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LPLC: Haste not, want not

Every Issue

Cite as: (2007) 81(6) LIJ, p. 86


Practitioners acting in the sale and purchase of small businesses have to ensure their clients understand the risks of rushing in.

Purchasers of small businesses are invariably full of exuberance when they come to see their solicitor.

They have signed the deal and want the solicitor to handle the paperwork as fast as possible, and as cheaply as possible, and they do not want to hear anything negative about the transaction.

They just want to get into the business and start making money.

On the other side of the transaction, the vendor is often desperate to get out of the business and get his or her life back and wants the deal over and done with as quickly as possible and, again, as cheaply as possible.

The challenge for solicitors is to ensure these types of clients take responsibility for properly protecting their own interests.

Where the client wants to take shortcuts, the solicitor’s role is to ensure the client makes an informed choice about those risks and consequently bears the resultant risk.

One area where careful advice is required is in relation to the provision of a s52 statement under the Estate Agents Act 1980 (Vic).

Acting for the vendor

Claims against vendors’ solicitors have often occurred when the vendor’s solicitor has failed to advise the vendor of the need to have a s52 statement prepared.

In some cases the solicitor was instructed to just draw the contract because the accountant was handling everything else.

Unfortunately, the accountant either prepared only the trading statement and not the rest of the s52 statement, or failed to prepare anything at all.

In other cases the solicitor failed to advise that a s52 statement was needed, wrongly assuming that no statement was required because there was no “goodwill” component to the sale.

Acting for the purchaser

When acting for purchasers, solicitors have been sued for failing to advise their clients of the need to obtain a s52 statement from the vendor.

Solicitors have also got into trouble for failing to tell their purchaser clients of the importance of a s52 statement, namely:

  • the vendor’s failure to provide a s52 statement entitles the client to rescind the contract;
  • the purchaser should have his or her accountant check the financials in the s52 statement; and
  • if the figures in the s52 statement are over three months old, or there is a defect in the statement, the contract can be avoided.

Risk management strategies

When acting for the vendor:

  • Explain that the failure to give the purchaser a s52 statement may allow the purchaser to avoid the contract. Confirm this advice in writing.
  • Explain that the trading statement in the s52 statement must be prepared by an accountant and must be accurate.
  • Explain that the remainder of the statement also needs to be prepared and be accurate and confirm whether you are to prepare this.
  • Once the client’s accountant has prepared the trading statement, request that the accountant or the client send the trading statement to you for inclusion in the s52 statement.

When acting for the purchaser:

  • Check that your client has received a s52 statement.
  • Advise your client to have the figures reviewed by an accountant.
  • Have the client check the remainder of the statement or offer to do it for the client.
  • Explain to your client that the absence of a s52 statement or a defect in it may entitle your client to avoid the contract.

Solicitors should also be aware that in order to come within the definition of “small business” in the Estate Agents Act not all of the “goodwill, plant, equipment and fittings” must be sold to deem the transaction subject to s52 (see, for example, Todoran v Timotic (unreported, VSC, 7751/92, 23 October 1995, Byrne J, Australian Current Law Reporter [110 VIC 18]).


This column is provided by the LEGAL PRACTITIONERS’ LIABILITY COMMITTEE. For further information, ph 9670 2001 or visit the website http://www.lplc.com.au

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