Category

Commercial

Business Ownership and Divorce

By | Commercial, Family Law

When two people decide a relationship has reached its end and it’s time to separate or divorce, they’re both keen to achieve a clean break.

Unfortunately, unpicking the ties of a relationship can be a complicated and time-consuming process, particularly where a business owned and run by either one or both parties to the former relationship is involved.

It’s this scenario we’ll provide some more information on here. This is because a business – whether you operate it as a sole trader, in a partnership, or through a company or trust structure – is considered as property for the purposes of the Family Law Act 1975. This means its assets and value can be considered by the court if it is asked to make a division of property assets from the relationship in a final settlement.

For this reason it’s essential you seek legal advice from specialists in this part of the law. At Arbon Legal Group, determining how your business will be affected by a divorce is one of our areas of expertise.

The need for full and frank disclosure

It’s important to understand that should business assets become part of a property settlement after divorce, there is an obligation on each ex-partner to provide full and frank disclosure of all business records, financial statements, bank records, BAS and tax documentation to the other side. This is an ongoing obligation for however long the settlement process takes.

Such disclosure takes a lot of time, time you may not have, and so you may require the assistance of experts such as experienced legal representatives, a financial adviser or accountant, and a valuer of business assets.

Divorce and the type of business you own

The type of business you run affects how the asset will be treated in a property settlement after divorce. The value of a small business operated as a sole trader, or which both ex-spouses ran as a partnership, is different to a business that boasts a corporate and/or trust structure, with larger assets and values such as goodwill.

In most sole trader set-ups, such as a tradesperson without employees, a court will generally find that the spouse whose skills and expertise are the reason for the existence of the enterprise should retain it. In this situation where one ex-partner retains their interest in the business, it needs to be attributed a value, which may be a modest amount when there are no employees or extensive assets.

If the business does have a number of employees plus other value to be found in other assets and goodwill, a proper business valuation process should be undertaken involving examination of the business’ financial records and accounts so that it can be considered as part of a property settlement after divorce.

If a couple ran a business in partnership, the situation is similar to that of the sole trader in that a value will need to be determined for the business if one partner wishes to retain the business post-divorce. Again, formal valuation will be necessary if the business is more established in terms of employees, assets and goodwill.

Once a value is established, the partner who wishes to continue with the business may pay out the ex-spouse their share of the business as part of a property settlement.

The party to the divorce who retains the business maintains what the court describes as a ‘continuing financial resource’. This resource will be taken into account during a property settlement when the court considers the future needs of each party when dividing assets.

In some cases, ex-spouses continue working in the business despite their break-up. In this event it’s suggested they negotiate a financial agreement, sanctioned under the Family Law Act, to deal with the possibility that they later wish to go their separate ways and need to sell their share of the business, or the business entirely.

In situations where you are in partnership with third parties, or own a business under a company or trust structure, seek expert legal advice as the impact of divorce becomes more complicated.

The problem of valuation

One of the common sticking points when it comes to a property settlement as a result of divorce is reaching a mutually agreeable position on the value of the business.

Where each party cannot agree on the business value, or one of them expects a greater share based on their contribution to building the business, it will be left to the Family Court to help settle the matter. This could involve the Court ordering the sale of the business with the proceeds divided on a just and equitable basis.

The ex-partners, or the Court, may also appoint an independent valuer to provide a more accurate estimation of the value of the business, which they provide to the Court as an expert witness. This value can help the Court to decide on an equitable division of assets between the ex-spouses.

Generally speaking this estimated value is not the price of the business if it were to be sold but its monetary value to the owner as well as the profits and other benefits the owner would derive if they continued operating the business.

Factors considered in a business valuation include it earnings over time; whether the business has stopped operations, or continues, and; estimates of future cash flow and also profits if the business were to be sold.

Case example

One recent example which illustrates the division of business assets in Family Court proceedings is the 2016 case of King v Hamidou (‘King’).

In King, the parties operated a number of businesses before their marriage ended after 14 years. ‘D’ Business, as it was known during the proceedings, was the subject of the property settlement because both parties wished to solely retain their interest in this successful venture.

The Court considered the direct and indirect financial and non-financial contributions of each party to the enterprise. It also considered the competing valuations of the business, with Ms King providing a valuation of $3.8 million and Mr Hamidou claiming it was valued at $4.2 million.

The parties’ post-separation contributions to the business were also important, with the Court finding Ms King had continued to operate the business and that her work had returned it to profit due to her financial management.

Assessing all these factors, the Court adjusted the overall asset pool for settlement to 52.5 per cent in favour of Ms King and 47.5 per cent to Mr Hamidou, with Ms King to retain ownership of the business. As part of retaining the business she was ordered to pay her ex-spouse $1,299,740.50 within three months of the date of the orders.

Contact Arbon Legal Group for further advice

When a business becomes part of the asset pool that needs to be divided in the unfortunate event of a divorce, matters can become complicated and, in some cases, an ongoing source of conflict.

Disputes about the value of the business, the contributions of each party to the venture before, during and after the marriage, and the needs of each party post-separation, are all areas of contention which can end up in costly and time-consuming proceedings in the Family Court.

At Arbon Legal Group, advising clients experiencing divorce on how to approach division of a business is one of our specialties. We have many years of experience on how to navigate your way through a potential property settlement in order to get a result that works best for you. Call or email us today for an initial consultation on (07) 5562 0444 or admin@arbonlegal.com.au.

commercial leasing

Leasing Your Commercial Property? What You Need to Know About Commercial Leasing in QLD

By | Commercial, Conveyancing & Property

The relationship between a landlord and a tenant in a commercial setting is an obviously crucial one which in Queensland is governed both by legislation as well as contract law.

Commercial leases generally divide into either retail or non-retail leases. Places where goods and services are sold to consumers, such as shops, comprise retail leases while non-retail leases include warehouses, distributors and manufacturers which operate a business but don’t sell directly to consumers. Sometimes these lines can be blurred and so seeking expert legal advice if you’re unsure of the status of your lease is a wise course of action.

Commercial and retail leases have similarities but also some key legal differences. In Queensland, as in other states, retail leases are governed by the Retail Shop Leases Act 1994 (“the Act”). In contrast, non-retail commercial leases are governed by state-specific property and conveyancing Acts which, unlike retail leases, can be contracted out of. The reason for this is that it is generally assumed a retail tenant has unequal bargaining power when compared with a landlord (often a large shopping centre owner), while the law is less inclined to involve itself in the contractual arrangements between commercial land owners and tenants.

In essence, however, all commercial leases will include terms covering:

  • payment of rent;
  • rent increases; and
  • maintenance and repairs of the premises.

The remainder of this article will primarily focus on the basics of retail leases.

Retail leases

In Queensland, the Act covers retail leases unless the business is a service station; operates from a premises with a floor area of more than 1000 sq m and is leased by a listed corporation or a listed corporation’s subsidiaries; is a temporary business such as a trade stall; is a premises within a theme park or amusement park.

In order for a retail lease to be agreed in Queensland, both landlord and tenant must provide disclosure statements. The landlord’s statement must provide summary information about the terms of the proposed lease and be given to the tenant at least seven days before the commercial lease agreement is finalised. Failure to do so allows the tenant the opportunity to terminate the lease.

The landlord must also give the tenant a copy of the proposed lease in writing at least seven days before entering into the lease, and a certified copy of the signed lease within 30 days of the lease being signed. Failure to do so may result in a fine.

Tenants must also provide a disclosure statement to the landlord that includes information about their business history and experience, as well as any details of representations made by the landlord. Prospective tenants should note that providing misleading or false information on this statement can result in the payment of compensation to the landlord if they suffer loss due to the misrepresentations of the statement.

Additionally, tenants who operate fewer than five retail businesses must secure a legal advice and a financial advice report before signing a lease. This will require the tenant consulting a leasing lawyer such as Arbon Legal Group to receive advice on the lease’s terms and conditions. These reports must be provided by the tenant to the landlord before the lease commences.

Rent reviews, options and renewals

A commercial lease needs to specify how the amount of rent paid by the tenant is varied during the term of the lease. For example, rent might be adjusted up by a fixed amount or according to the Consumer Price Index. Rent may also be renegotiated at the end of a lease term and in the case of a retail lease, this may require the services of a Specialist Retail Valuer to determine the market rent of the premises. This process can be costly but the valuer’s rental figure is generally binding on the parties.

An option to renew a commercial lease is usually a specific clause within the lease document which entitles the tenant to renew the lease for a further term. If there is no option or all options under the lease have been exercised, a new lease is required.

If the lease is for less than a year, the landlord must advise the tenant at least three months before the end of the lease whether the landlord intends to allow the tenant to renew and on what terms. If the lease is for over a year, the landlord must advise the tenant within six months of the end of the lease as to whether or not they intend to renew the lease. The landlord is free to set any rental amount they wish in these circumstances. Unlike other states, Queensland does not have any minimum term for a lease to be considered a retail lease.

Disputes

Where a dispute about a retail lease arises between a landlord and a tenant, the matter will go to the Queensland Civil and Administrative Tribunal (QCAT) who will first ask the parties to attend a mediation on the dispute. If mediation is unsuccessful, QCAT will conduct a hearing on the dispute.

In some circumstances a landlord can be made to pay a tenant reasonable compensation for loss or damage. This can occur if:

  • a landlord significantly restricts access to the tenant’s shop;
  • or significantly restricts or alters customer access or flow into the shop
  • or causes a substantial disruption to the tenant’s business;
  • or does not quickly rectify or repair building defects or breakdowns in plants or equipment;
  • or neglects cleaning, maintenance or repainting of the building;
  • or causes the tenant to leave the shop before the end of the lease so the landlord can refurbish or extend the building;
  • or makes an untrue statement or misrepresentation which causes the tenant to enter into the lease;
  • or fails to make the shop available for trading on the date specified in the lease.

If you’re a retail tenant who believes any of these circumstances apply to your situation, consult Arbon Legal Group for immediate advice and guidance on how to proceed. We have widespread experience in commercial law matters, including leases, whether you’re a landlord or a tenant. Contact us for a consultation today on (07) 5562 0444.