Legal advice for a commercial property transaction can make or break a successful investment deal, writes Law Graduate and Senior Paralegal, Andrea McGarry.
High stakes, commercial property transactions require a confident grasp of property law – including contract, taxation and local government law – and an eye for potential risks.
Poor legal advice in this area or a lack of legal advice can lead to serious litigious, tax and financial problems for purchasers.
To shield your commercial investment from the pitfalls, it is critical to get expert legal advice before you sign a purchasing contract.
Business and Commercial Senior Paralegal, Andrea McGarry, discusses seven risks buyers must be aware of before purchasing a commercial property.
The Purchasing Entity – who is the buyer?
Commercial property includes industrial land, buildings or units, office spaces, retail land and buildings, strata titles and shops.
Before you make an offer on a commercial property you should obtain accounting and legal advice in relation to the purchasing entity.
A purchasing entity can be an individual, individuals in partnerships, companies, trustees of a trust (both personal and corporate), Superannuation Funds or a combination of entities.
Entities raise complex legal issues and should not be thrown in at the last minute.
The consequences of using the wrong entity in a Contract can result in additional stamp duty, land tax liability, Capital Gains Tax (CGT) or potentially losing the property.
For example, a trust receives a 50% CGT discount after 12-months, while a company doesn’t.
An entity cannot be changed after a contract has been signed unless the parties agree to terminate the existing Contract and to enter into a new one.
Some agents think that writing ‘or nominee’ can solve this problem – it doesn’t.
The Contract for Sale – has to be right before you sign!
A Contract for Sale of commercial property is unlike a standard residential Conveyancing Contract.
Commercial property purchase Contracts contain standard printed conditions often varied by ‘Special Conditions’.
The Contract for Sale is usually prepared by a Seller’s solicitors or the agent or broker involved in the sale.
In Queensland, all parties should be aware that an agent or broker are not allowed to draft Special Conditions.
Section 24(1) of the Queensland Legal Profession Act 2007 prohibits a person from engaging in legal practice unless they are an Australian Legal Practitioner, and therefore, only a solicitor is qualified to draft Special Conditions.
A raft of issues are routinely applicable to Commercial property Special Conditions depending on the property involved.
For example, if buying an industrial unit, its proposed business use must be permitted by local council and the body corporate.
Commonly, self-represented Purchasers find errors or terms they do not understand in their contract after it’s too late.
Contracts which do not reflect the full terms of an agreement because Special Conditions are poorly drafted cause serious legal and financial problems.
It’s important all terms of a Contract are explained to you by an experienced commercial solicitor, prior to you signing a commercial property purchase Contract.
Existing property leases
Purchasers are bound by any existing leases entered into by a seller and tenant, and as disclosed in a Contract.
Sometimes a lease can be registered on the title to a property with options to extend that lease.
If your commercial property purchase has a lease, it is crucial to have it reviewed prior to signing the Contract, or to have the Contract conditional upon your review.
Leases contain a number of provisions which can affect the Purchaser, such as incentive clauses, and first right of refusal clauses.
A first right of refusal gives the lessee the first option to buy the property, and unless the lessee has not accepted his or her right to purchase, you may not be able to buy the property.
Leases can be registered on title as a means of securing the tenants interest in the property, particularly if they are tenant for 3 years or more.
Unregistered leases cause the most problems. Some tenants can claim owners have agreed to various conditions which have not been properly documented.
There may also be expired or terminated leases still appearing on the title of the property.
The removal of these lapsed interests requires the assistance of an experienced commercial property lawyer.
Due Diligence and proper searches
Due diligence is critical in all commercial property transactions.
A due diligence clause in a Contract will allow you to search and make inquiries with various bodies about a property, to ensure its commercial viability.
Council searches (for rates, zoning and business use approvals), lease inquiries and, if a property is within or comprises a body corporate, an inspection of the body corporate records are possible
A Land Tax search is mandatory to ensure there is no outstanding land tax owing on the property or to determine what amount, if any, can be adjusted on settlement.
Failure to obtain a land tax clearance certificate can result in outstanding land taxes being transferred to you as the new property owner.
Goods and Services Tax (GST)
The disastrous results not having being properly dealt with GST in a Contract is highlighted in the A&A Property Developers Pty Ltd case:-
In A&A Property Developers Pty Ltd v MCCA Asset Management Ltd the seller believed the purchase price was $2.9 million plus GST whilst the buyer believed the purchase price was $2.9 million including GST. This was a Victorian case and the appropriate box dealing with GST in the contract was not completed. The Contract therefore only read “$2.9 million GST” and the amount payable was therefore ambiguous. The Court had to look at all events, emails and correspondence leading up to the execution of the Contract and ultimately found the parties intended the purchase price to be exclusive of GST and the buyer was required to pay $2.9 million plus GST (a differential of $290,000.00).
Expert legal advice about GST is invaluable and can save you from expensive and stressful litigation.
Is the property sold as a ‘Going Concern’
Generally, if you sell commercial property you will be liable for GST on the sale.
However, if a Lease is part of the sale of a property, the sale of the property may qualify as a ‘going concern’, and you will not be liable for GST.
For the going concern principle to apply, both the Seller and Buyer must be registered for GST and must agree the sale will be a supply of a ‘going concern’, before a contract is signed.
There are some limitations to this principal.
Sellers must also keep in mind they bear the risk of paying GST if the Australian Tax Office challenge it.
Attwood Marshall Lawyers strongly recommend GST recovery clauses be inserted in a Contract.
Capital Gains Tax (CGT)
Purchasers must be aware of Capital Gains Tax (CGT) when they buy or sell commercial property.
CGT is worked out by taking the gross sale proceeds and deducting the cost base (the sum of the original cost of the property plus incidental costs).
Provided a property has been held for more than 12 months, the amount of a capital gain can be discounted by 50% for individuals and trusts, or 33 and a 1/3% for some superannuation funds.
It is vital you seek accounting advice and keep record of costs and expenses for an ultimate tax position that can be verified to the Australian Taxation Office.
The varying structure and uses of commercial property means no two transactions are alike.
Get expert legal advice before you sign a property contract to save yourself from the risks of a poorly executed commercial property deal.