Consider these five tips before entering into an agreement.
1. Finance Approval
Any agreement for sale and purchase that you enter into should be subject to you obtaining finance approval from your bank. You must ensure you have sufficient time in respect of the finance condition to achieve this.
We have started to see banks become more strict in respect to lending on property in general. Borrowers are being asked to provide registered valuations and seismic strength reports on commercial buildings as part of the banks' lending conditions, before finance is approved. In order to ensure you have sufficient time to achieve the banks' requirements we recommend inserting a due diligence clause into your purchase agreement in addition to the finance condition.
2. Building Report
A commercial property is a significant investment and ensuring that the property has no hidden defects is essential. A building report executed by a qualified builder with specific commercial property experience is recommended. Even if there are no hidden defects, the building report will highlight potential future required expenditure and allow you to budget for the same when you take ownership of the property.
3. LIM Report
A LIM report will, amongst other things, confirm whether the property has consents for all its building work, what zoning it has and whether your intended use of the property is a permitted activity.
The LIM will also determine whether the building has a current Building Warrant of Fitness – this is a statement supplied by a building owner, confirming that the systems (eg features of a building that give ease of exit or access, escape from fire, and other safety aspects) for their building have been maintained and checked in accordance with Council requirements for the previous 12 months, and that they will continue to perform as required.
We recommend that you purchase a LIM directly from the Council rather than relying on one provided by the vendor or the vendor's agent. This way, if it later transpires the local authority made a mistake with the LIM, you are more likely to have a cause of action against the local authority than if you rely on a LIM not specifically provided to you.
4. Unit Titles
It is common for commercial buildings to be incorporated in a Stratum in Freehold Title ("Unit Title"). If the building is held on a Unit Title, then there will be Unit Titles Act 2010 considerations to take into account. Essentially, you, as the new owner will become part of the body corporate. The body corporate together makes decisions that affect the whole of the complex. You will have to pay body corporate levies which go towards the maintenance of any common property, administration fees and insurance premiums. It is essential you are comfortable with the body corporate processes and fees.
5. Commercial Tenants - Leases
Before committing to the purchase of a tenanted commercial property, you should review all the lease documentation, obtain confirmation from the vendor that the terms of the lease are being met by the tenant and confirm there are no rental or outgoings (OPEX) arrears.
Summary
Commercial property investment differs from investing in residential property and even an experienced investor should undertake thorough due diligence prior to purchasing. At McVeagh Fleming we have the experience and expertise to assist you with all your commercial property needs.
For further information please contact Kate Chivers on (09) 415 4477 (kchivers@mcveaghfleming.co.nz)
© McVeagh Fleming 2018
This article is published for general information purposes only. Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice. If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.
