So, you’ve decided to invest in commercial property? It can be lucrative but it’s not without its pitfalls.
Don’t get caught out when it comes to completing a thorough due diligence. As with buying residential property, pre-sale checks are critical but there’s also additional information you’ll need to acquire when considering a commercial property investment.
Make sure you include a strong due diligence clause in any sale and purchase agreement you enter into.
Checks and balances are vital, but they can take time. Talk to your lawyer to ensure the agreement allows plenty of time to carry out a thorough due diligence so you can be confident about progressing with the deal, or being able to back out cleanly if things don’t stack up.
Basic checks include understanding what the zoning in the district plan allows. Will the permitted uses for the commercial property allow you to achieve what you want?
Find out what the property is currently being used for, and by whom. You’ll want to look at any leases or licences of the property and make sure you understand the obligations in them.
As with carrying out any due diligence on a residential building, the property’s title and Land Information Memorandum (LIM) should be reviewed carefully. Again, talk to your lawyer about the merits of seeking a building report and checking any building warrant of fitness requirements.
Putting commercial property on the market
There’s a bit more to selling commercial property than meets the eye. If you’re putting any commercial property on the market, you will be giving ‘warranties’ to the buyer and, in essence, guaranteeing certain aspects of the building – for up to a decade! That’s a long time to be potentially liable, so make sure everything stacks up and all the boxes are ticked.
Before you start the sale process, get all the appropriate consents for any building works that have ever been carried out and, where applicable, resource consent for activities carried out on the premises. Most commercial buildings need to have an annual ‘warrant of fitness’ and there could even be elements of the building that require a compliance schedule.
Don’t forget your tenants in the midst of all of this either. If you’re putting your property up for sale, keep your tenants in the loop, as any sale could potentially affect their business. And if checks and viewings are being carried out, be mindful that you can’t just have viewers dropping in on them whenever it suits.
A common (but avoidable) situation when it comes to commercial property transactions is the treatment of GST in the sale and purchase agreement.
We urge you to tread carefully. If you’re the seller and your entity that owns the land and buildings is GST-registered, run the agreement past your lawyer and accountant. Getting it wrong could have major consequences and be expensive.
Many people overlook the front page of the sale and purchase agreement, which states whether the purchase price is inclusive or exclusive of GST.
Depending on who is GST-registered, the parties may want different GST selections. For example, if the purchaser is not GST-registered, and the agreement is inclusive of GST, then you will have to pay GST out of that purchase price. If the agreement is GST exclusive, the purchaser will need to pay GST on top of the purchase price to you.
Ensuring the right GST selection is made is an important element of negotiating the agreement. We suggest having your lawyer and accountant involved in the early stages of the sale.
When both parties are GST-registered, the sale is zero-rated; that means no GST is payable. But beware, the parties’ GST status can change between signing the agreement and settlement.
As with any property transactions, there can be potential traps. Whether you’re a buyer or a seller, the best thing you can do, is do your homework. Make sure everything at your end is in order and, most of all, get expert advice from a lawyer and an accountant from the outset.