Commercial property: doing your dues
23 Nov 2017
By Ben King, Senior Solicitor, Aspiring Law
Making the leap from investing in residential housing to commercial property can be very lucrative – and exciting – but if you’re planning to move into this space, be sure you don’t get caught out by the differences in completing your due diligence.
Pre-sale checks are just as important as if you were buying in the residential market; however, there is additional information you should be gathering and considering when contemplating buying a commercial property. One of the first pieces of fundamental advice I give to commercial property investors is to ensure there is a solid due diligence clause in any sale and purchase agreement.
While newcomers to the market, for the most part, understand that checks and balances are vital, first-time buyers can be taken by surprise at just how long those investigations can actually take. You want to be in the position of having agreed a commercially-sound price that fits your budget, but have consulted with your lawyer to ensure the agreement allows plenty of time to carry out thorough due diligence, so you can finalise the deal with confidence – or back out cleanly if things don’t stack up.
Basic checks include understand what the zoning in the District Plan allows – and, are the permitted uses compatible with your vision? You’ll also need to find out what the property is currently used for, and by whom. Just as with completing due diligence on a residential building, the property’s title and Land Information Memorandum (LIM) need to be carefully reviewed. You’ll also want to speak to your legal adviser about the merits of seeking a building report, and explore any lease agreements you might be buying into with current tenants.
If you’re putting your commercial property on the market, you need to get your house in order, too. As with a residential sale, you will be giving “warranties” to the buyer, guaranteeing certain aspects of the building for up to a decade. That’s a long time to be potentially liable.
Before you start the sale process, have you obtained appropriate consents for any building works that have been done, and, where applicable, do you have resource consent for activities being undertaken on the premises? Most commercial buildings are required to have an annual warrant of fitness, and there may be elements of the building that require a compliance schedule.
Don’t forget your tenants amidst the sales process. Keep them in the loop, as any sale potentially affects their business, and, if checks and viewings are necessary, stay mindful you can’t just have people bowling in whenever it suits.
One of the most common, but avoidable, nightmares that can come out of a commercial transaction is the treatment of GST. If you’re the seller and your entity that owns the land and buildings is GST registered, tread very warily and don’t commit until you’ve run it past your lawyer and accountant. Getting it wrong can have major – and expensive – ramifications.
If a purchaser is not GST registered at settlement, and the vendor is GST registered, the purchase price will usually be increased by 15% for GST. If both parties are registered, GST is zero rated, so neither the purchaser nor the vendor pays GST. If the agreement records the purchase price as inclusive of GST (if any) on the basis that both parties are registered for GST, thinking the transaction will be zero rated, the purchaser can nominate a non-registered party to complete settlement. Under this scenario, the vendor would have to pay GST to the IRD out of the purchase price – essentially losing out. So be wary of a purchaser who insists on a contract that records a purchase price that includes GST.
Just as in residential transactions, there are plenty of potential traps. Whether you’re a buyer or a seller, the best insurance is always completing thorough homework, ensuring everything on your side of the fence is in order, and taking good legal and accounting advice from the outset.