Effect of Commencing Trial Period or Seller’s Tuition

Commencing the buyer’s trial period or the seller’s tuition waives the buyer’s rights under the finance, lease and financial due diligence clauses of the contract.

Buyers of businesses will often require the seller to provide them with a period of tuition prior to settlement to become familiar with the operations of the business. Further, those buying small food/retail businesses will often also require a trial period to substantiate financial performance.

Often, the trial period will commence before the lease is formalised or the buyer’s finance is approved. Pursuant to the REIQ Business Sale Contract, upon commencement of the trial period or the seller’s tuition, the buyer is deemed to have waived or satisfied all of the following conditions:

1.    finance clause (clause 23);

2.    assignment of lease/new lease clause (clause 24 or 25); and

3.    verification of books and records clause (clause 37).

Whilst this may first appear to be beneficial to a seller, and the seller may allow the buyer into the business accordingly, there is serious risk to a seller. If the buyer does not obtain finance or the required lease, not only will significant time and energy be wasted by the seller, but the seller risks the buyer subsequently abusing the confidential business information accessed. The seller may not recover such losses if the buyer is un-financial or may have to resort to legal proceedings, requiring significant cost and time. Further, the seller may become so frustrated with the sales process as a result that they withdraw their business from the market.

Solution: Unless the seller is assured that the buyer has the money and the lease, there is little benefit in a seller expending the time and effort in giving the buyer tuition or allowing the buyer to trial the business. If they do, they need to ensure at the very least that a well drafted confidentiality agreement is executed and a sufficient deposit is held or otherwise negotiated.

Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

Liability limited by a scheme approved under professional standards legislation.