Paper trail - what happens to authorities in a rent roll transaction?
Including up-to-date and legally binding authorities is essential during the sale of a rent roll for both vendors and purchasers.
As a Real Estate Agent, you are responsible for organising Authorities/contracts with your landlord clients.
These documents include the terms of the managing agreement, such as who is responsible for organising repairs and how quickly these repairs must be attended to. They also cover other areas such as who collects rental payments, the cost of management fees, advertising costs and who is in charge of rental property inspections.
Ideally, all your Authorities will be kept up to date, stored correctly and renewed when anything changes in regards to the management of the property. One reason to do this is to avoid legal issues, e.g. an out of date authority gives a landlord a loophole to sue you for commission fees.
The other reason it is important to have up to date authorities is for an easier transition when you decide to sell your rent roll.
Authorities and rent roll transactions
If you are selling your rent roll, these are the steps when it comes to authorities:
As the Vendor, you must have all managing authorities complete, up to date and fully compliant. This means including the correct Pty Ltd name of your company and having up to date signatures. Ideally, your authorities will be available in a digital format which is easy to share with both the Purchasing party and the Lender (if applicable).
The Lender involved with the sale must verify the authorities are complete and compliant.
The Purchaser should review all authorities to ensure they are complete and compliant. This includes having the notice of assignment attached to each one (if you don’t have a notice of assignment, the landlord may dispute the Real Estate Agent’s claim to commission).
The importance of an authority audit
Throughout the process of migrating a rent roll from one real estate agency to another, checking and double-checking authorities is essential. Any incorrect or incomplete authority could lead to legal troubles because they do not clearly advise who is responsible for the property.
Without a thorough check, you put yourself at risk of the following:
Landlords moving on with no notice or obligation to pay penalty payments
A fine for being in breach of the Estate Agents Act
Being required to pay back to the landlord any commission collected (without a watertight authority, they may claim they aren’t actually responsible for paying you).
What’s more, once a deal goes through, if the authorities are not up to date and correctly attached to the sale, the purchaser of the rent roll is impacted because they don't have continuity of the authority, and therefore they will not be able to claim management fees
On the other hand, if the vendor does not assign authorities correctly, they may find themselves facing legal action from the purchaser for not assigning authority in accordance with the Contract of Sale.
When to review authorities during a rent roll sale
Generally speaking, the review of authorities takes part during the due diligence process of a rent roll transaction. At the conclusion of due diligence, each party will agree on the wording for assignment letters to be sent to new landlords. There is a standard clause in the Authority which needs to be highlighted or re-stated in the assignment letter. Landlords will also receive new authorities in the name of the new managing agent.
Once all authorities have been returned and correctly filed, and once notification of assignments has occurred, the final settlement price can be determined.
Having accurate authorities is another reason why keeping good records and having a good administration team is so important when you manage properties on behalf of clients. Ideally, everything will be kept up to date and easy to access, making your rent roll sale a far smoother process.
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