To avoid rushing in to an appealing-looking client book deal, brokers should enter an exclusive negotiation agreement, says a prominent financial services lawyer.
Halseys Legal Services director Fiona Halsey told Australian Broker
that brokers who do not enter into an exclusive negotiation agreement (ENA) run the risk of getting burnt further down the track.
“We find that when people are in the marketplace, either buying or selling, they can be very enthusiastic about the deal and sometimes they will – because they don’t want the deal to escape – enter into a Heads of Agreement. But there are lots of problems with these, because it’s often very questionable whether they are actually binding or not.”
Instead, brokers should enter into an ENA, which restricts the seller from entering into negotiations with anyone else for a specified time period and gives the parties have some breathing space to effectively negotiate with each other, she said.
“Knowing the business that they’re looking at buying isn’t about to suddenly go somewhere else is really helpful. The beauty about an exclusive negotiation agreement is it’s exactly what is says it is – it just means the vendor’s not going to sell to someone else. It may turn into something, it may not.”
When parties are under pressure to sign a deal, often agreements are drawn up which do not have all important clauses in it – such as restraints of trade to make sure the buyer has exclusive rights to the client list.
If the parties made a binding contract with a Head of Agreement which does not have all the important clauses the broker is “in real trouble”, but an ENA gives parties time to properly negotiate, Halsey said.
“However, if you decide not to go through with deal, there’s no difficulty. It just means the seller won’t negotiate with anyone else through this period.”
An ENA is particularly helpful in protecting brokers against buying from fraudulent loan book sellers, said Halsey. “It definitely gives the time for investigation.”
A number of brokers have recently contacted Australian Broker
after allegedly being conned by a man calling himself Mark Whittingham, who is a banned trail book dealer.
The duped brokers say they purchased a database of around 30,000 names – with the understanding it was an exclusive deal – only to find the database was fake and being resold to other brokers.
Halsey recommends the ENA is properly drafted by lawyers, as agreements which are insufficiently certain are unlikely to be upheld by a court.
A feasible time period for the agreement should be set so once that time limit expires, the seller is again free to negotiate with anyone – two weeks being too short and two months being too long, she said.
However, a prospective buyer cannot force a seller to enter into an ENA and in many cases the buyer may choose the pay the seller in order to secure the agreement – particularly if it is a large book with high interest – but this is up to the parties.
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