer;
   3. seek amendments to the terms of the documents which do not correspond with the Letter of Offer,  the RLA  or your understanding of how you will occupy the premises; and  
   4. advise you on the tasks you (as the incoming tenant) may need to undertake before you can take possession of the premises, which may include:
      1. obtaining the landlord’s approval to any proposed fitout;
      2. the provision of a cash security deposit or obtaining a bank guarantee (and complying with the requirements for bank guarantees under the terms of the Lease); and
      3. obtaining public liability insurance coverage which complies with the insurance requirements of the Lease (which will usually include noting the landlord’s interest as an insured party on the insurance policy);
   5. assist with the timely execution and return of the Lease documents to the landlord’s agent; and
   6. seek from the landlord the return of the fully executed Lease documents and, where relevant, the consent of any mortgagee on title to the grant of the Lease by the landlord.
   
   
   
   
3. I have entered into a Lease and have taken possession of the premises.  Is there anything more I should do concerning the Lease?
   
   
   Yes, at a minimum you should:
1. ensure you and your employees comply with the various obligations applying to the tenant under the Lease document;
2. ensure that you and your employees comply with the tenant’s obligations under any building rules which might apply (where the premises are located within a larger building: for example, a shopping centre);
3. diarise the last day you can exercise any option to renew the lease for a further term (noting that if you exercise the option after that last date, the landlord might not be obliged to extend or renew the Lease);

If you would like assistance with your retail leasing, please contact Andrew Bini, Senior Commercial Lawyer at Nevett Ford Melbourne.

 

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Buying a business? Do your due diligence first!

Whether you intend on purchasing a small retail business or the business operations of a listed public company, the same fundamental approach should be applied: do your due diligence first!

As advisors to purchasers of businesses of various types and sizes, we are regularly involved in conducting legal due diligence.

However, a purchaser’s pre-contractual due diligence should not be limited to a lawyer’s review of legal matters, but should extend to:

• Inspection of plant and equipment: being a physical investigation by the purchaser (or preferably by qualified contractors on behalf of the purchaser) into the state of plant and equipment and other hard assets sold with the business.  If there are any problems with those assets, then the purchaser’s lawyer should be in a position to negotiate amendments to draft sale contracts requiring the vendor to rectify those problems prior to settlement.  Physical due diligence should also indicate whether the sale price reflects the true value of the physical assets being sold;
• Inspection of the premises including the landlord’s fixtures, fittings and installations.  Again this should be done by a qualified person on behalf of the purchaser and a report provided.  Issues arising out of that report should be dealt with in the sale contract to ensure the vendor rectifies issues prior to the purchaser taking possession of the premises and potentially becoming liable for hidden problems.
• Financial due diligence into the business including a detailed review of the financial statements of the business for at least the last five years.  The purchaser’s accountant should report on the financial status of the business including whether the purchase price is reasonable based on the business’s financial performance in recent years.
• Enquires with the local council and with owners of adjoining businesses as to potential changes to the local environment, such as the construction of roads, the construction of multi-level buildings adjacent to the business premises and other matters which might lead to business disruption in the future. 

Ideally legal due diligence will involve at least the following:

• An investigation into the status of the vendor:  If the vendor is a company, what is its registration status with ASIC?  In this regard, the assets of a deregistered company are vested in ASIC and cannot be dealt with by that company until re-registration, which may be problematic;
• Determining whether the vendor a trustee: If it is, then the sale contract should record the vendor as being the trustee of a trust to ensure the purchaser will acquire both legal and equitable title to the business assets;
• Personal Property Security Register searches to determine the existence security interests which may be registered over the assets of the vendor.  This will identify the parties from which the vendor must obtain releases of those security interests prior to or at settlement;
• An examination of significant contracts held by the vendor including the extent to which plant and equipment is leased by the vendor.  Also, significant customer contracts should be reviewed to determine whether those incomes streams can be assigned to the purchaser at settlement.  If they are not capable of assignment then, the sale price may have to be reduced to reflect the loss of those income streams;
• A review of the premises lease documentation including a determination of the extent of time remaining under the lease and options and, consequently, the amount of time the purchaser will have to obtain a return on its investment.  If there is insufficient time remaining under the lease we suggest the sale contract be made conditional upon the vendor obtaining the landlord’s consent to extending the term of the Lease as part of the transfer of lease documentation;
• A review of the status of all licences and permits held by the vendor to conduct the business which are to be transferred to the purchaser at settlement – thereby enabling the purchaser to lawfully conduct the business at the premises on and from settlement; and.
• Review of employment agreements and liabilities.

Once each area of due diligence has been undertaken and the material issues have been identified, it becomes the purchaser’s lawyer’s role when negotiating the sale contract to have included in the contract specific obligations on the vendor to rectify those issues prior to or at settlement.  Of course, that depends on how willing the vendor is open to bearing the cost of rectifying those issues.

Quite often impatient purchasers pay the price for poorly conducted and/or limited scope due diligence.  Although sale contracts may offer some form of vendor warranties (covering things such as the operational condition of plant and equipment) they can be little comfort to a purchaser when after settlement the vendor has disappeared overseas on vacation or doesn’t have the finances to compensate the purchaser for breach of a vendor warranty.  On that basis, we firmly believe quality pre-contractual due diligence which extends beyond legal due diligence is prudent practice all purchasers should consider adopting.

At Nevett Ford Melbourne we have experienced commercial lawyers with extensive experience in assisting purchasers of all types of businesses.

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Due Diligence and IPO’s

On 14 July 2016 ASIC released Report 484 “Due Diligence Practices in Initial Public Offerings”.  The Report outlines ASIC’s key findings from its review of due diligence practices of issuers of securities in relation to twelve initial public offers (IPO’s).  The Report is designed to help issuers of securities, their directors and advisors to conduct effective due diligence.

Due diligence practice is the process issuers adopt to comply  with their obligations under Part 6D.2 of the Corporations Act 2001 (Cth) in the preparation of IPO (and other rights issues) prospectuses.  The due diligence process involves among other things a thorough investigation into the issuer and its activities to ensure that all material information is contained within the relevant prospectus for consideration by investors.

Responsibility for the quality of the information in prospectuses lies with the issuers of securities and their directors who must ensure the prospectus is accurate and complete.

Typically the due diligence process comprises the establishment of a due diligence committee, the preparation of and adherence to a due diligence compliance program, the participation by directors, management and advisors of the issuer in investigating particular tasks and the verification of the content of draft prospectuses to ensure they do not contain false and misleading statements.

The key findings of the Report are as follows:

1. Poor due diligence often leads to defective disclosure, such as misleading and deceptive statements, statements with no reasonable basis or the omission of material information;
2. There was considerable variation in due diligence processes which led to different levels of investigation resulting in sometimes less desirable outcomes;
3. Some issuers adopted a “form over substance” approach to due diligence indicating less focus on actual disclosure in prospectuses and more on “ticking the boxes”;
4. Instances of superficial involvement by boards, despite significant directors’ liabilities under the Corporations Act;
5. Poor oversite by some Australian legal advisors of due diligence enquiries conducted by foreign advisors;
6. Inconsistent quality of contribution in the due diligence process between investigating accountants (who usually ranked high in their contribution) compared to legal advisors, which in some cases demonstrated a less consistent standard in conducting due diligence;
7. The costs of conducting due diligence may have an effect on the result.  It was found that a well-advised issuer would be better placed to mitigate risks.

The Report makes 5 recommendations for effective due diligence:

1. Issuers should adopt a due diligence process that promotes the oversight of the process, promotes investigations into the information contained in the prospectus, promotes record keeping of significant matters, promotes verification of all material statements contained in prospectuses and involves the continuation of the process after lodgement of the prospectus to capture any further material issues arising after lodgement;
2. Issuers should adopt a “substance over form” approach to ensure prospectuses comply with the law and promote informed decision making by investors who are relying on the content of prospectuses;
3. Directors should take an active role in the process and ensure that a robust due diligence process is undertaken;
4. Competent expert advisors should be engaged to identify material matters in the preparation of the prospectus; and
5. Australian advisors should focus on effective overside of due diligence carried by foreign legal advisors.

The clear message in the Report is that issuers should adopt a more rigorous approach to due diligence, their obligations under Part 6D.2 of the Corporations Act and to prospectus writing.

If you require assistance with IPO due diligence planning please contact Andrew Bini.

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