Buying Commercial Property - Key Considerations
Buying commercial property in New Zealand often involves a more complex process than buying a residential property. It requires careful due diligence, rather than simply agreeing to a price. While commercial property can be a rewarding investment, not all buyers are equipped with the necessary knowledge to navigate the process. In this article, we set out some high-level, key considerations that a buyer should keep in mind before signing an Agreement for Sale and Purchase (“Agreement”).
BEFORE YOU SIGN
It is common practice for the seller’s real estate agent to prepare the Agreement. However, it is important to have your lawyer review the Agreement before signing, as addressing any issues beforehand is easier than doing so after the Agreement is signed, which can be more challenging.
By involving a lawyer early to review all terms and conditions, and by seeking specialist advice on matters like GST, finance, and insurance (discussed below), you can avoid costly mistakes and ensure your commercial property investment is a sound one.
Here are some of the key things to consider before you sign:
1. Form of the Agreement used
In New Zealand, commercial property sales are typically drafted using the Auckland District Law Society Incorporated (ADLS) and Real Estate Institute of New Zealand Incorporated (REINZ) forms. These are widely recognised and commonly used in property transactions, although in some cases, a bespoke agreement may be used.
2. Who is the Buyer?
Which entity will own the property? What is the most appropriate corporate structure for the proposed purchase? You should seek legal and tax advice to ensure that the purchase structure you adopt is the most beneficial one for you, both from a legal and tax perspective.
3. GST Considerations
GST is an important consideration in the purchase of commercial property. In most cases, the sale of commercial property will be zero-rated for GST, meaning no GST is payable by the buyer on the purchase price. However, if the property has mixed uses, such as residential and commercial, this could affect the GST position. You should, therefore, seek tax advice to ensure you understand the GST implications of the transaction and to confirm whether the property can be used to make taxable supplies.
4. Deposit Requirements
While deposits are often payable once the agreement is signed, it is common for buyers to request that the deposit payment be made once certain conditions have been met. Ensure you are clear on when the deposit is payable, and any conditions attached to it.
5. Lease: Is the property sold with an existing lease in place?
If so, it is important to check whether the details of the lease are accurately reflected in the agreement. Any discrepancies between what is stated in the agreement and the actual lease terms could lead to disputes after settlement. Review the agreement and the lease documents carefully to ensure the terms align with your expectations, especially if you intend to lease the property out after purchase.
6. Chattels and Fixtures
What chattels are included in the sale? It is important to establish the condition of these items and ensure there are no disputes, particularly around whether a tenant might claim ownership of them. Make sure any chattels or items of value are clearly listed in the agreement and adequately described. Often, the lease documents will include a schedule of the landlord’s or tenant’s chattels, which can be useful for determining the list of the seller’s chattels.
7. Warranties
Warranties are statements of fact about the property that the seller provides in the agreement. Common warranties include ensuring that all building work has the necessary consents and, where required, a Code of Compliance Certificate (CCC) has been obtained. If any of these warranties turn out to be untrue, you may have grounds to claim a breach of warranty against the seller.
8. Conditions of the Agreement
Most agreements will include conditions that must be met before you are required to proceed with the purchase. These conditions provide a safety net for buyers, allowing you to back out of the agreement if certain conditions are not met. Some of the most common conditions include:
- Due Diligence
The buyer should have the right to cancel the agreement if they are unsatisfied with their due diligence investigation. Due diligence investigation usually includes all matters affecting the property that are important to the buyer, such as reviewing the property’s title, LIM report, lease documents, seller’s building service contracts, such as lift contracts (if applicable), confirming there are no issues with zoning/planning restrictions. - Finance
Buyers must typically secure financing before completing the purchase. Ensure that your financing condition is clearly outlined, and give yourself enough time to arrange funding. - Insurance
The buyer may require confirmation of insurance coverage on the property. Check with your insurer to ensure that the property can be adequately insured and that the terms of the policy align with your needs. - Professional Reports
Buyers often request reports from specialists such as valuer, builder, engineer, geotechnical professionals. Depending on the type of commercial property purchased, the scope of inspection may include structural, mechanical, electrical and hydraulic items, inspection of the condition of the state of repair of electrical, plumbing, draining, gas and other fixtures, fittings, equipment connections and facilities. Ensure these reports are satisfactory, before confirming satisfaction of these conditions and proceeding with the purchase.
If you feel you could use some specialist advice, don’t hesitate to contact the Property Team.
