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17 September 2019

Purchasing commercial property - what you need to know

Commercial property often attracts a more sophisticated buyer. But that doesn’t mean that every buyer is equipped with the necessary knowledge to complete their due diligence. In the first of a series of articles, Partner Nick Strettell outlines what to consider before you sign an Agreement for Sale & Purchase.

Before You Sign

Quite often the drafting of an agreement for sale and purchase (“Agreement”) is completed by the seller’s (or sometimes buyer’s) real estate agent.

It is very important to have your lawyer review the terms of the Agreement before signing.  A lawyer’s input is much more valuable before the Agreement is signed rather than after. Also, it is always a better opportunity to negotiate the terms of the Agreement prior to it being signed rather than during due diligence.  By involving your lawyer early in the process you often save on legal fees compared to your lawyer helping you solve a problem later on.

It’s a cliché but SRB want to be the fence at the top of the cliff rather than the ambulance at the bottom!  Here are some of the things to be aware of before you sign an Agreement:

Form

  • The form of the Agreement will usually be the current Auckland District Law Society (ADLS) Agreement for Sale and Purchase/Real Estate Institute of New Zealand (REINZ) form. Occasionally, other bespoke versions will be used but most people are familiar with the ADLS/REINZ form.

Who is the Buyer?

  • Are you nominating another buyer to complete the purchase?  If so, the original named buyer will remain responsible for performing the Agreement terms.

GST

  • A sale of a commercial property will usually be zero rated for GST.  In other words, no GST on the purchase price will be payable by the buyer to the seller.  Sometimes the property is mixed use e.g. there could be commercial and residential parts to the property, which can affect the GST position. 
  • Specialist advice should always be sought from your accountant on GST, particularly to confirm whether the property is able to be used to make taxable supplies. 

Deposit

  • Almost all Agreements will provide for a deposit to be paid by the buyer.  This is a part-payment towards the purchase price and provides the seller with security if the buyer later fails to complete the purchase.  The deposit should be payable once all the conditions of the Agreement are satisfied.  However, sellers often prefer the deposit to be payable once you sign the Agreement. 

Lease

  • Is the property sold subject to a lease?  If so, is the lease correctly described on the front page of the Agreement or in the further terms of sale?
  • We have seen a purchase where a property was sold with vacant possession, however, there was actually a lease in place.  This meant the buyer had a nasty surprise on settlement and had to try and recover its loss from the seller for a breach of warranty under the Agreement.

Chattels

  • Are there any chattels included in the sale and what is the condition of these chattels?  Is there any dispute as to whether the tenant might claim ownership of these chattels? 

Warranties

  • Warranties are statements of fact about the property that the seller provides under the Agreement.  There are some standard warranties contained in the general terms of the ADLS/REINZ Agreement.  For example, a common warranty outlines that all building work has been consented and, where applicable, a Code of Compliance Certificate has been obtained.
  • If these statements later turn out to be untrue, you may have a claim against the seller for a breach of warranty.

Conditions

  • An Agreement will usually be conditional on certain things happening before there is an obligation to complete settlement.  When people talk about an Agreement being subject to or conditional on certain things occurring, this is what they mean. 
  • Conditions will have a date which they are due to be satisfied by and, if they are not, usually the seller or buyer will have the right to cancel the Agreement. 
  • This is advantageous for a buyer because, depending on what type of condition is included and how generously it is drafted in their favour, it can allow the buyer to cancel the Agreement after signing if they have second thoughts or are not satisfied with their due diligence. 
  • Some of the more common conditions include:
    • The buyer being satisfied after undertaking a due diligence investigation of all matters affecting the property.  This is advantageous for the buyer because it allows investigation into all aspects of the property, and other details important to the purchase (e.g. finance, structural integrity, LIM and title, resource management, leases).  This condition generally allows a buyer to cancel the Agreement without having to state a reason. 
    • The due diligence condition should only be confirmed as being satisfied after the buyer has completed the required due diligence on the property and their lawyer has reviewed the appropriate documentation.
    • The buyer arranging sufficient finance and insurance to complete the purchase.
    • The buyer’s lawyer approving the title and LIM report for the property.
    • The buyer obtaining and being satisfied with any professional reports it requires (e.g. an engineering, builder’s or geotech report) for the property.

Insurance Claims

  • If there are any insurance claims to be transferred from the seller to the buyer (assigned), there needs to be a clause in the Agreement requiring this transfer.

DISCLAIMER

The above information is of a general nature only. The information contained in this document does in no way constitute legal advice and all readers should contact a law firm for advice relating to your specific circumstances.

 

Nick Strettell

About Nick Strettell

Nick is a Partner in Saunders Robinson Brown’s Commercial Team.

View all posts by Nick Strettell