Buying a commercial property is an important decision with significant financial consequences. If you are considering buying a commercial property, it is vital that investigations about the property are carried out so that you can make an informed decision regarding the prospective purchase and in order to protect your potential investment.
Legal due diligence should be carried about by a lawyer who is experienced in the purchase and sale of commercial property.
In this article we look at commercial transactions and the legal due diligence issues you need to be aware of when purchasing a commercial property.
Why undertake legal due diligence?
Due diligence is the process of verifying all statements and facts about a property you are considering purchasing.
The purpose of due diligence is to arm a buyer with as much information about the property as possible to enable an informed decision to be made about the commercial viability of entering into the contract of sale. For example, whether the property can be used for its intended purpose (such as developing the site or achieving an income stream from leases) and/or whether there are any existing problems with the property.
Due diligence is not a simple process and can take weeks or a few months to finalise.
When should due diligence be carried out
There are 2 options as to when to carry out due diligence:
- before an offer is made to purchase a property; or
- after an agreement for sale is reached.
There are a number of downsides to performing due diligence before an offer is made to purchase a property. For example, carrying out due diligence can be a costly process and if it is performed before a deal is reached, there is the potential for those costs to have been wasted. A buyer will also formulate his or her purchase price offer based on the findings coming out of the due diligence process, which can put that buyer at an advantage over other buyers who have not undertaken their due diligence.
The more usual course is for a buyer to reach an agreement with the seller that the contract is subject to the buyer being satisfied with its due diligence inquiries, to be performed within a specified period of time. This allows the buyer time to conduct searches and:
- renegotiate the purchase price of the property if any impediments are found; or
- terminate the contract if the outcome of the enquiries are not satisfactory.
Searches and investigations
Set out below or some common searches and investigations which are likely to be carried out during the legal due diligence process:
- main roads: to determine if there are any plans for road works affecting the property.
- rates and water search: to ascertain when rates have been paid and to obtain a water meter reading.
- title search: to confirm the seller is the registered owner and whether there are any encumbrances on the property.
- company search: if the seller is a company, to ascertain whether there are any charges over assets of the company or if a receiver or liquidator has been appointed.
- contaminated land register: to ensure the property is not recorded as contaminated.
Conclusion
When conducting due diligence on a commercial property a thorough legal and technical due diligence process should be undertaken with the assistance of specialist legal and technical consultants experienced in the process.
Although legal due diligence can be a costly and time consuming process, it is a vital step when purchasing a commercial property to ensure that you are entering into a sale contract fully informed.
If you or someone you know wants more information or needs help or advice, please contact us on 02 9790 7000 or email [email protected].