10 Dec 2015

Commercial Buyer’s Risk

You should never buy a commercial property unless your solicitor has seen the contract. There’s too much involved. There are GST issues, there are tenancy issues, and there are a lot of things in commercial that do not relate to residential that your solicitor needs to have a look at. They need to do some searches on it as well so that what you think you’re buying is actually what you’re buying.

You may think you are buying property where it’s being rented out as a retail or food outlet for example a fish and chips shop, but the zoning is for commercial and that doesn’t befit your fish and chips shop, so suddenly you’ve got an illegal use by the council. Youcan be shut down tomorrow and you’ve got no tenants. The property is set up as a fish and chips shop so you can’t even sell it.

There’s a lot more to commercial that you do need to go through with a solicitor. Leases for commercial property must be read and checked thoroughly by your solicitor. The first right of refusal is a common clause in lease agreements. When you buy a commercial property, your tenant may have first right of refusal to buy that property. You need to make sure that this has been honored. With commercial property, you need to be very wary, because some of these details are hidden in other documents that you may not be aware of as a buyer. Apart from rights of first refusal, sometimes commercial leases are also options for tenants to buy. This actually goes above the first right of refusal. The first right of refusal is, before I sell, I’ll let you have a crack at it first, but I don’t have to sell it to you if you can’t meet my price. An option is a right, not an obligation, but the tenant can force that position. As the buyer coming in, you need to be aware of lease agreements. This is all part of your due diligence.

There was a case recently, where the air conditioner failed between exchange and settlement and there was a clause in the contract (and most contracts have this clause) that made that the buyer’s problem. If it fails due to fair wear and tear, the buyer has to wear it. In commercial property too, you’ve got to be aware of who owns the actual internal fixtures and fittings including walls. Quite often, the tenant will own the walls, and the kitchen, and the things that you would normally take for granted as part of the property. These details are all contained in lease documents that need to be read

Residential Buyer’s Risk

Residential is a little bit easier. However, there are certain clauses, like get out of jail clauses that should be considered. In New South Wales, there are different rules from the rest of the country, so your solicitor needs to be part of that process of drawing up contracts.

If you’re buying property in any other State, you can sign a contract as a buyer and you can buy that property under the conditions of that contract, and the seller cannot sell it to anybody else. When you commit to the contract then you absolutely have to buy that property after all conditions have been met. That is the process of you going unconditional on that property.

In New South Wales, that’s not the case. In New South Wales you can sign a contract on a property and the seller can still sell it to somebody else until such time as you exchange. So, that process of exchanging is where your property goes unconditional in everybody else’s terminology. During that timeframe you’ve got to arrange all your money, get your finance approved, do all your searches, do everything else, and you’re still hanging yourself out to dry because your seller can still sell it to somebody else during that time until you actually exchange contracts.

Document Risk

This is one area of risk that lawyers are more renowned for dealing with. What do I put in the contract? What conditions?

Let’s say you’ve started negotiating a deal. Now you’ve got to capture it all in writing because really that’s the essence of the deal. Verbal contracts do exist, but essentially, if it’s not in writing it’s not much good. Verbal contracts are always problematic to rely on because someone will say, “Well, I didn’t mean it that way.” “Yes, you did. I heard it that way.” If it’s in black and white, and you both sign then you are agreeing to be on the same page. At the end of the day hopefully you end up with a contract document that spells out everything, with no room for negotiation. The wording of your contract is very important if you want to cover any risk. You need to work with your lawyer to ensure all contingencies are covered to your advantage. The way to do this is to add clauses to your contract.