Commercial and Industrial Property Purchases - Due Diligence
We act for a substantial number of commercial and industrial property owners. Every month we are acting on the purchase of commercial and industrial properties from small single tenant retail investments through to industrial warehouses and inner city high rise office blocks with multiple tenants. Each one brings with it its own set of special circumstances and potential pitfalls for purchasers.
Invariably the base document in common use for both commercial and industrial purchases is the ubiquitous Auckland District Law Society (ADLS) property agreement also used for residential property albeit with significant modifications.
A problem facing prospective purchasers is the need to carry out comprehensive investigations on a range of matters before being committed to proceeding with the purchase. This can entail significant professional fees and the commitment of time which purchasers may be reluctant to incur without the comfort of a signed contract. The solution is what is known as a due diligence condition.
Due diligence conditions give purchasers the comfort of a signed contract with time to carry out a range of investigations on matters relevant to their purchase decision. What is relevant in each case will depend on the property and the purchaser.
For a particular industrial purchase due diligence may, for example, include the state of yards, roofing, the presence of asbestos and the mechanical condition of roller doors. For a particular office block due diligence may include elevators, air-conditioning and building services.
Earthquake ratings and earthquake strengthening can be very important as some prospective tenants, particularly government departments and some big corporates, will not tenant buildings which are below certain National Building Standard (“NBS”) rating levels. Structural inspections by an engineer and reports may be required.
For tenanted buildings a review of lease documentation is critical. We specialise in legal due diligence including title and lease review. We are able to tell from a review of a lease whether it is in acceptable form or if it has any unusual provisions such as break clauses (entitling tenant early termination), unusual constraints on rent reviews, additional landlord commitments to future works, responsibility for exterior or yard maintenance, special tenant signage entitlements, unlimited use restrictions, obligations that may constrain leasing of adjoining premises. We can pick up the “flashing light” in a lease from the extensive lease preparation work we do for clients.
Part of due diligence will include obtaining or reviewing a local authority Land Information Memorandum (“LIM”) which includes the consented history of works on the property and whether or not there are any extant Code Compliance Certificates in respect of consented works. Due diligence will also include checking that all necessary Building Warrants of Fitness are in place.
Due Diligence conditions are usually expected and accepted by Vendors. It is common for their agents, particularly on higher value properties, to set up a password protected online data room containing reports, LIM, copy leases and other relevant material. It is also common for agents to prepare detailed Property Information Memorandums including detail such as tenancy schedules.
Due Diligence conditions can also have a real benefit for vendors. They can limit the warranties they need to give with the purchaser instead being reliant on their own investigations and judgement for their purchase decision.
We work closely with our commercial and industrial property purchaser clients not only during due diligence but, as importantly, in making sure that the purchase contract contains a suitably worded due diligence condition and any other necessary conditions.
If you are considering a commercial or industrial property purchase David Butler and Sam Walker would be happy to have a no obligation chat with you.