Taking on Employee's with New Business

Using a standard Business contract - Considerations regarding employees when buying an existing business.

When purchasing an existing Business an important factor to take into consideration is the retention or not of the existing employees and key personnel of the business - whether you are to retain them or not !

It may be imperative for you to keep certain staff members on for the continued success of the business or on the other hand, you have may your own trained and ready to go group of staff waiting to start.

No matter which road you take, it is vitally important to ensure the Business Contract reflects your intention in this regard. The Standard REIQ Business Sale Contract (Second Edition) provides for a schedule of employees in the business. You must then notify the Seller in writing as to the employees you wish to employ and those you do not.

Under standard condition 18.3 you must then offer employment on specific terms and conditions to those employees to commence on the Settlement Date on no less favorable terms than their existing employment. This is normally understood.

What is not normally understood - If you do not offer employment on the specified terms and conditions to the Seller’s employees, then you will be responsible for any redundancy payments made to the employee by the Seller and further will need to indemnify the Seller for any other loss or claim by or relating to the redundancy of that employee – standard condition 18.5.

Furthermore, for the employees who do accept your offer of employment, the Standard Conditions state that the Seller only reimburses you (by way of adjustment at settlement) for 70% of the aggregate value of the employee’s entitlements such as sick leave, annual leave and long service leave – standard condition 18.8.

These clauses, among many others, should be seriously considered and if necessary negotiate changes with the seller prior to signing the Contract to protect your interests and ensure that you are not out of pocket unnecessarily.

As part of our service come and see the Commercial team at Hatzis Lawyers before you sign any business purchase contract so that we may advise you on issues such as this and make the appropriate changes to the Contract with our custom made special conditions or assist you with the negotiations.

Unfair Contract Terms

From 1 July 2010 new trade practices legislation has been introduced regarding unfair contract terms in standard form consumer contracts. These changes will affect all businesses, large or small, alike.

These changes apply to standard form contracts that are generally not open for negotiation and are produced to a consumer by a business in order for the supply or sale of goods and services – generally for that consumer’s personal or domestic use or consumption. This may include terms and conditions of trade, credit polices and the like.

There seems to be a presumption that any ‘consumer contract’ is deemed to be a standard form contract (thus attracting these new provisions) unless proven otherwise by the business relying on the terms of the contract. The reforms even go so far as suggesting that businesses must be prepared to provide sufficient evidence to show that the contract is not standard form. Businesses must be wary of this.

To determine whether a term is unfair is highly subjective and will be judged on a case by case basis. There is no magic formula and a determination will depend on (among other things) the negotiations surrounding the terms, the bargaining power of each party, industry standards and of course the subject matter of the Contract.

The general tests to determine an unfair term are as follows:
· Does it cause a significant imbalance in the parties’ rights and obligations;
· Is it not reasonably necessary to protect the legitimate interests of the party who is advantaged by the term; and
· Does it cause detriment to a party if the term were to be applied or relied on.
These limbs must all be proven for a court to determine a term unfair.
The true scope of the reforms is yet to be properly tested to see whether the changes have merit.

It would be hard to speculate at this stage how stringently the courts will enforce these provisions, however businesses should seek legal advice as to any consumer contracts they are currently using and any potential unfair terms that may be lurking inside.

Upon sighting your terms and conditions or other such standard form contracts, Hatzis Lawyers can provide you with a fixed fee quote in order for one of our commercial solicitors to review the document and advise you in this regard.

Retail Shop Leases Act

Recent amendments to the Retail Shop Leases Act 1994 have made provisions commonly known as ‘ratchet’ rent provisions void in any lease for a retail shop. Ratchet provisions are defined in the new section 36A of the Act as follows:

‘ratchet rent provision means any provision of a retail shop lease to the extent that it—
(a) prevents, or enables the Lessor or another person to prevent, the rent decreasing under a rent review; or
(b) limits or specifies, or allows the limitation or specification of, the amount by which the rent may decrease under a rent review; or
(c) prevents, or allows the avoidance of, the rent review by the Lessor or another person for a purpose mentioned in paragraph (a) or (b).’

The common understanding of the ratchet rent provision is a mechanism whereby the review of rental is such that the rent for the subsequent lease year is either the review amount (be it a market or CPI review) provided it is no less than the rental for the current lease year. An example of which would be a market review where if such review resulted in a decrease of rental, the rental amount would be ratcheted and therefore remain at the current rental for the subsequent lease year rather than decreasing.

This has been a common practice by Landlords for some time.

The definition above seems broad and is yet to be fully tested in a court. It is unclear whether the intention behind the amendment is to broaden the generally accepted definition of a ratchet rent provision or whether it is meant to reinforce it.

If you are a landlord our advice generally would be to keep rental reviews at a fixed percentage to avoid any ambiguity or potential pitfalls.

Whether you wish to rent your retail shop or are entering into a lease in a retail shop as tenant, come and see us at Hatzis Lawyers so you can be sure you are getting the latest up to date advice. Contact us on commercial@hatzis.com.au

Personal Property Securities Act 2009

In 2009, the Commonwealth Parliament enacted the Personal Property Securities Act 2009, replacing more than 70 pieces of legislation Australia wide and several Registers in the States and Territories.

The Act creates the Personal Property Security Register, containing details of secured property and which is available for searching. The Act further contains provisions for enforcing interests on the default of a party, and rules for when property may be free of a security interest and for determining priority between competing interests.

Section 12(1) of the Act provides that a security interest is an “interest in relation to personal property provided for by a transaction that, in substance, secures payment or performance of an obligation”.

A security interest is only enforceable when the grantor (debtor) has rights over or powers to transfer collateral (the personal property) and the secured party (creditor) gives value for the transfer of those rights.

The Act provides for lots of different applications, depending upon who is seeking to enforce the interest. If, for example, the parties are seeking to enforce the interest amongst themselves, all that needs to be proven is that the security was attached to the property. Attachment under the Act is merely that the grantor (possessor of rights over the property) has rights to transfer their rights to the property or its use and that value or some act was done giving rise to the interest.

If the security interest is being enforced against a third party, not only is attachment necessary, but also perfection. Perfection requires that the third party has some possessory rights over the property or that there is a compliant security agreement in writing signed by the grantor.

COAG (Council of Australian Governments) has delayed the Act coming into force until a date to be set in October 2011 due to an Amendment Bill currently being debated by the Federal Parliament in response to concerns raised by stakeholders.

If you have any queries in relation to how this Act may affect your business, please don’t hesitate to contact our Commercial law team on 1300 428 947 or at commercial@hatzis.com.au