In Check Issue 41 (December 2008)
In this issue
In desperate times beware vendor finance
Land Tax reminder for estates
In desperate times beware vendor finance
In these current economic times practitioners are likely to see more vendors desperate to get out of their floundering businesses, and cash-strapped purchasers willing to give the business a go and make their fortune!
Not quite the match made in heaven both parties think it is because the solution both sides come up with is the provision of vendor finance. While it seems to solve everyone’s problems it ultimately creates many more, usually for the vendor’s legal practitioner.
Vendor finance generally results in the vendor receiving some money, often a small proportion of the purchase price, from the purchaser up front and then the rest of the purchase price is agreed to be paid at some later date. The biggest problem with vendor finance is the lack of security for the money the vendor effectively lends to the purchaser to buy the business.
Vendors’ practitioners get caught out in these scenarios because they:
- fail to advise the client to take security for the loan. In many instances the purchaser is a $2 company and not even directors’ guarantees are taken.
- fail to keep a good written record of the advice they gave the client: that is, the risk of the client losing the balance of the purchase price if no security is taken.
- advise the client to take a debenture charge over the purchaser company’s assets but then fail to lodge the charge within the time required. Often because it took too long to get the client to execute all of the documents and provide the lodging fee. Similarly we have seen cases where a mortgage over the purchaser’s property is obtained but then not registered on title and the purchaser sells the property before the practitioner realises the error.
- advise the client to take a charge over the assets of the business (usually where the purchaser is an individual), which turns out to be worthless because the purchaser dissipates the assets without the vendor’s knowledge or the only assets are effectively worthless equipment.
While many practitioners appreciate the dangers of vendor finance, in these economic times it may be very difficult to dissuade a desperate vendor from going ahead with a risky vendor finance arrangement. Practitioners should consider the following risk management strategies:
- have a face to face meeting to discuss the risks posed for your client, in particular discuss all possible security available to the client;
- keep a detailed file note of the advice and the client's response and confirm in writing the advice given;
- obtain the security agreed on; don’t let registration of interests or lodgement of charges slip between the cracks;
- where charges over company assets are to be taken, make it clear to the client in writing what the time limits are and insist on obtaining the lodgement fee up.
Land Tax reminder for estates
The State Taxation and Accident Compensation Acts Amendment Act 2007 (Vic) amended the Land Tax Act 2005 (Vic) (“LTA”) on 12 December 2007 in relation to land held by personal representatives of deceased estates.
A new category of administration trust was defined in section 3 of the LTA to be trusts
under which assets of a deceased person are held by a personal representative, but only
during the period ending on the earlier of -
(a) the completion of administration of the deceased estate; or
(b) the third anniversary of the death of the deceased person or the further period approved by the Commissioner under subsection 3(3).
Where previously, trusts established by a will were excluded trusts for the first three years or until the first of all minor beneficiaries turned 18, that is no longer the case. Administration trusts are not excluded trusts, but are specifically referred to in section 46A as being trusts to which the land tax surcharge does not apply. However, this will only be for the first three years after the death of the testator (or if a further period is approved by the Commissioner) or until completion of the administration of the estate, whichever occurs first.
The other change that practitioners should be aware of is the specific requirement for personal representatives of a deceased estate that includes land in Victoria, to lodge a written notice with the Commissioner within one month after the administration of that estate is completed (see subsection 46K(5A) of the LTA). The requirement that trustees of land in Victoria notify the Commissioner if anything happens to change the category of trust provision is still at subsection 46K(3).