Navigating the sale of a rent roll

In the recent Queensland District Court decision of realT Properties Pty Ltd v Arete Real Estate Pty Ltd & Anor [2024] QDC 180, the District Court considered a contractual dispute in relation to the sale of a rent roll.

Background

The plaintiff in this matter, realT Properties Pty Ltd, is a real estate agency, which managed 46 properties on a rent roll.

On 15 May 2023, the plaintiff entered into a contract to sell the rent roll to Arete Real Estate Pty Ltd, the first defendant in this matter, for an amount of $278,574.04. The second defendant, Karen Leanne McDonald, is the sole director and secretary of the first defendant. The second defendant was experienced in real estate and had purchased rent rolls previously. 

The contract of sale was subject to, and conditional on, the first defendant being satisfied with its due diligence enquiries as to the rent roll within 30 days of the contract date. In addition, the contract included a retention clause, which allowed for price adjustments of up to 10% of the purchase price if properties left the rent roll during the 180-day retention period.

The contract required a 10% deposit to be paid followed by two further payments on completion of the sale, which was due to be completed by 30 June 2023. One payment of 80% was to be made to the plaintiff and the second payment of 10% was to be paid to the plaintiff’s solicitor, to be held in trust for any adjustments to be made.

On or around 5 June 2023, the plaintiff’s property manager, who had worked for the plaintiff for over five years, resigned with little notice and encouraged some of the clients with whom she had a previous relationship to leave the plaintiff’s rent roll.

On 6 June 2023, the defendants confirmed that they were satisfied with their due diligence enquiries and the contract became unconditional.

On 6 and 7 June 2023, several clients gave notices of revocation of their appointments of the plaintiff as their agent reducing the number of properties on the rent roll by 11. The clients were required to give 30 days’ notice, which meant that the termination of the appointments did not come into effect until after the contract was due to settle on 30 June 2023.

On 14 June 2023, the plaintiff’s representative advised the defendants that its property manager had “gone rogue”, and that she had resigned and contacted clients who had subsequently given notice of termination of their appointments.

On 15 June 2023, the first defendant purported to terminate the contract on the basis that there had been an anticipatory breach of the contract in circumstances where the plaintiff could no longer complete the contract as it could no longer transfer all 46 properties as originally contemplated by the parties.

The plaintiff rejected the first defendant’s notice of termination of the contract. On 30 June 2023, the plaintiff attempted to effect settlement of the contract, however, the defendants did not attend settlement or pay any further money under the contract.

The plaintiff sought specific performance of the contract or, alternatively, damages arising from the defendants’ alleged unlawful termination of the contract. The defendants made a counterclaim for the return of the deposit on the basis that the termination of the contract was lawful.

Issues to be considered

The main issue for the Court to consider was whether the contract was lawfully terminated.

The first defendant maintained that the information it had received from the plaintiff’s representative advising of the termination of the appointments gave rise to a reasonable inference that the plaintiff was unable to perform the contract. However, the plaintiff argued that the statements allegedly made did not constitute an anticipatory breach of the contract and the plaintiff was always ready, willing and able to perform the contract. The plaintiff maintained that, as at the settlement date of the contract, it still held 46 appointments.

The plaintiff contended that the revocation notices did not prevent performance of the contract and should have been addressed under the retention clause (which was created for these circumstances), not as a breach of the contract. Furthermore, the plaintiff maintained that the 46 appointments were in fact assigned, it completed its contractual obligations and was entitled to recover the purchase monies as a debt.

The defendants argued that the assignments of the appointments did not take place and the appointments in relation to the 11 properties the subject of the termination notices did not continue to be "in force" during the 30-day notice period and therefore could not be assigned during that period. However, the Court did not agree with this argument in circumstances where the agent would continue to receive rent and be entitled to its commission during this time.

The Court noted that in accordance with the Property Occupations Act 2014 (Qld), appointments can be terminated with 30 days' notice, however, they can also be assigned during this period. The Court stated that the agent "holds" the appointment during the notice period, and the obligation to complete the assignment passes to the new agent, who must notify the client within 14 days of the assignment.

The plaintiff argued that it had completed the assignments by performing the necessary actions, and the first defendant, as assignee, had the benefit of these assignments. In addition, the plaintiff argued that the first defendant’s failure to send the required notices did not affect the validity of the assignments.

The plaintiff submitted that the defendants were aware of the retention clause when they learned of the notices of revocation and that the negotiated adjustment was to provide for such a situation. However, the defendants argued that the retention clause only applied to loss of management of properties after the completion date and did not apply to the 11 properties in question because the retention clause is said to apply from the date of completion to 180 days after completion.

Decision

The Court accepted the plaintiff’s position that the appointments continued to be in force and were capable of being assigned during the 30-day notice period and were correctly assigned by the plaintiff, therefore, the plaintiff had performed its obligations under the contract.

The Court concluded that the plaintiff was not in breach of the contract at the time of the defendants’ purported termination, nor was there an anticipatory breach. The Court held that the notices of revocation with a minimum 30-day notice period did not prevent the plaintiff from completing the contract.

The Court noted that any impact from the resignation of the property manager could have been addressed either by the defendants attempting to persuade the property owners to reconsider terminating the appointments after completion of the contract or through compensation pursuant to the retention clause, which was the agreed mechanism to deal with this situation.

In the circumstances, the Court concluded that the defendants did not have the right to terminate the contract and should have paid the purchase price when it was due but failed to do so.

Regarding the assessment of damages, the defendants sought to rely upon an implied term to the effect that “should any properties subject to the rent roll provide notice of termination prior to completion, the purchase price shall be reduced by the sum attributable to the price agreed for the subject property…”.  This implied term would provide compensation for properties lost before completion, which the defendants claimed was not covered by the retention clause. However, the Court disagreed and found that in circumstances where the notices of revocation only expired after the completion date, the management of the properties was not lost until after the completion date of the contract.

The Court also explained that for a term to be implied, it must be reasonable, necessary for business purposes, and not contradict existing terms in the contract. Since the proposed implied term was not necessary, contradicted the retention clause, and was not consistent with industry practice, the Court rejected it.

The Court concluded that the plaintiff was entitled to the outstanding purchase price of $230,059.23, but not the retention amount of $28,757.40, less an adjustment to account for the income derived by the plaintiff since 30 June 2023.

Conclusion

This decision demonstrates the importance of having clear contractual terms in relation to a contract for the sale of a rent roll and highlights the legal obligations of both parties during the sale process. Agents should ensure that they keep thorough records of all communications and actions taken to fulfill their obligations under a contract of sale.

Read another property management article: Managing break lease fees when co-tenants fall into dispute.

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