The rise of $2 companies has led to many discussions regarding legal execution of agreements.
Entering into an agreement whether it be for a lease, purchase or sale is a significant financial decision generally involving large sums of money.
It is a good financial decision as a landlord, tenant, buyer or seller to seek advice from qualified professionals about the terms and conditions outlined in the agreement. Signing an agreement is a substantial commitment which can dramatically affect your wealth.
Written agreements are legally enforceable contracts between two or more parties which set out the rights and obligations. If they are not upheld, it may be alleged that one party has been engaging in unconscionable conduct. This is where either party’s greater bargaining or marketing power is misused in a transaction to achieve an outcome that extremely disadvantages the other party. An example of this may be where one party takes advantage of the other who is unable to make a voluntary or independent decision which is in their best interests.
To determine if unconscionable conduct exists, the following points must be considered:
- the relative bargaining powers of the parties;
- whether the other party was able to understand any of the documents relating to the agreement;
- the extent to which the party unreasonably failed to disclose to the other party any intended conduct which may have altered the other party’s interests;
- whether any undue influence or pressure was exerted on, or any unfair tactics were used against the other party
- the extent to which the party’s conduct towards the other party was consistent with the party’s conduct in similar transactions
- the extent to which the party was willing to negotiate the terms and conditions of the agreement with the other party
- If the parties acted in good faith
If unconscionable conduct is established, you will want to seek damages from the other side. If the other party to the agreement is a $2 company, then it is not necessarily a bad risk but $2 may be all the shareholders have put in to fund the company’s operations.
The amount shareholders are willing to invest suggests how much risk they are willing to accept in backing the business. The better understanding you have of the risks involved in the transaction, the more protection you can ensure is included in the agreement.
Warranties are an ideal way of ensuring you obtain the maximum value of your asset if the purchasers do not have enough time to undertake a substantial due diligence, or if the vendor/landlord has not disclosed all the financial information. However, a warranty is only as worthy as the company providing it. If the company providing the warranty has a low capitalisation (e.g. a $2 company) or becomes insolvent preceding the sale, then taking an action against them will not be feasible. Warranties are also beneficial in negotiating the conditions of the agreement.
As a purchaser purchasing from a $2 company you must protect yourself which may be done by one of the following methods:
- Holding a deposit/bond and a further amount to be held in trust by your solicitors which will be released to the vendor/landlord at a certain time after deducting any damages owing to you for breach of warranty.
- Making the sale/lease conditional on a guarantee.
- Taking a charge over the vendor’s assets
Before you sign an agreement you should be confident that you understand and can adhere to the terms and conditions. To determine if an agreement is suitable for you, consideration must be had to the critical dates involved i.e. period of lease, date of settlement, etc.
You must decide whether the agreement will be a profitable investment for you to proceed with.
It is also important that you consider whether you are able to engage a valuer to determine market rent/purchase price.
To ensure you completely understand these points of the agreement you should discuss it and any other questions you may have with your solicitor and financial adviser.
If you have any questions or would like to discuss an agreement in relation to a lease or contract of sale, then please contact our office on 07 3876 5111. We offer a no obligation consultation for leasing and acquisition enquiries if required.