Commercial Property Due Diligence
1. Certificate of Tile
1.1. Identify land.
1.2. Obtain current title search.
1.3. Check for any previously unknown interests.
1.4. Obtain and review all documents evidencing: easements, caveats, restrictive covenants, notifications, memorials or other encumbrances.
1.5. Request details of any unregistered interests, including car parking arrangements, if any, particularly with local authorities or adjoining owners.
1.6. Get clause 42 Certificate under Metropolitan Region Scheme – check zoning. 1.7. Check with local authority as to any restrictions on land.
2. Restrictions on sale
2.1. Confirm that there are no options granted to third parties.
2.2. Confirm that there are no pre-emptive rights in favour of tenants.
2.3. Confirm that there are no other restrictions in leases likely to affect the sale, or the purchaser's capacity to operate or expand the building.
2.4. Ensure that your key staff are secure in their employment (as best as possible) whilst at the same time not usually advising of any proposed sale until it is a known fact (i.e. just before settlement).
3.1. Locate all lease documents.
3.2. Review signed* lease documents including:
3.3. Extension and assignment documents
3.4. Dates of expiry/exercise of options to renew
3.5. Confirm WAPC approvals were granted prior to entry into lease and endorsed on the lease where necessary.
3.6. Confirm that there are no ‘first rights of refusal’ to purchase.
3.7. Obtain details of any bonds/deposits/bank guarantees held.
3.8. Obtain details of fit-out.
3.9. Details of tenant’s paint and repair obligations.
3.10. Check details of any caveats lodged - leasehold interests.
3.11. Check details of any special access arrangements.
3.12. Check for any tenants that are in arrears.
3.13. Check if there is a car parking licence.
3.14. Prepare a tenancy schedule setting out all of the above information.
3.15. Check GST position in leases – long term leases may not have GST provisions allowing recovery of GST from tenant. This can have significant ramifications for purchaser.
4.1. Maintenance agreements
- Review all contracts including in respect of the following:
- Physical maintenance
- Neon signs
- Background music
- Check assignment provisions and expiry date of these contracts.
- Prepare a schedule with the relevant details of the maintenance contracts.
- Check that owner has certification as to safety facilities (Worksafe requirements).
- Check for any special arrangements with Western Power and/or Alinta Gas.
4.3. Rates and tax adjustments
- Confirm what has been paid and what is required to be paid.
4.4. Business Names / Trade marks
- Confirm whether building name is a registered business name (note: registered trade mark is best).
- Check to see whether the building name, if it is used by tenants, is covered by the lease.
- Check signage rights in respect of building. There can be complications for a purchaser if the signage rights conflict with the purchaser's requirements for signage.
- Confirm details of current insurances.
- Check that insurances conform with lease requirements.
- Ask for details of any current insurance claims.
- Title insurance?
4.6. Tax Issues
- For depreciable items, ask for estimate of proposed written down value. Depreciation can be very important for a purchaser.
- GST – consider whether the sale is a sale of a going concern or whether the property will be sold under the margin scheme.
4.7. How Much Funds do you Need?
- Confirm what chattels (e.g. premises plant & equipment), fixtures and fittings will be included in the sale – conduct a Personal Property Securities Act encumbrance check on the PPSR.
- Obtain proof of ownership of chattels if necessary.
5.1. If an identification survey exists, is it current and can the purchaser rely on it?
5.2. Consider whether a new identification survey should be completed.
5.3. Obtain copies of all plans and specifications held by the vendor.
5.4. Boundary (note: watch for ‘adverse possession’ with old fences/ dividing walls, shed etc).
5.5. Consider whether there are any known or suspected encroachments.
5.6. Consider also undertaking a Property Interest Report from Landgate to identify any unregistered interest that may affect the use of the property.
5.7. State of the property
5.8. For recent buildings:
- Is the ‘benefit’ of the building contract (e.g. structural warranties) to be passed on to the purchaser?
- Confirm appropriate certificates for the local authority and DFES have been issued.
5.9. Building and structural report.
5.10. Confirm that no asbestos or ‘concrete cancer’ exists.
5.11. Consider the need for an environmental audit (e.g. Contaminated Sites Act issues).
5.12. Consider whether any other obvious physical defects should be reviewed by engineers or other experts.
5.13. Review any consultant's report for liability issues.
5.14. Ask for "as-built" drawings to assist the purchaser's inspection of the property.
5.15. Plant and machinery
- Ask for:
- Plant and machinery permits and certificates
- Warranties and operational manuals
5.16. Ask whether any major maintenance or structural repairs are planned for the sale period and the source of the funds to pay for it.
5.17. Review any consultant's inspection reports for liability issues.
6. Planning, licensing and environment
6.1. Current zoning and use
- Conduct the usual purchaser's inquiries with local authority, WAPC, etc.
- Confirm current zoning and that the use/uses conform with that zoning with the local authority and the WAPC.
- Review compliance of the property with original and any recent planning consents/building approvals, especially lettable area limits and car parking requirements.
6.2. Work Orders
- Check whether any work orders exist (i.e. local authority, DFES, DEP or Worksafe WA).
- Enquire of Water Corporation, Main Roads, local authority, Western Power and Alinta Gas if any major works are planned.
6.3. Liquor Licensing
- Check if any premises in the building has a liquor licence.
- Obtain a copy of the liquor licence and approved plans.
- Conduct enquiries with the licensing authority – (e.g. disciplinary action, outstanding works orders etc)
- Search DEP databases and recent environmental assessments.
- Obtain permission from vendor to conduct environmental testing if required.
6.5. Heritage and Aboriginal Heritage
- Conduct searches of:
- Local Government Municipal Inventory;
- Heritage Council Register;
- Register of the National Estate (Australia Heritage Commission);
- Fifth schedule of the City of Perth Planning scheme for National Trust of Australia listing;
- Department of Indigenous Affairs Register of significant sites and objects;
- Aboriginal Lands Trust Estate website.
- Obtain permission of vendor to conduct heritage assessment if necessary.
- Review any heritage assessment and reports and advise clients.
- Ensure that all plans for the building (e.g. electrical, construction etc) are available. These are essential for a purchaser.
6.7. Water Issues
- Does the purchaser require water to be drawn from a water course or interference with a water course?
- Are ‘riparian rights’ (to draw water) integral to the value of the property?
- Is there an existing water licence?
- Should the contract be subject to the Department of Water undertaking to grant the appropriate water licence?
- Performing the Sale Agreement
7. Other Enquiries
7.1. Conduct ASIC, PPSR and court registry searches (including bankruptcy register).
8. Status of tenants and other contracting parties
8.1. Conduct ASIC, PPSR and court registry searches (including bankruptcy register) of major and other relevant parties.
9. How to avoid unnecessary legal risk, cost and stress
9.1. Don’t rely on friends, ‘mates’, agents or other non-qualified third parties for “advice”. They:
- Do not act for you,
- Do not owe you no fiduciary duty; and
- Are not qualified (or insured!) to give you proper legal advice.
9.2. Engage a lawyer at the right time – e.g. you do the deal but before you accept a contract, be sure to obtain appropriate legal advice.
9.3. Business lawyers can add value and can be better than warranty/insurance claims or litigation!
9.4. If a dispute arises, be sure to clarify the issues in writing, keep all material information/documents and seek advice early (also, if applicable, promptly notify your relevant insurer – rights of subrogation).
10. Seek professional, friendly legal advice so you can make an informed decision.
For further information contact Murfett Legal by emailing one of the following directors:
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Jason De Silva (Director): [email protected]
Kelly Parker (Director): [email protected]
Peter Broun (Director): [email protected]
Author: Peter Broun
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