Tips for Successfully Purchasing Commercial Property
Purchasing a commercial property is a decision filled with opportunities and potential pitfalls, with the review and negotiation of legal documents holding the potential to make or break the experience. We take you through purchase documents, highlighting areas to look out for, empowering you to negotiate with confidence and clarity.
What is a Contract of Sale?
A contract of sale for a property purchase is a legally binding document that outlines the terms and conditions agreed upon by the buyer and seller. It includes aspects such as the purchase price, property description, deposit amount, settlement date, and any special conditions. Understanding and negotiating the documents involved with a commercial property purchase allows both parties to identify any discrepancies, ambiguities, or unfavourable terms that may need clarification or modification.
Negotiating aspects of the contract enables buyers and sellers to reach mutually agreeable terms that protect their interests and mitigate risks. Ultimately, a well-understood, carefully scrutinised, and effectively negotiated contract of sale sets the scene for a successful property transaction, minimising the potential for disputes and ensuring a smoother process for all involved parties.
Financial Considerations of a Contract of Sale
Purchase Price
In the contract of sale for a property, the purchase price is highly important, as it determines the financial terms of the transaction. It's crucial for purchasers to carefully consider this aspect, especially if a valuation comes in lower than the asking price. To reduce potential risks, purchasers can request an upfront valuation before committing to the purchase. By obtaining an independent assessment of the property's worth, buyers can ensure that they're making an informed decision and avoid potential discrepancies between the agreed-upon price and the property's actual value. This proactive approach helps protect against unexpected financial implications and provides transparency in the transaction process.
Deposit
Typically, the deposit demonstrates the buyer's commitment to the purchase and serves as a security measure for the seller. It's essential for both parties to agree upon the deposit amount, which is usually a percentage of the total purchase price, as well as the method and timing of payment.
In Queensland, the deposit can range from zero to a maximum of 10% of the purchase price of the property. The amount can be split into an initial deposit and balance deposit.
Buyers should ensure they have sufficient funds readily available to cover the deposit when it is due, as failure to do so could result in breaches of contract and potential legal ramifications.
Goods and Services Tax (GST)
In most cases, investors, individuals, developers, and businesses will be required to pay 10% GST on the purchase of commercial property. If a seller is registered for GST (or has a turnover of $75,000 per year and is required to be registered) and is running an “enterprise”, they may need to charge GST when selling property. If GST applies, the buyer usually takes on the responsibility for paying it as per the contract terms.
Sometimes, the seller can use something called the margin scheme to calculate GST for the sale. This means they only pay GST on the profit margin of the property, not on the whole sale price. It is vital to figure out early on if GST applies because it affects how much needs to be paid at settlement and the stamp duty charged on the sale.
Transfer Duty
In addition to the purchase price, you will be responsible for payment of Transfer Duty on the purchase of the commercial property. You will need to ensure that you arrange for Transfer Duty to be calculated correctly and paid in accordance with strict time limits set by the Queensland Revenue Office. If GST applies, Transfer Duty will be calculated on the purchase price + GST.
Finance
If you do not have sufficient funds to purchase a property (as is the case for most property purchasers), you’ll need to organise finance with a lender. It’s a good idea to ensure the contract is made “subject to finance approval” in case finance is not improved. If you’ve complied with the finance conditions and have not been successful with the loan application, you will be able to withdraw from the contract without penalty.
Assessing the Vendor’s Statement
The Vendor’s Statement is expected to disclose essential information regarding the property's title, including any restrictions, zoning details, and rating information. It typically includes a copy of any existing lease agreement. It’s essential to thoroughly review the statement to ensure everything is as expected, and conduct further due diligence if needed.
Title, Plan, Zoning and Building Works
The title and plan of the property must be assessed to ensure the lot lines up with the property being sold. It’s important to seek professional assistance to verify property dimensions against the title and plan. The title will also reveal information such as registered mortgages, caveats, and any planning agreements or restrictive covenants.
Be sure to review zoning and rating restrictions, ensuring compliance with all regulations. This is particularly crucial if you’re planning development or changes in property use, so you can anticipate any potential complications or requirements in advance.
Upon signing the contract, you are responsible for all property improvements. This includes structures built without permits or without final inspections by the Vendor. It’s best to uncover any unauthorised work before the property is handed over so it can be rectified at the sellers expense.
Existing Lease Agreements
When buying a property with an existing lease, it’s important to check details with an agent like how long the lease lasts, if the tenant has met their obligations, and if the property can be used as intended based on zoning rules. You’ll also need to check if the rent is fair and whether there are any special conditions in the lease. If you're thinking of modifying or developing the property, be sure to check for any rules about demolition or relocation.
Contamination Risks
Given that it’s likely any contamination will become your responsibility once the sale is finalised, it’s worth considering negotiating that the property purchase is subject to an environmental inspection report.
If there are serious contamination problems with the property you want to buy, you might like to negotiate with the seller about covering the costs to clean it up. This is called an indemnity. But remember, this agreement needs to be clearly written into the contract.
Common contaminants include asbestos, contamination of soil, paint, wood and various other fixtures.
We’re Here to Help
For expert guidance on navigating your commercial property contract, turn to Bradley & Bray. Our experienced property lawyers offer comprehensive advice on contract terms and we’re equipped to negotiate amendments on your behalf, ensuring your interests are protected every step of the way. Get in touch with Bradley and Bray today to secure the expertise you need for a successful commercial property transaction.
Disclaimer: This article is general in nature and does not constitute legal advice. If you require legal advice in relation to your personal circumstances, you must formally engage our firm, or another firm to provide legal advice in relation to your matter. Bradley & Bray lawyers take no responsibility for any use of the information provided in this article.
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