When you sell your commercial property the prospective purchasers will do some due diligence investigations before exchanging contracts. You should get ahead of the pack with some good preparation to make that job as easy for them as you can.
When it comes to preparing your contract for sale you should give your property lawyer the proper documents to attach to the contract to help your prospective purchasers feel comfortable that they are making a good investment. These documents may include: –
You don’t have to have a contract prepared in advance when you are selling a commercial property as you must if you are selling a residential property. But it makes a lot of sense to do so. Having a contract for sale ready allows you to get contracts exchanged quickly after reaching agreement on price. It reduces the time in which the purchaser could notice another property that they might buy instead of yours.
Your property lawyer or conveyancer will probably use the standard NSW Law Society contract for sale of land and add some special conditions. Your property lawyer or conveyancer might take the “kitchen sink” approach to special conditions and use every one he or she has ever heard of (regardless of whether it is relevant to your commercial property or your circumstances). This approach can be off-putting to purchasers and lead to protracted negotiations which could cause you to lose your sale. Ask your lawyer to explain them all to you and then you decide if they should be in the contract or not.
These must be attached to the contract for sale. If they need to be registered, ensure that they are, and then attach copies of the registered documents to the contract. Don’t attach un-signed or half signed copies, or worse, just parts of copies. You want to show prospective purchasers that you have been professional in your approach.
If any of the tenancies in your building are governed by the Retail Leases Act, then you should have served disclosure statements on the tenants before entering into the leases. If any of the retail leases have been transferred to new tenants, then the new tenants should have been served with an Assignor’s Disclosure Statement. Find them and consider attaching them to the contract for sale. Hopefully they have been fully signed. If they haven’t been fully signed, consider putting an explanation in the contract.
All contracts include a list of potential inclusions and exclusions but when you’re selling your commercial property the issue can be more complicated because your purchaser is going to want to know whether your fixtures and fittings are mixed up with those owned by the tenants. Your commercial leases will also have inventories, but they can get outdated, particularly in the case of long-term tenants and tenants who occupied the property before you purchased it. In any case you should get ownership of fixtures and fittings sorted out before your commercial property goes on the market so that you reduce the risk of a time-consuming argument about it that could put exchange of contracts at risk.
An identification survey will show your prospective purchasers where the improvements on the land are located relative to the boundaries. It will disclose setbacks and whether there are any encroachments. If there are encroachments, then you might try to get the problem sorted out before the property is put on the market because no purchaser wants to buy in to a dispute over encroachments with their neighbours.
These are important indications to the purchasers that there are no illegal structures on the property and that everything was built in accordance with approved plans and that all the conditions were met.
Attaching copies of the development consents and conditions will show the prospective purchasers that the Council (or relevant consent authority) approved the improvements at the property. They will also list any conditions of the approvals (some of which might impose ongoing obligations on the building owner).
Your tenants may have been required by law to obtain consent for the particular use to which they are putting your property. The lease you granted to the tenant almost certainly imposes an obligation on the tenant to obtain all relevant consents. Your prospective purchasers may wish to know this has been done but talk to your property lawyer or conveyancer before you talk to your tenant about this.
The owners of certain classes of buildings are required by law to engage a consultant to inspect the building annually and serve Fire Safety Statements on the local council and sometimes on the Fire Brigade. If you haven’t been doing this then you need to check whether your building is exempt or not, and either get it in order or have answers for all the questions you might get from prospective purchasers.
Owners of commercial properties often make the incorrect assumption that the terms of the leases they grant to their tenants will pass liability for proper OH&S management to their tenants. This is certainly not true for common areas in commercial properties and may not even be true for the areas inside the separate premises. Your building manager may provide you with annual reports on compliance with OH&S. If so then they should have them ready for prospective purchasers to see and you may talk to your property lawyer or conveyancer about attaching copies to the contract for sale.
You should resolve the question of whether you or your tenants are liable for arranging inspections for hazardous materials and the proper management and reporting. Regardless of where those liabilities lie in your particular case, you still need to be able to convincingly field questions from prospective purchasers as to whether the building contains hazardous materials. You will improve your chances of a successful sale of your commercial property if you are properly prepared and can make appropriate disclosures in the contract for sale.
You will have your building insured against certain risks. Landlords normally check with their insurance brokers from time to time that they have appropriate cover. Your insurer can give you a “certificate of currency” for your policies which you may then attach to your contract for sale. On completion of your sale the purchaser will have to get their own insurance but having a certificate of currency for your insurance attached to the contract may help indicate to them that you take a professional approach to managing the building. Prospective purchasers may wish to know about your history of claims so you might have that ready as well.
The leases you have with your tenants in your commercial property will almost certainly require that the tenants hold certain insurance cover. They also highly likely provide that your tenants have to give you evidence that the policies are up-to-date whenever you requested. It makes sense to get certificates of currency from your tenants and attach copies to the contract for sale of your commercial property. That way your purchasers know that they don’t have to do the chasing when they own the property.
A sensible purchaser of a commercial property will not want to let him or herself get into a situation where they might have to refund a security deposit to a tenant where the purchaser didn’t actually receive the security deposit or it didn’t come into their control. When you have the contract for sale of your commercial property prepared you need to work out where all the security deposits are, exactly how much they are (including accrued interest), whether they are in the form of bank guarantees and whether they are held by the NSW Small Business Commissioner (which will be the case for leases under the Retail Leases Act).
If the sale price of your commercial property is $750,000 or more then you must arrange to have ATO clearance certificates for each vendor served on the purchaser before completion. An efficient way to minimise the risk of any oversights or complications is to obtain the clearance certificates at the time of preparing the contract and attach copies to the contract so that they are deemed to be served on exchange. Give your property lawyer or conveyancer full details of the building owners (whether it is individuals, a company, a trust, a self-managed super fund, et cetera), their residency status, their citizenship status and the country in which they lodge tax returns, as well as their tax file numbers. Instruct your property lawyer or conveyancer to attach the clearance certificates to the contract and avoid the problems that can arise if you leave service until after exchange. Also having them in the contract for sale gives the prospective purchasers a better impression.
Your commercial property will attract an annual land tax liability if its unimproved capital value as determined by the Registrar General to be above the applicable threshold amount. In any case the contract for sale of your commercial property must include a land tax certificate. Your property lawyer or conveyancer will tell you what information he or she needs to apply for the land tax certificate and if the property is owned by individuals then one of those things will be their birthdates.
If your commercial property includes premises housing retail food outlets, commercial laundries, photographic laboratories, automotive industries, et cetera, then make sure you have the relevant approvals in place and attach copies to the contract for sale. If the approvals are conditional on periodic inspections, then you should also attach to the contract for sale the most recent certificates confirming the inspections.
Your commercial property may contain lifts, air-conditioning plant, roller doors, fire safety plant, back to base of alarm systems, stormwater pumps, et cetera. You may have entered into contracts with third parties for servicing, maintenance and repairs. You should locate those contracts and if necessary, get them up to date. You should just discuss with your property lawyer or conveyancer whether it would be appropriate to attach copies to the draft contract. If you had plans from when the services were installed, then you should locate those plans and have them available to prospective purchasers. It would be unusual if they needed to be attached to the draft contract.
It is not uncommon to find that a commercial property is located on land that is zoned for some other purpose. For example, a service station may be on land that is zoned “Residential”. Prospective purchasers will be very concerned if this is the case however it should not present any particular obstacle as long as you can show that the current use has continued for an unbroken period commencing prior to the most recent zoning changes. You may have to seek evidence (such as statutory declarations) from previous owners, neighbours, et cetera, that there has been that unbroken period of usage. Some councils maintain a register of existing use rights.
The proper use of “specific disclosure clauses” in your contract may overcome all sorts of potential problems that could turn off a prospective purchaser. Examples of problems that might be the subject of specific disclosure clauses include building defects, non-approved works, impending special levies, outstanding orders, informal arrangements with neighbours, et cetera. Some problems with a commercial property constitute a “defect in title” while others are simply “defects in quality”. In any case, if you include a clause in the contract stating that the problem exists and stating that the purchaser will not refuse to complete the purchase or claim compensation then generally prospective purchasers will not be off put by this. Failing to clearly state that problems exist and staying silent about defects (or worse still trying to hide it) can lead to major disputes. Generally, the earlier a prospective purchaser learns about problems in the property the less concerned they will be particularly if you have voluntarily disclosed it.
Purchasers of commercial properties are not buying somewhere to live, and they are not buying a lifestyle. They are most likely going to take a very businesslike approach so they should have some hard questions for you. Consider the above items so that you are prepared.
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