Commercial property is an asset class that can provide good returns if you buy at the right time, in the right place, and can instal good tenants.
It’s also a considerable investment, however, and for this reason it pays to do proper due diligence on any commercial property before you commit your money to a final settlement.
Due diligence comprises in-depth investigations on a range of pertinent issues so that you can make a decision on purchasing the property with confidence that it is not encumbered or burdened with problems that may reduce your expected return on investment.
Specialist commercial legal professionals can be invaluable during this process, helping you identify the right questions to ask and sourcing the right documents to answer those questions.
What sort of issues are addressed by due diligence?
A comprehensive due diligence process encompasses research and investigations into technical, legal, financial, planning, environment and risk management issues around the asset.
This process might begin with a series of questions such as whether the property is located in an area prone to natural disasters; whether any previous use of the land has resulted in contamination; whether the property is properly connected to water, sewage and power; whether any permits or licences are needed in order to build on or otherwise use the land; and whether there are any cultural or environmental covenants over the land.
Specialist building consultants will often be engaged by people purchasing highly valued commercial property to compile a technical report that assesses the building façade and walls (external and internal), roof and guttering, ramps and stairs, entry lobbies, floors and floor finishes (carpets, tiling, etc.), ceilings, stairways and amenities such as kitchenettes.
This report will generally also provide detail on a commercial structure’s mechanical and electrical systems such as lifts, escalators, switchboards and airconditioning, as well as fire protection systems, water supply, sewerage and stormwater systems.
It’s also important for a would-be purchaser to be fully cognisant of all planning and environment issues pertinent to the property. This may involve reviewing current zoning and height restrictions, original occupation and development certificates, fire safety statements, environmental or heritage assessments, and any existing contamination issues such as asbestos, for example.
What type of financial and legal issues are involved?
The potential purchaser of a commercial property needs to be fully aware of current rental market conditions if the property is untenanted.
If it is already leased, due diligence will involve assessing the current lease arrangements. This will require sourcing the lease document (from either the current owner or even the tenant) to review its terms, including:
- lease expiry dates and options to renew, including how and when rent is reviewed;
- planning approvals granted prior to entry into the lease;
- presence of any restrictions within the lease agreement that could affect the sale or the capacity to expand the building, or on certain uses;
- details of any bonds/deposits/bank guarantees held;
- details of arrangements regarding maintenance and repair (who pays for what, etc.);
- details of any caveats lodged;
- whether the tenant/s are in arrears;
- details of any issues regarding the premises raised by the tenant;
- what insurances does the tenant have in place and has the tenant paid all required premiums;
- whether GST is being charged – long-term leases may not include this provision, affecting the purchase decision.
Legal professionals experienced in commercial property transactions can conduct the investigations outlined above on behalf of the prospective purchaser.
They will also check off other common legal issues around commercial property, such as signage rights; the terms of existing maintenance contracts (for example, cleaning, mechanical systems); check details of current insurance policies; discover any unregistered interests such as car parking arrangements; conduct ASIC and court registry searches (including bankruptcy register) on existing tenants; and review all documents for details on easements, caveats, restrictive covenants, notifications, memorials or other encumbrances.
While the due diligence process may require the cooperation and assistance of the vendor, the onus is on the purchaser to conduct their own investigations. They may be legally exposed should they purchase and later discover something that would have been uncovered during a more thorough due diligence process.
How we can help
South Geldard Lawyers, we have many years experience in conducting due diligence for clients wishing to purchase commercial property.
We can condense the various reports mentioned above into one document, including those of any external consultants, valuers or market analysts, to assist you to make the most informed decision possible on committing to the property.
It is important to seek specific advice regarding your circumstances as this fact sheet provides general information only and does not constitute legal advice.