Purchasing a Commercial Investment Property? Have you done your due diligence?

Due diligence in respect to the property and any lease or tenancy agreement is essential prior to signing any documents for the purchase of the property.

A legal review of the contract will identify any onerous conditions and restrictions affecting the property such as easements, covenants and rights of way as well as issues relating to planning, zoning and building particulars. In this post, we take a brief look at commercial investment properties.

Due Diligence – What are some of the things you need to review?

Leases

• 1) Is there an existing lease? Is it a Retail lease or a Commercial lease (not governed by the Retail Leases Act 2013)?
• 2) What are the terms of the lease:
  • How many years is the lease for?
  • Does the lease provide for any further terms?
  • What is the rental and does it include GST?
  • Is the rent return of such a nature that it will require you as the new landlord to be registered for GST purposes?
  • What outgoings are paid by the tenant? Are all outgoings recoverable?
  • Is there a security deposit and/or personal guarantees provided? If so are they sufficient in the circumstances?
  • Does the tenant pay for the insurance of the building, plate glass and public liability?
  • Does the permitted use of the building require any additional compliance with regulations?
  • Does the permitted use of the building require a planning permit?
  • Are there any make good obligations by the tenant?
  • Does the tenant pay for any land tax applicable to the property?
  • Is there the ability for either the Tenant or the Landlord to end the lease prior to the expiry of the term (i.e. is there a demolition or redevelopment clause)?
  • What maintenance or repairs are required to be carried out by the landlord?
  • Has the Landlord complied with the procedures of the Retail Leases Act 2003?
  • Are the Lease documents current (i.e. have all documents been executed properly) and have renewals been entered into as required?
  • Has there been rent reviews calculated and applied during the term?

Under a Retail Lease, the payment of land tax cannot be passed onto the tenant and the owner is responsible for such payment.

Other aspects of a commercial site to consider would be:

• Is the property in a shopping strip which has more vacancies rather than tenancies?
• Is the tenant competing against other similar tenancies in the vicinity?
• Is the tenant sustainable?
• Parking – is there customer parking available? Is it part of the freehold Title?
• What is the current state of repair of the building? Will the roof need replacement, exterior painted, windows replaced, etc? You may inherent landlord repair obligations which could be very expensive if the property is in a poor condition.
• Are there any covenants or easements registered on title which have an impact on the property? Has there been any breach for which, you as the new owner, will be liable?
• If a gross return on Lease – what are the outgoings (rates, taxes, etc)? You should be careful of gross leases when there is a potential for substantial increases in land tax or rates if the value of the property has increased significantly recently.
• What is the “track record” of the tenant in terms of rental payments, defaults and the like?
• Are there any proposed developments nearby which may affect the property or impact on whether you can tenant the property in the future?
• Location and whether any roads or highways are planned in surrounding areas which may affect the value of the property or the potential foot traffic to the property.
• Are there contamination issues?
• What is the zoning of the property and is the planning controls or zoning likely to change in the near future?

If you are purchasing the site for development potential there are a range of further issues which need to be reviewed which we will deal with in a later post.

Goods and services tax

There are also GST implications to consider when acquiring a commercial property. Whilst a purchase of a “second hand” residential dwelling is input taxed and does not attract GST, the acquisition of a commercial property will have GST ramifications and any purchasing entity which is not yet registered for GST will need to consider their GST status as part of the transaction. In relation to the purchase of a vacant non-residential site, GST is usually payable (at 10% of the purchase price). Naturally, if the purchasing entity is registered for GST it can then claim back the GST component of the price after settlement. If the commercial property is leased and both the vendor and the purchaser are registered for GST, the parties can agree that the transaction constitutes the sale of a going concern, in which case no GST will be applicable. However, the issue of GST must be worded carefully and be dealt with in the contract for sale.

For more information, please contact a member of our Property Law team.