When buying commercial property there's a lot of issues to consider compared to residential property. That's why in this guide we're outlining the key issues you need to consider when purchasing commercial property in Victoria.
Buying Commercial Property Guide
Click the links below to jump to the issue you're interested in or feel free to call our office to discuss your issue. We're business and property solicitors, so we're well placed to advise on how to buy commerical property.
Purpose of Purchasing Commercial Property
Why are you buying this property? This is the first question we ask our clients when buying a commercial property. Is it for your business, an investment, to develop? Your answer will shape the type of due-diligence that needs to be done.
For example, if you're buying the property for your business, you will need to look into zoning and permits. Buying a restaurant, is there a liquor licence? If you are buying as an investment, you will need to carefully review the lease agreement and tax issues. If you're buying to develop, planning schemes and contract terms are important.
Type of Commercial Property Being Bought
What type of commercial property are you buying? Again, the type of property will impact the due diligence.
For example, for retail or commercial properties, you will need to review the lease, Retail Lease Act obligations, and tenancy ledger to make sure the tenant up to date. If you're buying farmland - land surveying, water use rights, licences are issues you have to consider. Buying a warehouse? Is it in the correct zoning for the type of business you want to run or do you need to apply for a planning permit? Is it industrial? Contamination and EPA checks should be done.
Buying Entity
The entity you purchase commercial property with is important. The type of entity you buy with will impact your tax circumstances, personal risk, and what type of loans are available to you. The options available to buy commercial property are:
- Personal name
- Company
- Trust structure
- Self managed superfund (SMSF)
Each of the above have their pros and cons and we can assist you in determining what is the best entity for your buying decision or advise with your accountant.
Tax Issues
Commercial property has several tax issues you need to to consider:
- GST: Does GST apply to the purchase? And if so, is the sale going to be a going concern transaction so no GST is paid at settlement, will margin scheme apply, or is the sale going to be plus GST. If the sale is plus GST, then you'll need to pay 10% extra at settlement and stamp duty will also be assessed on the plus GST price. There are strategies that can be used here to reduce this tax or make sure you get the GST reimbursed on your BAS as soon as possible if the deal is structured correctly.
- Capital Gains Tax: Will CGT concession be available to you in the future when you sell? The entity you buy with will impact this.
- Land Tax: You'll need to budget for your annual land tax. If you buy with a trust, you may pay a surcharge land tax rate.
- Stamp duty: How much stamp duty will you need to pay or is the property stamp duty exempt? Are you eligible for any discounts, such as the regional commercial property duty discount?
- Commercial and Industrial Property Tax (CIPT): This is a new tax that exists in Victoria. If the property that you are buying has not entered into the CIPT, then 10 years after settlement you will be a new 1% tax on the property's land value. If the property has already entered the CIPT, there may not be any stamp duty payable at purchase. Our office can investigate this for you.
- Development Taxes: If you're planning to develop, there may be many different taxes you need to be aware of, such as open plan contribution taxes, GAIC, or other government contributions.
Commercial Leases
If the property is tenanted, the lease is the most important document in the entire transaction. The lease will dictate the value of the property and what has been agreed between the vendor and the current tenant.
It is important to do proper due diligence here as the purchaser is taking over all obligations in the lease. When reviewing commercial property contracts, we often find vendors fail to include all lease documentation in the sale paperwork, such as renewal or transfer of leases, variations of leases, and disclosure documents. When a lease is renewed, it’s not uncommon that the terms of the lease are changed, so you are buying blind unless you ask for them and review all items.
Generally, you should investigate the following when buying a commercial property with a lease:
- Current rent and outgoings (including what outgoings the tenant pays)
- Rent review mechanisms.
- Lease expiry and options.
- Responsibilities for maintenance and repairs.
- Whether the Retail Leases Act applies.
- Disclosure statement compliance, including proposed works nearby that may impact the property.
- Bond or bank guarantee arrangements.
- Arrears or disputes.
- Make-good obligations.
- Fitout contribution agreements.
- Rent free periods.
When buying a tenanted property it is important to review the commercial lease
Permits and Zoning
Every commercial property sits within a planning zone that controls how the land can be used. Before buying, you need to check the zoning classification and confirm whether your intended use is permitted, prohibited, or requires a planning permit.
You should also look into other practical issues like car parking requirements, noise restrictions, signage controls, and operating hours should also be considered.
Contract of Sale Terms
Before signing the contract or section 32, it is important that you carefully decide upon the terms of the deal. You should consider standard terms like the purchase price, the fixtures included in sale, settlement date, subject to finance or building inspection.
But depending on the type of property you are buying and what you plan to do with it, additional terms may be needed. For example, a subject to soil test in industrial areas. Development deals need custom payment terms, like term or option purchases. The type of terms you negotiate will depend on the property you are buying and its popularity.
Build Quality
Commercial and industrial property do not have the same warranties that residential property do. Before buying it is important that you complete a building inspection to make sure you are happy with the structure or make your contract subject to building inspection.
Commercial Loans and Guarantor Advice
Commercial property loans often have higher requirements. It's important before buying that you understand what the lending requirements are. If you are buying under a company or trust structure, lenders will often require a personal guarantee and for you to obtain legal advice on what it means to be a guarantor - we can assist with this.
Contact Us
If you need help with buying commercial property, please contact our office. We can guide you through the legal pitfalls and due diligence you need to do to make sure you make a sound investment. Please call us on 03 9708 5564 to use the contact form below.