Terms of the Contract  – Financial Due Diligence and Approval of the Lease

By David Burrough

Two of the critical points that must be considered in the motel purchase contract are the following conditions:

1.       Financial Due Diligence;  and

2.       Approval of the Lease.

These conditions will be relevant whether you are purchasing the motel business, the freehold investment or both the business and the freehold.

Financial Due Diligence

The purchase contract should be conditional upon the purchaser being satisfied of the financial soundness of the business by a certain date after execution of the contract.

To enable this to occur the contract should provide for the vendor to deliver or make available to the purchaser or the purchaser’s accountants copies of such financial data which may be reasonably required.

The purpose of such enquiries is to enable the purchaser to explore the financial viability of the business.  Generally this will be required to be provided to the purchaser’s financier in order to secure finance for the purchase.

If the purchaser is not satisfied of the financial soundness of the business, then the purchaser will be able to terminate the purchase contract by notice in writing to the vendor.

Care should be taken to ensure that the time frames in the contract within which the purchaser needs to be satisfied with the financial soundness of the business or within which the purchaser needs to terminate the contract are strictly adhered to.  For this reason it is important for a prospective purchaser to liaise with their accountant early in the transaction to ensure that the time frames can be met.

Approval of the Lease

The approval of the lease is an important condition for both the purchaser of a the leasehold business and the purchaser of the freehold investment.  It is essential prior to purchase of the business that the purchaser understands as much as possible about the lease document and how it works.  Not only does this document affect his own activities in the motel business, but is also is an important part of the asset which is sold.

Generally the contract will require the vendor to deliver to the purchaser a true copy of the lease within a certain amount of time of the contract being entered into.  The contract should be conditional upon the purchaser being satisfied with the terms and conditions of the lease by the a certain date.

If the purchaser is not satisfied of the terms of the lease, then the purchaser will be able to terminate the purchase contract by notice in writing to the vendor.

Again, care should be taken to ensure that the time frames in the contract are strictly adhered to.

The results of the analysis of the lease in terms of cost to the prospective tenant or landlord should be conveyed to the purchaser’s accountant prior to the contract becoming unconditional.

These conditions are for the benefit of the purchaser and every effort should be made to use the time available to conduct thorough enquiries in relation to both the financial soundness of the business and the lease.  Such information enables a purchaser to make an objective and informed decision in relation to whether or not to proceed with the proposed purchase.