Advice on Unit Holder Agreements

When unit trusts are created, it is important to ensure that you have a supplement document called a unit holder agreement to manage the rights and responsibilities between the owners.

What is a Unit Holder Agreement?

A unit holder agreement is a supplement legal document to a unit trust. A unit holder agreement will set out the rights and responsibilities of the unit holders. It is strongly recommended for all unit trusts to have a unit holder agreement as it is this agreement which sets out how unit holders may exit the unit trust, how deadlocked parties are resolved, and prevents conflicts of interest, confidentiality and competition.

Does my unit trust need a unit holder agreement?

Even if your unit trust comprises of your only your closest friends in the world, a unit holder agreement is a necessity for all unit trusts. A well drafted unit holder agreement prevents nasty disputes from getting out of hand and reduces the delay, costs, and any interruptions to the unit trust’s business by clearly outlining how to deal with such disputes and unforeseeable events.

Unit holder agreements offer a level of certainty and security that are both often hard to come across by in a volatile and unpredictable environment.

What is commonly included in a unit holder agreement?

Depending on your unit trust and its circumstances, the provisions contained within your unit holder agreement will vary so it will be necessary to seek out the advice from a lawyer to ensure that your unit holder agreement considers are contingencies relating to your unit trust.

Despite this, there are standard provisions that you will often come across in most unit holder agreements, these include the following:

  • Dispute Resolution

As the unit holder agreement primarily deals with how disputes will be resolved, a dispute resolution clause is often necessary to enforce the use of alternative dispute resolution processes prior to relying on court litigation.

  • Primacy

The primacy provision is one where it states that the unit holder agreement will prevail over the company’s constitution if there is such a conflict between each.

  • Right to pre-emption

The right to pre-emption is a provision that restricts the transfer of units. It requires a unit holder to offer their units to other unit holders in the trust before offering them to an outside buyer.

  • Mandatory sale

This provision outlines what will cause the mandatory sale of a unit. A common circumstance is when a unit holder passes away.

  • Unit valuation methods

It is necessary to obtain the value of a unit in a unit trust to be able to complete such things such as a sale or a transfer. A unit holder agreement will often outline the preferred method of seeking and obtaining such valuation.

  • Drag along and tag along rights

This provision is often included to balance the rights between a majority and minority unit holder. It permits a majority unit holder to require the minority unit holder to join a sale in their units under the drag along option. Under the tag along option, minority unit holders are able to join a majority unit holder in the sale of their units.

  • Deadlock resolution

This provision will outline how unit holders are to deal with situations where unit holders cannot agree on something. There are different ways to draft a deadlock provision and a lawyer will assist you in selecting the most appropriate one for your unit holder agreement.

This list only comprises a few of the things that you will need to consider in drafting a unit holder agreement. There are often more contingencies that you will need to include depending on your relationship with the other unit holders and how big the unit trust is. Our lawyers at GLG Legal will be able to assist you in drafting a unit holder agreement that is appropriate for you, your business and its interests,

Conclusion

A unit holder agreement is fundamental to any unit trust and unfortunately, are often overlooked when a unit trust is created. We urge all unit trusts to create a unit holder agreement as without one, your unit trust will have the inherent risk of not being able to resolve a disagreement between unit holders. It is important to have your unit holder agreement drafted in the early stages of your unit trust so as to avoid expensive litigation should there be disagreements already that cannot be resolved.

Our lawyers at GLG Legal have extensive experience in reviewing and drafting unit holder agreements. We are aware that not every unit trust is the same and take the time to understand the purpose and needs of your unit trust when drafting your unit holder agreement.

If you are thinking about creating a unit trust or need legal advice on a unit holder agreement, contact our office today to have one of our expert lawyers guide you through the agreement to ensure that your interests are protected.