What Developers should look for in a Vendor Statement
We often are asked to review contracts of sale and vendor statements for developers looking to purchase development sites.
The Vendor Statement in particular is often the starting point for a developer’s due diligence enquiries and it is critical that developers understand what they are looking for and how it may impact their decision to acquire the property, how it will impact their plans for development and what issues need to be negotiated with the vendor.
Some key issues which we often need to advise developers on are as follows:
Title Issues
It seems like an obvious question, however, it is surprising how often there can be question marks around whether a vendor in fact has the power to sell. This may be to do with a number of factors such as family law issues, deceased estate issues contractual issues, bankruptcy issues.
Ultimately, a developer needs to consider whether any of these issues will affect the vendors ability to pass on clear title to them if they buy the property.
Use issues
Similarly, there may be a number of other legal restrictions which affect a title which may not affect the developers ability to acquire the property but may have a significant impact on how a developer can use the property.
Restrictive covenants may exist on the title of a property which may restrict the use of the property. In certain areas, there are often covenants which restrict the ability of an owner to subdivide the property or build more than one building on the land. Whilst these covenants may be removed, the process of doing so may be prohibitively expensive.
Are their restrictions on the depth of development? Many properties have depth limitations and this may inhibit the construction of things like basements or underground car parks.
There may also be easements on the land which allow third parties, rights of access or carriageway which may also affect what parts of the land can be built on and what parts of the land may require permission to build over. Drainage and sewerage easements are a common example where permission is required from the water authority to build over such easements.
Council planning instruments will also always be a key factor for developers to consider. Zoning restrictions may inhibit certain sorts of development from occurring and whilst planning laws are constantly changing and developing a prudent developer needs to assess carefully whether their vision for their development will be reasonably accepted by the council and the local residents without significant objection.
Lease issues
Leases over development property can be a blessing and a curse. They can be a blessing insofar as they can provide income to a developer pending the preparatory stages of development, however they can be a curse if there are difficulties in being able to bring leases to an end without causing undue delay to a development.
Particularly, where there are commercial leases in place, it is important to check:
- When the leases expire, whether there are any options for renewal;
- If the leases are retail leases governed by the Retail Leases Act 2003, whether in cases where the length of a lease is below the minimum 5 years and if so whether waiver certificates have been obtained by the vendor, noting that in the absence of the same the tenant may be entitled to a full five year lease;
- Whether the lease contains any early termination clauses such as demolition clauses and what the terms of the same are (eg. do they provide for compensation to the tenant which may become a liability for the incoming purchaser);
- Is the developer entitled to the going concern exemption? Are all parts of the property let out and or do some need to be actively marketed for letting in order for the going concern exemption to apply?
Environmental issues
What has been the prior use of the property and are there any environmental issues as a result? Remediating contaminated land can be costly both in time and money. Does there need to be testing carried out to ascertain the risk?
Is the property at risk of pest infestation, flooding or bushfire? Are there special building requirements as a result?
Is the property subject to future development projects by the government which may affect the zoning or which may make the property subject to compulsory acquisition?
Building Issues
Does the condition of the building present any risk to a developer? Most contracts of sale provide for the risk of any building notices to fall on the purchaser as and from the day of sale.
Does the state of the building affect a purchaser’s ability to insure?
Is any aspect of the existing building affected by heritage restrictions and if so how will that affect the development?
Is the property subject to an owners corporation? If so will the developer obtain sufficient control of the owners corporation to enable it to carry out its plans?
The above are just some of the considerations and issues we have been asked to advised developers on in the context of reviewing vendor statements. In most cases depending on the answers to the above queries, special conditions will need to be negotiated in order to protect a purchasing developer’s interests.
Should you be a developer needing assistance in relation to the acquisition of a development site, we recommend that you speak to one of our property and construction team.
