A young client showing wisdom far beyond her years called me to seek guidance about how to protect her interests on a sale of a unit that she had listed with three agents. One of the agents had submitted an offer.
The property was leased and was due to expire before the settlement date.
The property was managed by the Resident Unit Manager (RUM) in the building. The agent assured her that the Buyer had not seen the property through any of the other agents and therefore there would only be one round of real estate agent’s commission payable to this Agent who had actually sold it.
I asked her to fax to me a copy of the Contract signed by the Buyers together with a copy of her Management Agreement with the RUM and if she had it, a copy of the Lease.
She advised that she did not have a copy of the Lease and I asked her to call the RUM and ask him to immediately fax to her a copy of that Lease.
In that circumstance I cautioned her about the strong possibility that the Manager would be very anxious about the sale and an unscrupulous one might tell her that the Lease (that they had signed on her behalf as her agent) also included an option for the tenant’s benefit allowing the tenant to extend the Lease for another six months (this would be unacceptable to the Buyer and cause the loss of the sale as the Buyer required vacant possession of the unit on settlement for their own use).
I recommended to her that if the Agent told her that this was the case she would call their bluff and call for a copy of the Lease (showing the Option) to be faxed to her immediately (so they couldn’t attempt to stall things and backdate a new Lease containing that Option).
My client asked “Why would an agent go to all of that trouble to attempt to retain the letting of just one unit in their letting pool”.
The answer was simple.
Their desire to protect their income stream of say $1,500 a year from the management of the letting of a unit, but more importantly the capital cost that they had paid to buy the management of that unit as part of the Management and Letting Rights business. [sam id=32 codes=’true’]
On the Gold Coast the capital cost of acquiring this unit as part of the business is approximately five times the rental income, that is, $7,500. The Manager therefore would be fighting to save the loss of $1,500 income and the capital cost of the unit in the letting pool of $7,500.
After perusing the Lease and the Management Agreement with the RUM I advised that there were three things that she must do to protect yourself in this sale.
Firstly, include a clause in the Contract of Sale whereby the Buyer guaranteed that they were introduced to the property by the agent who had sold it, and not any other real estate agent.
The Clause should also go on to state that the Buyer indemnified (compensated) the Seller in the event of any successful claim for commission by any other real estate agent.
My client was not sure whether she had given a sole agency or an exclusive letting agency to either of the other two agents and therefore without the protection of this clause there was a real risk that she could end up paying double of even possibly triple commission.
Insertion of the clause was therefore very important and should not raise an objection with the Buyer if their claim that only one agent had introduced them to the property was truthful.
Secondly, I advised my client that she direct the Manager in writing to advise the tenant in writing after the contract had been signed that return of possession of the property was required at the expiration of the lease so that the tenant could not legally remain in possession as a month to month tenant (failing to give notice to a tenant that possession is required at the end of the lease usually allows the tenant to stay on as a month to month tenant – this would be fatal to the contract).
Finally, I advised that she must give notice in writing to the Manager terminating the Managers appointment to manage the property upon vacation of the property by the tenant.
The Management Authority required the owner to give 90 days notice to terminate the management failing which the seller would continue to be responsible to pay commission to the Manager.
SUBSCRIBE & DON'T MISS A SINGLE EPISODE OF MICHAEL YARDNEY'S PODCAST
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
PREFER TO SUBSCRIBE VIA EMAIL?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.