Restraint of trade clauses are a big part of a real estate agency rent roll exchange and are something you need to be aware of regardless of whether you’re planning to buy or sell.
This clause restricts the seller from competing with the buyer in specific ways after a rent roll exchange is completed. It typically prevents the seller from pitching to the same clients, operating in a particular geographic area or starting a competing business for a set period of time.
The purpose of this clause is to protect the buyer's investment by preventing the seller from taking actions which undermine the value of the rent roll. However, the terms of the restraint must be reasonable to be enforceable, balancing the buyer’s need for protection with the seller’s right to continue in the industry.
Here’s what to be aware of when it comes to restraint of trade in a rent roll exchange:
Buyers: Protection from Losing Clients
When you buy a rent roll, work with your legal team to ensure the restraint of trade clause protects your investment. It should clarify exactly which activities the seller should avoid engaging in, where and for how long. If you fail to pay attention in this area, you may find the vendor sells the rent roll and then immediately tries to claw back their clients.
This clause has the power to make or break your results, so be wary of pressure to compromise on the terms.
Vendors: Consider Your Future Plans
If you’re selling a rent roll, make sure you don’t inadvertently shoot yourself in the foot by agreeing to a restraint of trade clause, which effectively puts a straightjacket on your entire business. Before you agree to any terms, think carefully about your long-term goals and how a restrictive clause might impact them.
Think about the terms you would like to include early in the process of selling your rent roll. Restraint of trade clauses are often responsible for deals falling over in later stages, and this can be frustrating for all parties.
What to Negotiate
No matter which side of the deal you’re on, think about the following conditions and talk them through with your broker and legal team:
Geographic footprint: How far-reaching is the restraint? Does it cover a small, targeted area, or does it extend too far and unfairly impact the future business prospects of the seller?
Time period: How long will the trade curbs remain in effect? Common timeframes are 3-5 years, but this can be negotiated based on the specifics of the transaction.
New business restrictions: Can the seller start a new business in the area? If so, under what conditions? These should be carefully outlined in the agreement.
Property owner preferences: There may be instances where clients have strong relationships with the seller and wish to continue with their services. Address this in your exchange contract and factor in financial adjustments to the final sale price based on client retention.
Restraint of trade clauses can trip up a rent roll exchange and result in a more drawn-out process or a total deal collapse. It’s important to think about the conditions you want early in the sale process to prevent time being wasted.