Those familiar with our industry will understand that the concept of a clawback (where the purchase price is reduced for any letting appointments lost from the seller’s letting pool between contract signing and settlement) is well entrenched.

Despite agents and seller’s lawyers initially opposing the concept when it first surfaced some 10 years ago, over time it has become the norm. It is today rare for a contract not to have such a provision, particularly in the case of a permanent let complex.

When negotiating a clawback provision there are many things to consider including the following so it is perhaps unsurprising that negotiations around a clawback provision can become complicated:

• If there is to be a clawback for lost appointments, should there be a clawforward for gained appointments?
• Should there be a cap on clawforwards as a buyer may not be able to fund a purchase price increase?
• If there is a cap on clawforwards, should there be a cap on clawbacks?
• Should there be a minimum number of lost or gained appointments (say 1 or 2) before a clawback or clawforward kicks in?
• If so, do all lost or gained appointments count, or just those above the minimum?
• Should the claw figure be calculated at contract signing or left to the buyer’s accountant – a dangerous thought for a seller?
• What if the seller disputes the accountant’s calculation?
• Is it necessary to have a clawback or clawforward in a short term or holiday let complex where (except in periods of 100% occupancy) the loss or gain of an appointment may not affect the income?
• Should there be different figures for different types of units and the rent paid for those eg a 1 bedroom apartment versus a 3 bedroom apartment?
• What do you do when a complex has a mix of permanent and short term or holiday units in the letting pool?
• Should an imminent increase in body corporate remuneration and rents, which will offset some loss of units from the pool, be taken into account?

These are all questions that a buyer and seller will invariably have to turn their mind to when negotiating a purchase or sale.

Written by John Mahoney

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