Commercial Property Due Diligence Issues

Commercial Property Due Diligence Issues

Purchasers of commercial property should undertake an exhaustive review of each potential purchase before declaring an agreement unconditional. This review should be undertaken in consultation with your lawyer, accountant, property manager, building inspector, lender, and otherwise as appropriate.

The following is a list of all matters which should be considered.

1. Tenancies

(a) Copies of all material documents and correspondence in relation to the Leases and other tenancies (if any) (ie copies of any agreements to lease, deeds of lease, subleases, carpark licences, licences, variations, renewals, together with any formal or informal documents or letters which establish any other leasing or licensing arrangement or any variation or renewal).

(b) Details of any leasing matters that still need to be documented.

(c) Whether the Tenants are in breach of any of their obligations under the Leases.

(d) All knowledge or information the Vendor may have which might cause it to believe that the Tenants may become, or are, unwilling to meet any obligations under the Leases.

(e) Information held by the Vendor in relation to the financial adequacy of the Tenants and guarantors.

(f) Details of outgoings which are not recoverable from the Tenants.

(g) The name, address and phone number of a contact person for each tenancy. It is intended that the tenants be approached by or on behalf of the Purchaser to discuss any matters relating to the leasing considered relevant by the Purchaser.

2. Construction and Certificates

(a) The certificate(s) of practical completion for the construction of the Building.

(b) Certificates received confirming the completion of all necessary remedial work required in relation to defects apparent during construction or after completion of the Building.

(c) Copies of current “as built” or “as laid out” drawings, specifications, plans and manuals applicable to the Building and the building contract for the Building.

(d) Confirmation that all maintenance retentions have been paid out and, if not, details of what remains to be paid.

(e) A detailed schedule specifying all guarantees and warranties given to the Vendor in respect of the construction of the Building and in respect of all fixtures, fittings, plant and machinery, together with confirmation as to their assignability.

(f) Confirmation that all obligations in respect of bonds to territorial authorities and other authorities have been complied with and discharged.

(g) A schedule of all building licences and permits received during construction of the Building and confirmation that those licences and permits have been fully complied with.

3. Building Condition
 
(a) Details of any:
 
(i) Structural defects or faults in the Building;
 
(ii) Outstanding repairs or maintenance to the Building of either a structural or cosmetic nature;
 
(iii) Repairs or maintenance necessitated by reason of defect in the design and construction of, or any modification of the Building; and
 
(iv) Leaks or seepage due to the Building not being watertight.
 

4. Building Act
 
(a) Copy of the compliance schedule for the Building and the latest Building warrant of fitness.
 
(b) Copies of all notices or compliance orders received by the Vendor in respect of the Building (together with details of any complaints, requisitions or requirements issued or made in respect of the Building by any governmental, regional, territorial or other relevant authority).

 
5. Plans and Operating and Building Manuals
 
(a) Copies of current “as built” and “as laid out” drawings, specifications, plans and operating and building manuals applicable to the Building (covering structural, electrical, mechanical and positioning of all fixtures and fittings).

 
6. Fixtures and Fittings
 
(a) A detailed inventory specifying all fixtures, fittings, partitions, chattels, plant and equipment belonging to the Vendor which are included in the sale (and identification of any Tenant fixtures and fittings if any).

 
7. Insurance
 
(a) A copy of the most recent insurance certificates that have been prepared by a valuer or a surveyor relating to the Building, plant and equipment.

 
8. Capital Expenditure
 
(a) Whether the Vendor is aware of any capital costs which are about to be or are likely to be incurred.
 
(b) Whether there is a sinking fund. If so, what is being paid into it and by whom? What has been paid from it and for what? Has it been audited? Full details including contributions by individual Tenants and the current balance are also to be supplied.

9. Service Contracts

(a) Copies of all service contracts presently in place and whether they are assignable.


10. Services

(a) Copies of all reports, plans and specifications obtained or held in respect of the building services (including, but not limited to, air conditioning, electrical, lighting, lifts, fire alarms, sprinklers, fire detectors, security systems and heating).


11. Security

(a) Details of all security systems for the Building.

(b) What keys and access cards (exterior, interior, lift) will be handed to the Purchaser on settlement. Are these keys and cars clearly identified? What keys and cards (if any) will not be available?


12. Litigation, Disputes and Claims

(a) Details of any existing or threatened litigation against the Vendor or against any Tenant or any other person (including litigation relating to a breach of any environmental regulations or environmental incidents or of any known circumstances which are likely to, or, could give rise to any claim, proceedings or litigation in respect of the Property or breach of any environmental regulations or the Resource Management Act 1991) and details of any claim lodged, or any potential claim the Vendor has notice or knowledge of, with the Waitangi Tribunal under the Waitangi Tribunal  Act 1975.


13. Land / Title Issues

(a) Investigation of the following items:  
  (i) a review of the title and all encumbrances for the property;

  (ii) a review of adjoining land. Amendments to the Overseas Investment regime in 2005 under the Overseas Investment Act 2005 mean if an overseas person is buying any land in New Zealand then that land and all adjoining land needs to be checked to review whether the land is, or adjoins, sensitive or special land;  

  (iii) whether any of the land or any adjoining land contains an area which is the subject of a notice of requirement for a heritage order or is a historic place, a historic area, a Wahi Tapu or a Wahi Tapu area under the Historic Places Act 1993;  

  (iv) a review of unit title/cross lease plans of the original structure against the present structure;  

  (v) a review of the District Plan and LIM, to include operative and proposed plan, zoning and permitted, controlled and discretionary activities;  

  (vi) review the possibility of altering and/or extending the use of the property to allow the purchaser’s intended use;  

  (vii) review the ability to renovate, refurbish, alter or add to existing structures;  

  (viii) physical inspection of the property including engineering reports, soil or geotechnical surveys or analysis, inspection of the structural, mechanical, electrical and hydraulic items for soundness, condition, repair and suitability of existing and proposed improvements;    

  (ix) obtain a valuation of the property;  

  (x) inspection of the condition and state of repair of electrical, plumbing, drainage, gas and other fixtures, fittings, equipment connections and facilities;  

  (xi) review the compliance of the building with resource consents and building consents, plans and specifications and the architectural standard of the building;  

  (xii) obtain information as to whether the land has been filled, is subject to land slip or is otherwise suitable or unsuitable for the purposes of the purchaser;  

  (xiii) obtain information as to whether the land is flood prone or subject to tidal inundation;  

  (xiv) inspection of the property for borer or other insect infestation or damage;  

  (xv) review of applicable environmental law issues for industrial properties;  

  (xvi) review of all licences for any business being carried on at the property;  

  (xvii) review of the ability of the purchaser to obtain finance satisfactory in all respects for funding the purchase and development;  

  (xviii) obtaining details of any breach or non-compliance with any legislation relating to building, planning, fire safety, public health, occupational health and safety in relation to buildings on the land;  

  (xix) obtain details of any public works or other designations affecting the property including:
          (aa) railway or road re-alignment, widening, siting or alteration proposal;
          (bb) identified sensitive land;  
          (cc) Maori land claims and/or Waitangi Tribunal issues/claims;
          (dd) heritage orders;  
          (ee) any parks or other planning proposals.

  (xx) obtaining details of any past, present or potential disputes with, its tenants, licensees, adjoining neighbours, local authorities or any other person, association or company in respect of the land owned or occupied;  

  (xxi) are there any restrictions on the replacement of existing buildings with a building of a similar size, type and function in the event that the building is damaged or destroyed;

  (xxii) whether sewerage connection is available and whether public drains cross the property; and

  (xxiii) details of environmental audits and assessments.

14. Sources of Information  
There are a number of reports which can help with obtaining the information required during the due diligence process. Here is a brief description of the different kinds of reports available.

Land Information Memoranda –

A LIM is now considered a basic tool to assist in deciding whether the land is worth purchasing, whether the land is free from any restrictions, as well as whether the intended use of the land is feasible.

While it is now common practice to obtain a LIM it must be remembered that a LIM may not provide all of the information the client needs to assess whether the property is suitable for its required use or, development of the property is financially feasible, further enquiries may be necessary.

A LIM will only provide information which the Council knows about the property. Often It is what the Council does not know that is important. An alteration made without a building consent will obviously not be shown on a LIM. As a lawyer we will not have inspected the property and so may not have been alerted to the fact that an alteration has been made. Also unless original building plans are obtained which may not be possible for old buildings, unauthorised alterations may not be apparent.

Application for a LIM (application forms available from Council websites) can be submitted to most Councils via post or hand delivery. Some also allow for applications to be faxed. The cost varies depending on which Council is processing the application, though most seem to be around $200.00. Some Councils provide an urgent service, which is more costly, but allows the LIM to be obtained within four hours as opposed to within ten working days for a non urgent LIM.

A LIM is a report prepared from records held by Council. A LIM provides a summary of property information as required to be included under the Local Government Official Information and Meetings Act 1987, current as at the date it is produced.

A LIM may provide the following information:  

  • special land features or characteristics including potential:  

           - Erosion
            - Avulsion (removal of land by water action)
            - Falling debris
            - Subsidence
            - Slippage
            - Alluvion (the deposition of silt from flooding)
            - Inundation (flooding)
            - Presence of hazardous contaminants which are likely to be relevant to land and is known to the Council;
            - Private and public stormwater and sewerage drains as shown in Council records;
            - Any rates owing in relation to the land;
            - Council valuation for rating purposes;
            - Official address, legal description, area of site and unit/flat number as appropriate;
            - Details of approved building, plumbing/drainage and resource planning permits and consents indicating where further action is required;

       

As required by the Building Act 2004 details are included of:  

  • Code Compliance Certificates: a final certificate of approval for building consents
  • Compliance schedule: required for certain systems or features of commercial and multi-residential properties
  • Warrant/Statement of Fitness: in conjunction with compliance schedule — issued annually to maintain compliance standard;
  • Details of dangerous goods, liquor, hairdressing and health licences
  • Details of operative and proposed zoning, road widening, height restrictions, view and tree protection, and any Historic Places Trust listing;
  • Any outstanding requisitions or notifications from Council regarding any matters on that property that do not meet Council specifications and which require action within a certain time frame;
  • Such other information concerning the land which Council considers to be relevant (at Council’s discretion).  

    

Project Information Memoranda –

 
In the Auckland City Council area a PIM can now be obtained. It is required to be issued by the Council for all building work intended to be carried out. Without the issuing of a PIM, a building consent cannot be granted for the building work.

Auckland City Council advises on its website that for major construction an application for a PIM should be made prior to the building consent application. However, if the developments are minor (eg internal alterations) the PIM and building consent can be applied for simultaneously. Any application for a building consent will automatically require the generation of a PIM.

Obtaining a PIM requires the completion of the appropriate application form (available on most Council websites, can be posted out on request). It seems the standard processing time for such an application will be within ten working days.

A PIM can also be prepared by Council on request even if the client is not applying for a building consent.

A PIM contains any information or requirements the Council has that could affect construction and including information on the following (much of which is also included in a LIM):

  • Special land features including:  
    - Erosion
    - Avulsion (removal of land by water action)
    - Falling debris
    - Subsidence
    - Slippage
    - Alluvion (the deposition of silt from flooding)
    - Inundation (flooding)
    - Presence of hazardous contaminants which are likely to be relevant to land and is known to the Council;
  • Matters notified to Council by any statutory organisation which has the power to classify land or buildings for any purpose;
  • Details of stormwater or wastewater utility systems which relate to the proposed building work, or which are adjacent to the building site;
  • Details of any authorisations under other Acts Council requires, and details of the requirements to be met in the granting of these authorisations and the conditions they will be subject to (eg resource consents required under Resource Management Act).

A PIM will also include either:  

  • Confirmation (subject to other provisions) that the building work may be carried out subject to the requirements of the building consent and subject also to all other necessary authorisations being obtained; or
  • Notification that building work may not be undertaken.

Council Property Files -

All Councils will hold a file for every property within its boundaries. The contents will differ but should contain records such as building consents, private drainage plans and swimming pool compliance. The property file may also hold information that does not appear on a LIM such as plans and correspondence. Auckland City now provides these on CD.

The property file may include:  

  • Building Compliance Schedules and Building Warrants of Fitness  

This may include details of:  

  • Inspection reports
  • Building warrant of fitness
  • Compliance schedules;

Land-Use Consents  
These may include resource consent applications, including information relevant to the development for example:  

  • Site/boundary plans
  • Floor plans
  • Building elevations
  • Structural details
  • Expert reports if these were required, for example from engineers, environmental experts;  

Building Consents  
Each building consent may include:

  • Floor plans
  • Building elevations
  • Structural details
  • Private drainage plans
  • Consent specifications and calculations
  • PIM
  • Producer statements
  • Code Compliance Certificate for the completed structure;

Health Issues
This may include details of the following:

  • Inspection reports/field notes on food premises including licence certificates
  • Other health licence certificates as are relevant for that property (eg, amusement gallery);

Liquor Licensing
This may include:

  • Licence application and proposal
  • Transfers of the licence
  • Copies of all correspondence
  • Copies of certificates;

Swimming Pool

This may include details of all pool fencing inspections and whether the pool and fencing complies with Council requirements;

General Property Documents
This may include details of:

  • Site remediation reports
  • Private drainage plans
  • Miscellaneous correspondence.

A property is made historic in Council records when a cross lease subdivision of the property occurs or new titles have been allocated. If you order the property file by CD, you will only receive documents when they pertain to the current title. Historic property information is available by viewing the file.

Neighbourhood Development Report –

This is a relatively new report and provides details of activities in the surrounding area which may have an adverse effect on the client’s enjoyment or use of the property.

A Neighbourhood Development Report will give information on the properties within a 100m radius of the site including:

  • Building consents for the past three years
  • Planning-related resource consents for the past five years
  • Sbdivision resource consents are provided for the past eight years
  • Engineering consents.

This report does not include PIMs or details of consents where work has been completed or where applications have been withdrawn.

It will include licences issued in the area for example:

  • Street trading licences
  • Liquor licences for club licences, off licences and on licences for the past three years
  • Special liquor licences for the past twelve months
  • Environmental health licences, including:
    - Amusement gallery licences
    - Brothel licences
    - Camping ground licences
    - Dangerous goods licences
    - Food premises licences
    - Food stall certificates
    - Hairdresser licences
    - Health protection licences
    - Mortuary licences.


Temporary liquor licence applications and licence applications that have been cancelled, closed, declined or withdrawn are excluded from this report.

The following maps for the area can also be obtained:

  • Contours ($20 per map)
  • Public drainage ($20 per map)
  • Special land features, including wind zones, flood plains, soil warnings, soil register and contaminated sites ($20 per map)
  • Public drainage, water services and contours, on one map ($40 per map).

15. Specific Matters for Unit Titles

A property which is part of a unit tide scheme with a Body Corporate will have other specific matters which need to be investigated and which cannot be done by a PIM, a LIM or a Neighbour Report. The disclosure statements which can be obtained from the Body Corporate only give limited information on levies and insurances.

To obtain a full overview of the status of the buildings and the Body Corporate it is necessary to review the Body Corporate records. This will give the purchaser knowledge of all matters which have come to the notice of the Body Corporate or the Committee in the past and which may be still unresolved.

The records to review of the Body Corporate include:

  • The minutes of the Owners Committee, of Annual General Meetings and any Extraordinary Meetings;
  • All resolutions that have been passed in the last two to three years and whether these have been actioned and the financial reports for the last two to three years;
  • Correspondence which may highlight matters which are on going and are unresolved for example are there any issues around any particular occupant, any structural problems which the Body Corporate has not addressed, parking issues, issues relating to rubbish and pets and other matters which can go to the purchaser’s enjoyment of the property;
  • A large complex may have lifts, swimming pools, gyms and other amenities as well as management and security services and it is recommended that it is ensured there are current and comprehensive contracts;
  • Details of all bank accounts will reveal the amounts that are being held for long term maintenance and the replacement of Body Corporate equipment and plant, major items such as lifts may need replacing in the near future or if the swimming pool may need an upgrade;
  • Review of the register of members of the Body Corporate and occupants of the complex will indicate the percentage of the complex which is leased and the names of the lessees – this in some instances will indicate to the purchaser how many absentee landlords there are. This may indicate that these owners do not have a hands on approach and may not wish to contribute to any long term maintenance plans;
  • Review long term maintenance plans, budgets for these works and detail of any sinking fund. A sinking fund is not a rainy day fund but it is for planned major long term maintenance and capital. works such as painting, roof maintenance, cleaning of the outside of the building, maintenance of common areas such as gardens, common parking areas which may need resurfacing, security doors and gates;
  • The amount of the levies – a new building may have very low levies which may attract a purchaser however it is necessary for the purchaser to consider whether these will be sufficient to maintain the asset;
  • Review details of insurances other than building insurances that are held by the Body Corporate for example public liability;
  • Check whether there are shared services, for instance there may be shared hot water, waste water and telecommunications. Have these been maintained and are there funds in place to continue the maintenance and to upgrade?

16. Other Sources
There are other sources of information which you may wish to use if the Council does not have the full range of information such as a LIM, PIM or the Neighbourhood Report Some of this can be gained from various private websites. For example Quotable Value has a website which can show you the latest Council rateable value, an indication of the sale value within a range based on similar sales in the area which have actually been finalised and information on the neighbourhood for example the nearest schools, churches, motorways, shops and an indication of zoning. This snapshot can be invaluable to alert you to any other searches or investigations that should be taken and that you should carry out.

Brandon Cullen | Partner | Albany Office

(09) 966 3609 | bcullen@mcveaghfleming.co.nz


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© McVeagh Fleming 2013

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.