Buying or selling a commercial property requires considerations additional to those necessary for residential property transactions.
Whilst the conveyancing process is similar, there will usually be more complex contract terms and additional documents to review.
Due diligence requirements need to be specifically tailored to the unique features of the property and the parties’ respective circumstances.
Commercial property includes retail outlets, office space, industrial buildings, factories and warehouses.
Contract for sale
The contract and disclosure statement are the governing legal documents for a property purchase. The contract is typically prepared by or on behalf of the seller and will set out the essential terms and conditions of sale. It includes a description of the property, the purchase price, a list of fixture or fittings included in the sale and the completion date.
In a commercial transaction, the contract provisions will be unique to the property and are usually negotiated between the parties.
The contract must correctly identify the buyer and seller of the property which may be an individual, partnership, corporate entity, trust, or any combination of these. Your lawyer will ensure that the appropriate searches are conducted to correctly identify the parties you are dealing with and to ensure their capacity to enter and complete the transaction.
Buyers should consult with their financial advisor from a tax management and asset protection perspective, to ensure the most appropriate purchasing entity is used to enter a commercial property transaction.
Significant stamp duty and capital gains tax implications may arise if it is decided that a different entity should have purchased the property subsequent to completion.
Disclosure and due diligence
Sellers must provide a statement to a prospective buyer which sets out prescribed information about the property including details of mortgages, covenants, easements, zoning and outgoings. The information included in the statement depends on the type of property sold.
There are various additional searches and enquiries necessary during a commercial property conveyance including rates and water searches, company searches (if the buyer or seller is a corporate entity), contaminated land searches and land tax searches.
The location and permitted use of a property play a key role in the success of a commercial investment. Consequently, a buyer should invest in appropriate searches and enquiries, particularly with local council and planning authorities, to ensure the capacity of the property for its intended and future use.
Obviously, a multi-use property will provide more options and sustainability as will properties located within proximity of transport and other infrastructure.
Unlike residential property transactions, the buyer of a commercial property has no cooling-off rights so these issues must be addressed before exchanging contracts.
Existing tenancies
Many commercial properties will be sold with existing tenancies. This means that the rights and obligations under a present lease are transferred from the seller to the buyer on completion. The buyer’s representative will need to ensure that the buyer is aware of the terms of the lease and that key dates are noted.
The terms of the lease and the tenant’s reputation for the timely payment of rent and maintenance of the property should be carefully scrutinised as they may impact upon the viability of the investment.
On settlement, adjustments are made between the buyer and seller for rent and outgoings payable under the lease and the existing tenants will be directed to make future payments to the buyer.
Goods and Services Tax
Generally, the sale and purchase of commercial premises attracts GST which is imposed where a seller is registered or required to be registered for GST and is conducting an enterprise.
A buyer registered for GST may claim the GST component in the next business activity statement but must be aware of the obligation to pay any GST up front.
There are some exemptions to the application of GST on a commercial property, such as the sale of a property which is part of a going concern.
It is imperative that buyers and sellers obtain sound financial and legal advice on the effect of GST on commercial property transactions as this will have significant implications.
Engaging competent professionals when buying or selling a commercial property will ensure that the parties meet the legislative requirements and that the appropriate enquiries and processes are adopted to facilitate a smooth transaction.
We encourage clients to contact their financial and legal advisors when contemplating their sale or purchase to ensure that the necessary steps are in place, and the timing appropriate, before the property is placed on the market or contracts entered.