Once a buyer has made the decision to commit to the purchase of a commercial property there are a number of important steps to take during the settlement and post-settlement phases.
Settlement of commercial property generally takes longer than the typical 30-day settlement period for residential properties because of there are considerably more issues involved in handover – from financing and due diligence, to reviewing existing leases on the property and other documents associated with the asset.
We’ll take a closer look at some of these formalities in this article which our commercial property legal experts at PD Law have ample experience and expertise in.
The due diligence process
Once the contract to purchase has been agreed to between seller and buyer, we’ll provide you with a purchase pack that contains all key documentation including the contract.
It’s always advisable for due diligence to be made a condition of the contract so that the buyer can conduct more extensive checks to make sure the property will be commercially viable.
Searches on council rates, zoning and business use approvals for the site, building and pest inspection reports, equipment testing reports (air-conditioning, fire prevention, etc) as well as lease inquiries and whether the property is within or comprises a body corporate, are examples of the information a buyer should be in possession of before the deal is complete. Additionally, a land tax search and obtainment of a land tax clearance certificate is necessary to determine whether this impost is owing on the property and whether it needs to be accounted for in the settlement price.
Due diligence provides an opportunity for the buyer to terminate the contract and have the deposit refunded if the information produced is not to their satisfaction.
Leases and service contracts
One of the most important issues to deal with during the settlement process is reviewing any existing lease or leases entered into by the previous owner, as well as service contracts. It is crucial that one of our experts at PD Law, for example, review such lease agreements as part of the due diligence process or as a condition of the contract to ensure they do not contain clauses which create onerous or unusual obligations for the new landlord.
The items scheduled in a typical commercial property contract in Queensland will provide for disclosure of any leases, including the name of the tenant, the lease term, whether there are any options for the tenant to extend the lease, the rent payable and the use of the property by the tenant.
It’s important for the buyer to create diary reminders of the important dates applicable to the lease, such as expiry or when options for renewal are activated.
The seller is required to give a copy of all leases, as well as a statement it has done so, to the buyer after the contract is signed. The buyer has seven days to terminate the contract if they are not satisfied with the terms and conditions of any lease. If the buyer does not terminate the contract, they are bound by the disclosed leases, after completion of the contract.
The buyer is entitled to terminate the contract at any time before settlement, even if the contract is unconditional, if information in the lease schedule – such as the amount of rent to be paid by the tenant or the period of the lease, for example – is incorrect.
Additionally, a seller cannot – without the consent of the buyer – accept a surrender of lease, grant a new lease, vary an existing lease, assign an existing lease, or negotiate or set new rent in breach of the contract.
If the tenant had paid rent in advance to the seller, the sale price of the property will be reduced by the outstanding amount. If the tenant is in arrears, the seller has the responsibility for retrieving the outstanding amount from the tenant after settlement. The seller also provides the buyer with a Notice of Attornment which the buyer gives to the tenant after settlement, confirming sale of the property and directing the tenant to pay future rent to the new owner.
If the property is subject to any service contracts (for maintenance and cleaning, for example), the terms and conditions of those contracts should also be reviewed as part of the due diligence process with the costs considered in the overall market value of the property.
Getting other documentation in order
An important aspect of the settlement period is ensuring all document relating to the property are reviewed. These documents include the building’s certificate of occupancy (formerly certificate of classification, providing information about the building’s class; how the building can be used; ongoing maintenance requirements; fire safety; other special requirements), the building’s plans and drawings, documents to manage tax (such as depreciation) and lease documents (as discussed above).
Depending on the business structure used to buy the commercial property (partnership, company, trust, etc) a buyer should also update their will to reflect the significance of the asset and provide certainty to beneficiaries about how it will be handled if something happens to the owner.
The buyer should contact their financier one month after registration to obtain a registration confirmation certificate. If a financier was used for the purchase, the buyer’s legal representative can send this once received.
Rely on expert advice
At PD Law seeing through commercial property transactions to completion is a specialty of our legal professionals. From an initial discussion about the risks involved in investing in the commercial asset through the contract, settlement, and post-settlement considerations addressed in this article, we can help streamline the process for the would-be commercial property owner. Contact us today to talk through your commercial property investment.