How Employee Restraints Cost A Client A $1.8m Sale

We recently concluded an extensive marketing campaign for a high yielding quality portfolio, with the unusual result of no sale.

We have never seen a case like this, and it’s worth sharing the experience as the same situation could easily happen to any business owner.

Prior to the portfolio being marketed the Senior Property Manager left as they were advised the business was for sale. The person set up their own business within close proximity of the Sellers’ office.

It’s important to note the past employee didn’t breach any restraint provisions. They willingly adhered to the non-solicitation provisions of their Employment Agreement, and there’s no suggestion of any impropriety by the employee.

While there wasn’t any intent by the employee to cause the seller any commercial angst, with the benefit of hindsight that’s exactly what occurred.

When potential buyers of the portfolio became aware of the employees’ new business, they withdrew their interest. The common concern was that regardless of the employment restraint provisions, they all felt there is a very high risk of landlords gravitating to the business of the previous employee at some stage in future.

This message came through loud and clear. The buyers marched with their feet and no $1.8 million took place.

The lesson to be learned is how do employee Restraint provisions need to be structured to protect your business from a similar situation occurring.

While nearly all employment contracts have some degree of restraint and or non-compete provisions, our research identified not enough include a geographic exclusion. These must be structured fairly as clauses that are too onerous or restrict a person from earning an income can be legally challenged.

It is not unreasonable with your key personnel to include Restraint and No Complete provisions that include realistic geographic boundaries from your office.

This complex area of HR must be handled by lawyers who not only are conversant with statutory employment legislation, but also have a thorough working knowledge of the real estate industry.

We work closely with Kristen Porter, founding Partner of O*NO Legal, who’s law practice specialises in providing advice and services specifically to the real estate sector. It’s both refreshing and comforting to know there is law firm who now focus only the industry.

Kristen is well aware of the above issues and can provide your business the advice on the best way to prepare correctly structured restraint clauses on employment agreements.

Kristen can be contacted on at O*NO Legal on  letschat@onolegal.com.au

To avoid the same situation as what our client recently experienced it’s best you review your employment agreements with Kristen or your own lawyer to given you peace of mind that you don’t find yourself in the same situation when you wish to sell your business.

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