Revised ADLS/REINZ Agreement for Sale and Purchase of a Business – a fond farewell to the GST Schedule
The ADLS Documents and Precedents Committee is pleased to announce that a revised ADLS/REINZ Agreement for Sale and Purchase of a Business (the agreement) will be released on 4 September 2017.
Committee member Chris Bradley put his hand up to act as principal drafter of the revised agreement as the GST Schedule, which was added to the agreement when it was last released on 24 February 2014, had never sat well with him. It seems to have also confounded many practitioners who were never quite sure what they were meant to do with it.
History of the GST Schedule in the business agreement
During the last revision, the GST clauses and schedule were imported from the ADLS Agreement for Sale and Purchase of Real Estate. The GST Schedule was added to the agreement for consistency with the real estate form to allow for compulsory zero rating (CZR) under section 11(1)(mb) of the Goods and Services Tax Act (GST Act).
The clauses and Schedule were driven by the need under section 78F of the GST Act for the purchaser to notify the vendor about their GST status and whether or not they intend to use any part of the land as their principal place of residence.
However, it soon became apparent to the Committee that the business agreement did not deal with GST in a way that made sense for the vast majority of business sales as it is rare for a purchaser of a business to use the land acquired (usually leased premises) as its principal place of residence.
This anathema served as a prime motivation for revising the form. However, over the course of the revision, other issues have been identified and addressed, although it should be noted that this is not a full revision of the agreement.
A new approach to GST
Most business sales will be zero rated, either because the business is a going concern or CZR applies. Thus, the Committee decided to approach GST with the assumption that there is the sale of a going concern so that it will be zero rated (under section 11(1)(m) of the GST Act), which is now dealt with by clause 11.
Clause 11.4 provides for the payment of GST if the sale is for some reason not zero rated (but requiring the price to be expressed as “Plus GST” on the front page).
Clause 12 deals with CZR and includes the statements around status and intention that are required by sections 11(1)(mb) and 78F (including for a nominee under section 78F(5)) of the GST Act.
The Committee appreciates that the Schedule had a role in focussing parties’ minds on GST status and their intentions regarding residence. The revised agreement now positively states that the purchaser will not be using any part of the land as its principal residence, which raises a risk that an agreement might be signed with an incorrect statement in this respect.
To counter this, the Committee has added warnings about not signing without seeking legal advice with specific reference to these issues prior to signing the agreement. These warnings appear on page one of the agreement and below clause 12. The standard warning above the signing section also remains.
The Committee takes the view that the risk of a GST mistake occurring due to incorrect statements in clause 12 is extremely low, as there are so few situations where a purchaser of a business might use the interest in land as its principal residence, and any harm caused if a purchaser did get it wrong would be self-inflicted in light of the prominent warnings.
There are a number of changes of minor detail or for reasons of readability and consistency. Below are the more substantive changes to the agreement:
- the addition of covenantors and guarantors as signing parties (note: ADLS will also be releasing a deed in restraint of trade and deeds of guarantee);
- the addition of a number of definitions to improve interpretation, including importing definitions from the GST Act into the agreement;
- aligning time for performance and notice sections with the ADLS Agreement for Sale and Purchase of Real Estate;
- the provision of more detail about what a settlement statement should contain;
- the provision of more detail about the process for assigning a lease;
- the addition of a right of pre-settlement inspection;
- more and clearer detail about the mechanics of settlement and possession;
- improved restraint of trade wording, including restraint period and restraint area definitions;
- a new due diligence condition;
- the rearrangement of clause 8 so that lease conditions are now located with the other conditions;
- the addition of an expert determination clause for disputes; and
- the addition of a “no announcements” clause.
ADLS has produced a “compare” version of the form to identify all the changes more easily for practitioners, which can be found here.
Practitioners will also notice that the look of the agreement has changed – the font has increased in size and the format updated. The Committee is keen to update all its agreements to reflect this new style. The revised business agreement is the first ADLS form to receive this treatment.
The Committee would like to take the opportunity to thank our tax advisors, in particular Allan Bullot and Eddy Carter at Deloitte, for their excellent advice on the GST changes to the agreement.