There is much to consider when estate agencies undertake mergers and acquisition (M&A) activity, from their own property portfolios to employment contracts and covenants. Here’s what both sides need to know.

Merger and acquisition activity between estate agencies and property groups has been rife since 2008. For both the company being acquired – often owner-managed, regional estate agencies – and the acquiring ‘parent’ company, the many pitfalls can be avoided with strong legal advice.

The many pitfalls of acquisition can be avoided…

Two key considerations are commercial property and employment. In our experience, even property professionals often fail to get their ‘house in order’ prior to acquisition. The first consideration of the estate agency seller is to get all property-related paperwork in good order, including any outstanding licences for alterations, check rent and service charge details up to date, and any  informal arrangements documented (typically the all important car parking).

Landlords and leases

Where an agency needs to assign a property lease to their property group buyer, the timing of any approach to the landlord is crucial. Who is going to pay the cost of the landlord and its surveyor? Is the buyer obliged to provide rent deposits or director guarantees?

Due to confidentiality this usually happens post-acquisition, but the seller needs to consider such issues as failure to do so can result in the business sale being delayed or used as a negotiation point to reduce the business sale price. We advise ensuring the sale document contains robust clauses dealing with landlord requirements. The acquiring business should also consider how an existing lease length fits with their business plan.

Buyer beware

Buyers are understandably sensitive to exposing themselves to unexpected post-acquisition costs. They should look for dilapidations or reinstatement obligations on leases coming to an end and if these are in connection with a key office, see if the landlord can be approached to agree a new, longer lease with a schedule of condition. Check that rent-free periods have been taken into account when considering the profitability of the business to be acquired; a business paying no rent can look very profitable indeed!

It is equally important to flag whether there are any long-outstanding rent reviews where payments may need to be made when the rent is agreed. These issues may also delay the lease transfer and it is best to have a plan of action in place and any co-operation from the seller or landlord obtained in advance.

If there will be any consolidation, a full review of lease break clauses and potential costs is needed. Break clauses are not always effective, particularly if they are contingent on there being no breaches of the lease.

As part of any acquisition, there are a number of HR-related issues that need to be factored in such as what will happen to the seller’s workforce, ensuring protection of legitimate business interests through covenants, and any potential employment claims in the pipeline.

Do restrictive covenants work?

Estate agencies typically face high staff turnover, which makes restrictive covenants in employment contracts for estate agents essential. These seek to prevent staff from joining a competitor, setting up in competition, or taking clients and staff, once they leave. Unfortunately, many covenants we see in this industry are unenforceable and will offer the employer estate agency and acquiring ‘parent’ no protection at all.

As the Courts have been upholding more covenants in favour of employers, it is prudent to review your covenants and ensure they work for you. Non-compete clauses are notoriously difficult to enforce so careful thought needs to be given, particularly in relation to the restricted territory. For example, the rise of online property businesses makes a prescribed territory worthless for business protection, though these business must be differentiated from an estate agency that has a website but is not web-based.

Role-specific protection

Non-solicitation and/or non-dealing of clients or employees clauses should be tailored to the individuals; for example, a Commercial Sales or Lettings Manager may have many crucial client relationships and typically has access to more commercially sensitive information. These potentially business-damaging elements should also be captured within well drafted confidentiality provisions that apply post departure.

TUPE trouble

M&A activity may well trigger the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), which effectively means the acquiring company inherits the employees of the business it purchases, along with their existing terms and conditions, including their covenants.

In reality, this means that whilst the acquiring company can seek to enforce the covenants were any transferred employees to leave post acquisition, those covenants would only protect the business interests of the company that has been acquired – which is of little use to the acquiring company, unless say the clients overlap. This is a complex legal area that requires tailored legal advice on a case-by-case basis to explore whether there are ways to introduce new covenants to transferred employees.

Anita Rai: [email protected]