Selling a home with business potential: the potential risks

Journal,  Journal,  Principals,  Salespeople

While a home with a small business opportunity included may seem like a two-for-one deal, there are several potential traps for agents when taking on sales of home businesses without first considering the potential risks.

Selling a home that has business potential

Throughout most local council areas of Queensland, there are city plans which allow residents to operate small businesses from a residential home, for example a local hairdressing salon, childcare service, or farm stay. Some local councils allow particular types of small businesses to be run from a residential home without any application process through council. Conversely, some local councils specifically prohibit certain types of small businesses from operating in residential areas without relevant approvals.

However, the planning rules in most local council areas are highly complex, subject to change, and will require a detailed consideration of both the business in question as well as the zoning of the real property.

In most circumstances, a real estate agent will not be in a position to confirm whether or not a home business, and or its related property adequately meets the criteria to operate as a home business with or without council approval.

In all situations where a property is represented as a home and business, sellers should be encouraged to obtain their own legal advice on the capabilities of the property, including any concerns they may have regarding council approvals, or any other approval issues, prior to confirming the terms of a marketing approach, and certainly prior to entering into any contract of sale.

Similarly, agents should take extreme care not to advertise the property to buyers as having approvals from council or business potential without finite evidence of same. A prudent sales agent would ensure that any marketing material is approved by the seller in writing prior to publication.

In any case, all prospective buyers should be advised to make their own enquiries and to undertake due diligence investigations prior to entering into a contract of sale, rather than relying on any representation or warranty made by the seller and/or agent.

Any representations about the capabilities or business potential of a property should include words to the effect of ‘Subject to Planning Consent’ and all interested parties should be encouraged to undertake their own independent enquiries and seek professional advice if appropriate.

The consequences of misleading advertising

Section 212(1) of the Property Occupations Act 2014 (Qld) (PO Act) states that a licensee or real estate salesperson must not represent anything that is false and misleading relating to the letting, exchange or sale of real property. The maximum penalty for breaching section 212(1) is currently $74,439.

Section 212(3) of the PO Act provides that a representation is taken, for the subsection, to be false or misleading if it would reasonably tend to lead to a belief in the existence of a state of affairs that does not in fact exist, whether or not the representation indicates that the state of affairs does exist.

If a person makes a representation relating to a matter and he or she does not have reasonable grounds for making the representation, the representation is taken to be misleading (section 212(4) of the PO Act). The onus of establishing whether the person had reasonable grounds is on the person making the representation (section 212(5) of the PO Act).

Further, section 18 of the Australian Consumer Law (ACL) prohibits conduct, in trade or commerce, which is misleading or deceptive, or is likely to mislead or deceive. Misleading and deceptive conduct is a broad concept which includes words, actions, and pictures. It is irrelevant whether there is an intention to mislead; what is relevant is the overall impression created by the conduct and its actual or likely effect on the target audience.

Selling a home business: the practical component

While in some circumstances a home business may have limited business assets and financial history, the sale of a home and business should be treated as two separate transactions.

Agents should ensure that they are appointed for the sale of a business using the relevant special terms of a business broker, or for the sale of a property with the relevant special terms of a sales agent. Agents should also take care to ensure that they are adequately insured through professional indemnity insurance to accommodate business sales.

The sale of property (whether residential or commercial) and the sale of business assets would typically be documented on separate contracts of sale.

Conclusion

Agents must be vigilant in ensuring that they comply with their legislative requirements when marketing properties with business potential for sale.

As well as being careful to ensure that all representations (whether in writing, orally or by conduct) made in relation to properties are completely accurate, agents should ensure that they actively encourage all sellers and prospective purchasers to undertake their own enquiries and investigations in order to satisfy themselves of the property’s actual potential. Agents should also ensure that all marketing material contains an appropriately worded disclaimer.

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