Due diligence in a lettings portfolio sale is structured around the management agreement register. The managed portfolio is the asset — and the buyer’s due diligence is primarily an investigation of whether the AMFI figure presented in the marketing materials is supportable, whether the management agreements are in order, and whether the portfolio will transfer intact.
Understanding what buyers look for — and preparing for it in advance — reduces the risk of post-HOT price renegotiation and protects the earn-out.
When Due Diligence Happens
Due diligence begins after heads of terms are signed and runs concurrently with the exclusivity period — typically four to six weeks for a lettings portfolio sale. The buyer (or their appointed surveyor and accountant) will review the management agreement register, financial records, and operational documentation.
The management agreement audit is usually the critical-path element: it cannot be shortcut, and the results directly inform the AMFI figure used to calculate the final consideration.
Management Agreement Audit
The management agreement audit is the core of due diligence in a lettings portfolio sale. The buyer will examine every management agreement on the register:
Currency and execution. Is each agreement signed by the current landlord? Unsigned or expired agreements are not enforceable and will be excluded from the AMFI calculation.
Assignment provisions. Does each agreement contain an assignment or novation clause that permits transfer to a new management company? Agreements without assignment provisions may require individual landlord consent — this creates both a legal risk and a retention risk.
Fee structure. The buyer will check that the fee rate in each agreement matches the income recorded in the accounts. Discrepancies suggest informal arrangements that may not transfer.
Gap properties. Properties on the managed register without a current tenant in place generate no management fee income. The buyer will calculate the gap rate — the proportion of registered properties that are currently vacant — and will exclude gap income from their AMFI calculation.
Notice periods. Short-notice management agreements (where landlords can terminate on one month’s notice) are treated as lower-quality income than longer-term arrangements. The buyer will assess the proportion of the register at risk in any given period.
Financial Due Diligence
Three years of accounts and management accounts. The buyer’s accountants will reconstruct the AMFI from the accounts and check whether the AMFI figure used in the marketing is supportable. Where the AMFI in the marketing materials differs from the reconstructed AMFI, the buyer will seek an explanation or adjust the consideration.
AMFI composition. Management fee income will be analysed by fee rate, by property type, and by landlord concentration. A portfolio where a significant proportion of AMFI derives from a small number of landlords carries concentration risk that buyers will price in.
Other income streams. Let-only fees, renewal fees, maintenance margins, and other ancillary income will be reviewed. Some buyers will value only the recurring managed portfolio AMFI; others will include ancillary income in their calculation. The seller should understand which basis the buyer is applying.
Expense structure. The buyer will review staff costs, office costs, and any owner-related expenses running through the business. Normalised EBITDA should be documented clearly, with owner salary replaced by a market-rate management cost.
Operational Due Diligence
Property management team. The buyer will assess the team — who manages which properties, the tenure of key property managers, and whether key client relationships sit with the business or with individual members of staff who might leave. Teams where senior property managers have long-standing landlord relationships that are organisational (not personal) are more valuable.
Systems and software. The property management software, accounting systems, and communication platforms will be reviewed. Buyers need to understand the integration cost and the data migration requirements.
Client relationship mapping. Where the seller has direct personal relationships with key landlord clients, the buyer will assess transition risk. Evidence that clients are comfortable dealing with the team — not just the owner — supports the earn-out.
Legal Due Diligence
Office lease. The buyer’s solicitors will review the lease on the agency’s office — term remaining, assignment provisions, rent, and break clauses. For multi-office agencies, all premises will be reviewed.
Employment contracts. All employment contracts will be reviewed. TUPE applies on an asset purchase — all employees transfer to the buyer. Unusual contractual terms, garden leave provisions, and any outstanding employment claims will be flagged.
Regulatory compliance. Client money protection scheme registration, redress scheme membership (Property Ombudsman or Property Redress Scheme), and any professional body membership documentation will be reviewed. Any outstanding complaints or regulatory proceedings must be disclosed.
Client account compliance. The buyer will review client money accounting — whether landlord funds are properly segregated, reconciled, and accounted for. Client account irregularities are a material issue.
What Happens When Issues Are Found
When due diligence reveals problems, buyers will either:
- Adjust the AMFI figure used for the calculation, reducing the headline consideration
- Seek a specific indemnity — for example, an indemnity against landlords who give notice within a specified period after completion
- Renegotiate the earn-out structure to reflect discovered risks
- Walk away if the issues are material and cannot be resolved
A management agreement register that is clean, current, and well-documented reduces the scope for post-HOT price adjustment. Sellers whose registers have gaps — unsigned agreements, agreements without assignment provisions, undocumented fee changes — will face a more challenging due diligence process.
How Sellers Can Prepare
Audit the management agreement register before marketing. Go through every agreement: check it is signed, current, and filed. Identify any landlords where the agreement is not in place and regularise the position.
Reconcile AMFI to the accounts. Prepare a clean AMFI schedule that reconciles to the financial accounts, with gap properties clearly identified and explained.
Document the team structure. A clear organisational chart with tenure and client relationships mapped reduces buyer concern about key person risk.
Check regulatory registrations. Confirm that client money protection, redress scheme membership, and any professional body memberships are current.
For a full guide to the estate and letting agency sale process, see how to sell your estate or letting agency. For guidance on preparing your portfolio for sale, see preparing your estate or letting agency for sale.
Contact our team for a confidential discussion about selling your estate or letting agency