Conduct due diligence when buying a commercial property

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Over the years many clients have questioned why I insist on them carrying out due diligence when buying commercial property either for an investment or to occupy themselves to run their business from.

What is due diligence?

In simple terms it is an investigation, audit, or review performed to confirm the facts of a matter under consideration before entering a proposed transaction with another party. It can cover various types of due diligence such as financial, legal, regulatory operational to name a few.

What due diligence should you carry out when considering buying a commercial property? 

Outlined below are some of the issues we always discuss with our clients:

Architectural & Structural issues

This could involve engaging building consultants to assess the structure, parking, boundaries.

Mechanical & Electrical aspects

This may require the examination of the existing plant and electrical services things such as lifts, switchboard etc. The review should ensure compliance with the relevant standards in place and identify any issue that my or must require repair or upgrading.

Then, their report will assess how well it all complies with Building Code of Australia (BCA) and Australian standards, and also comment on any corrective measures needing to be undertaken, in order to rectify any non-compliance.

Hydraulics & Fire protection

It is important to make sure if you intend leasing the premises or occupying it yourself that you comply with the various legal requirements in the relevant area the building is located in.

Financial and Legal

It is important to make yourself aware fo the current market conditions if the property is occupied or not to consider the level of return as against the investment.

If there is a lease in place, due diligence will involve assessing the current lease arrangements with a view to review the terms, including:

  • any restrictions within the lease agreement that could affect the sale or the capacity on certain uses
  • bonds/deposits/bank guarantees held
  • details of arrangements regarding maintenance and repair and who is responsible for paying what?
  • details of any caveats lodged
  • have the tenants being paying their rent on time?
  • outstanding issues regarding the premises raised by the tenant and whether they have been resolved
  • planning approvals granted prior to entry into the lease
  • relevant expiry dates and options to renew, including how and when rent is reviewed
  • what insurances does the tenant have in place and are they up to date
  • whether GST is being charged – long-term leases may not include this provision, affecting the purchase decision.

There are also a number of searches which may have to be carried such as:

  • company searches if the seller is a company, to ascertain whether there are any charges over assets of the company including if a receiver or liquidator has been appointed
  • contaminated land register
  • main roads to determine if there are any plans for road works affecting the property or that could affect it in the future
  • rates and water searches to ensure they have been paid and they are up to date rather than getting a surprise at settlement or even after settlement
  • title searches to confirm the actual seller is the registered owner and whether there are any encumbrances on the property which could affect any plans to occupy or future plans

How can we help with your due diligence?

The matters outline briefly in this article are just some of the problems that a purchase may encounter when purchasing a commercial property.

Our team has nearly a hundred years combined experience in acting for buyers right through from small commercial premises, both free standing and in community titles schemes right through to large properties worth tens of millions of dollars to occupy, lease out or with a view to future development. 

Contact our team today to discuss your needs.

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