Make sure you get your house in order first (and by “house” we mean commercial property)
November 20, 2018
If you own commercial property in New South Wales and are thinking about selling, there are various legal matters that you must properly address to make sure that the transaction is not delayed or derailed.
A potential purchaser of a commercial property will usually do some form of due diligence. At a bare minimum this will include a review of any tenant’s lease.
In our experience, one of the most common “deal breakers” for a potential purchaser is issues that arise from leases being deficient. This is because the leases will bind the purchaser as the new landlord.
If a tenancy has been poorly managed, or the terms and conditions of the lease do not support the purchaser’s commercial objectives, there is a real risk that the purchaser will not proceed (or demand a substantial discount).
The easiest way to avoid unnecessary negotiations and ensure the best sale price for your property is to ensure that your house is in order. That is, ensure your lease is in order and there are no outstanding tenant issues before putting your property to market so that a purchaser will be easily satisfied with their investigations.
It is best to start updating your commercial and retail leases as early as possible. Leaving it to the last minute can lead to unnecessary (and significant) increases in complexity and costs.
Of course, trying to leave it all for the purchaser to deal with can lead to a deal falling through or a price well below what a seller would expect. This is because many purchasers will simply not take the risk (and time and money) to deal with problematic leases.
What are some key issues to look for?
You should have all of your leases properly reviewed to check that the grant of the lease complies with all legal requirements.
This includes ensuring that all leases have been properly executed by all parties in accordance with the law and have been registered on the title of the property (if required). This may include ensuring that mortgagee consent was obtained prior to registration.
It is not uncommon for an unregistered lease to significantly delay settlement which can be a very real issue when a vendor has made plans to use the money it is due to receive.
Do you have a Retail Lease?
You need to ask this question even if you believe you do not have a retail lease in place.
The Retail Leases Act 1994 (RL Act) imposes a significant number of terms between landlords and tenants and may render void the terms of any lease for a “retail shop” that is inconsistent with RL Act.
The RL Act has a fairly expanded definition of a “retail shop” and is commonly viewed as being designed to strongly protect retail tenants.
Accordingly, it is important to ensure that if you do have a retail lease that these fully comply with the RL Act.
It is particularly important that any prospective retail shop tenant is not given possession of the premises until they have agreed to the terms and conditions of a written lease and have been provided with the disclosures set out in a Lessor’s Disclosure Statement prior to entering into the lease.
A landlord is required by law to provide these documents to the prospective tenant. Failure to include relevant information in the disclosure can deprive the landlord of important protections and impede the landlord from undertaking works in respect of the property that the terms of the lease might otherwise permit.
For example, a failure to disclose a contemplated redevelopment of the property can jeopardise the landlord’s plans.
Are planning consents in place?
Another important issue for purchasers will be that all tenants have the appropriate planning consents in place for the permitted use of the premises under the lease. A potential purchaser will also want to ensure that there were the appropriate permissions for any works that the tenants may have carried out.
Purchasers will want to check that such works were carried out in accordance with the relevant building code and all relevant occupation certificates obtained were obtained.
For many purchasers, if their investigations are not satisfactory, they will simply not be willing to take the risk of dealing with these issues in the future and may not proceed with the acquisition.
Quality of tenants
Some purchasers will be looking at a commercial property to knock down and develop.
However, for many purchasers (and even developers who want to give themselves some time) an important factor will be the rental income stream from tenants.
That is, purchasers will want to check that tenants have a satisfactory record of paying their rent, outgoings and other costs under the lease on time and otherwise complying with the provisions of the lease.
A vendor should ensure that their records are kept up to date so that any enquiries from a purchaser can be promptly and efficiently answered.
A landlord should always make sure that tenants comply with their leases. For example, a landlord should make sure that the tenant does not undertake works without planning approvals.
Even relatively simple matters can seriously impair the value of a property. A relatively common example is a tenant who carries out the installation of substantial solar panels and batteries on the roof of a building without consent or structural engineering reports. A purchaser will not only be wary about buying a building with unapproved and non-compliant works but the landowner’s building insurance may also be compromised.
Terms and conditions of the lease
A property owner should make sure that the terms of any property lease are commercial and give flexibility to any future purchaser.
If the terms and conditions of a lease overly restrict a landlord this may adversely impact on the value of the property and/or the appeal of the property to a potential purchaser.
For example, if the objective of a potential purchaser is to redevelop the property, then the sale may fall through if the property is subject to a long term lease without a clause permitting early termination for redevelopment.
A number of the issues for potential purchasers can be completely avoided if landlords carefully manage their leases up front. Simply dotting your “Is” and crossing your “Ts” can avoid complexity and cost in the future.
Of course, these matters should be dealt with well and truly prior to marketing the property for sale to avoid the risk of a sale falling through.
This article only provides a snapshot into the importance of leases in the sale of commercial property. If you are considering selling your commercial property at some point in the future and have any questions about the state of your current leases, please get in touch with us.
This article is intended to provide general information in summary form on a legal topic, current at the time of publication. The contents do not constitute legal advice and should not be relied on as such. Formal legal advice should be sought in specific circumstances.