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When looking at a property for the first time for any potential sale, lease, or purchase situation it pays to have a detailed and questioning mind. This is the first article in a special series of three in which we will cover some major matters of review and concern that you can look at.
Your target in the review process of a commercial property is to identify key issues that affect property operation, the current cash flow, the future of the investment, and the elements of risk either known or expected.
As to how you do this and how deeply you look at these matters will really relate to the way you are acting on the property, so in this paper we will open up to a comprehensive list of many things. You can adjust as appropriate depending on your property role and who you are acting for.
So to achieve this analysis, the property is broken up into the main elements of:
Each of the above categories has many subsets of concern, review, and focus. Given that each property is different and diverse you need to be open to seeing and questioning everything. This check list below will help you on that.
In all respects of property review and detail gathering, always keep your notes of your findings and date your conversations clearly. It is surprising how important this becomes when clients and customers later change their mind or memory of an event or discussion. It is not unusual to go to court over a dispute with or between clients and customers to a transaction. The only thing that can really support you well is your notes taken at the time of the event and your proven diligence to the process.
In this the first of the three articles, we will concentrate on legal matters. The detail below is in no particular order but the categories are quite important.
- Building Approvals and Permits: You need to know if the current use of the building is compliant with the building approvals and permits originally issued and or later updated for the premises and site. If necessary consult the local council or planning authority and get copies of the relevant documentation. Approval plans and guidelines frequently change over the years and supplementary documentation may have issued.
- Contractual Conditions: Every contract or potential contract will have terms and conditions that impact the deal and the sale or settlement. It pays to consider the impact of these and how they can or will work as the sale progresses. Monitoring the timing of these conditions and the compliance of the parties involved is essential. Do not leave these matters just to a solicitor acting for the client; keep involved and work with the appropriate legal people to ensure momentum and clear direction.
- Covenants and Restrictions: Covenants and restrictions can exist on a property in many ways including leases, property usage, plans, deeds of agreement, licences, notices, orders, zoning, and title registered matters.
- Development Approvals and Permits: You need to know if the current use or activity on the property is compliant with the development approvals and permits issued for the property. Be aware that these approvals and permits may have a time expiry for compliance and completion. Visiting the local council planning authority will help you with this awareness. You can also seek the assistance of a qualified town planner to assist.
- Easements and Encroachments: In all property cases you need to obtain a copy of the survey plan for the boundaries and question any potential discrepancy or encroachment. As part of that process, you should question the client regards any boundary disputes or arrangements with neighbouring properties. Should any matters exist you should get copy of relevant documentation. This includes any registered easements or encumbrances on the title. Best practice in this regard would involve walking the boundaries of the property with the property owner and taking photographs of relevant areas. If possible, look for the survey pegs at the corners of the property (this is possible in properties recently surveyed). If there is any question relating to boundaries, it is best to get a surveyor involved to identify the boundary points.
- Environmental listing: The local councils in your area will have a variety of environmental impact statements, plans, and registers of properties that they consider are of environmental concern. Identifying these matters and obtaining the full relevant detail is essential to the property use and fact finding process. Environmental matters may be local to the property you are handling (for example a tank or storage device on site) or in the general precinct (such as a river or creek).
- Essential services and compliance: The essential services to a building are originally planned and approved as part of the building design and construction process. These essential services need to be regularly maintained to achieve ongoing compliance of property occupancy set by the standards authority. The essential services include matters relating to fire safety, occupancy safety, and building usage. Contractors are employed by the property owner to administer the matters of ongoing compliance to the standards. In doing this, the contractor’s record their activities on log books and registers which become part of the risk management and insurance monitoring process for the property. In all matters of property sale and a due diligence, these log books and registers become discoverable. For this reason, it is wise to question the existing property owner to ensure that their selected contractor is undertaking the necessary compliance activity over the essential services in the building. If in doubt, recommend that the building owner sources an engineer to check these matters.
- Insurances: Every property is unique and special when it comes to the needs of insurance. Importantly every property should be suitably covered by insurance when it comes to matters of sale and settlement. Your main concerns would be to ensure that the parties involved in the transaction both understand the need to ensure their interest in the property as it proceeds between contract and settlement. Given your involvement as an agent or broker on the property, you should also enquire of the property owner regards the public liability coverage that exists currently and that it covers you whilst you inspect the property with interested parties.
- Leases and licences: commercial properties that are run as investments will have a variety of leases and licences that record occupancy detail. It is also possible that a casual occupancy without lease documentation can exist. Importantly you need to understand the matters of occupancy for each tenant and how they are achieved. Copy of all occupancy documentation is essential. In many locations, leases and or licences may need to be registered on the title to be enforceable or to comply with legislation. Generally speaking, leases are used for the recording of exclusive occupancy and the usage of particular space by a tenant. Licences on the other hand are used for the non exclusive use of other areas by the tenant such as storage, signage, car parks, and roof antennas.
- Deeds: These are the documents of agreement that exist between parties. They can be agreements with tenants, property neighbours, or any other interested party. In most cases, deeds of agreement are not registered on any property title and yet they can have significant impact on the sale of the property. Commonly deeds are also used to record incentives as they apply to lease or tenant occupancy. Always ask about the existence of the deeds and seek a copy of such. In many cases it is necessary to have the deed discharged or paid out prior to any property sale. This is therefore a cost to the client. The client’s solicitor should be consulted about the matter of a deed and how it can be handled.
- Litigation: Matters of litigation over a commercial property are common. They can involve matters of damage, risk, arrears, members of the public, or tenant noncompliance. In some circumstances the litigation can continue for years even after a property has been sold and settled. For this reason you need question the client on the current matters of litigation and any current dispute matters that could evolve in that direction. If the magnitude of the litigation is significant and severe, it is best to involve the client’s solicitor in any decisions or discussions involving the litigation and the impact that it can have on the future disposal or sale of the property.
- Local Authority Notices: The local council or the local planning authority may at any time serve a notice on the property or the property owner seeking compliance on matters of concern or infringement. Most commonly this relates to boundaries, structural, environmental, and heritage matters. It can also involve matters of occupational health and safety. Any such notice will normally need to be satisfied and discharged prior to any sale. The complexity and cost of doing this should be directed to the client with their solicitor or accountants to give guidance.
- Management contracts: the management of a property may be contacted to a property management or facility management group. The processes of management need to be understood and the termination of the contract of management similarly so. It can be that the termination process of the management group will have some mechanism, time, or cost component that the client must address. When the termination of a management or facility management contact is to occur, the handing over of all records and complete disclosure is essential to ongoing property stability and function.
- Native Title and or Heritage Listing: You want to know if the property is free from native title and or heritage claims. Today there is great awareness and acceptance of matters relating to native title and heritage in the community. This then impacts on all types of property and in all regions. Fortunately local councils and planning authorities will normally have registers that detail the properties that come under either matter. Sensitivity is needed with any property so listed. Essentially these mattes can impact on if and how any changes can occur to the property. Both of these lead to controls, approvals, costs and processes. Each location and council will have its own way of handling these things. You can consult with the local planning authority to understand the impact that these generate if your property is listed or is likely to be listed on the registers. When a property is listed and you expect that it will impact on the property transaction or event in which you are involved, it pays to bring in architects, engineers, town planners, and quantity surveyors to provide expert advice.
- Occupancy Permits and Certificates: Each property when it is constructed is done so to an approved plan. When the construction is completed, the property is inspected by the planning authority to ensure that full compliance has been achieved to the approved plan. In that case a certificate of occupancy (or similar named document) is then issued to the property owner. The certificate will say what can and will occur on the property as part of ongoing occupancy. The property can then be leased to tenants and occupied on that basis into the future. If a property becomes unsafe, unhealthy, or changes significantly for any reason outside of the original approval guidelines, then the certificate of occupancy can be withdrawn at any time. A notice can then be issued by the planning authority to rectify a discrepancy. As you would imagine this immediately effects the ability of the landlord to lease or occupy the premises with tenants. This will then shut down cash flow from rental in an immediate way. It is not unusual for occupancy certificates to be withdrawn from a property when the local planning authority becomes concerned about an event or condition of the property. As buildings get older and in a lesser state of occupiable condition, or after a disaster such as earthquake, fire, or flood, the problem of the certificate of occupancy can evolve. For these reasons you should ask the property owner about the matter and any threats or orders of such occurring. Older buildings should be a natural trigger for the questioning process.
- Occupational Health and Safety: A commercial building is generally a workplace of tenants and businesses. Current building codes will require that the building comply with Occupational Health and Safety matters and standards as they apply to the particular property type and the approvals as originally granted to the property. To achieve the ongoing compliance it is necessary for the building owner to undertake regular inspections and maintenance of equipment and then to also keep log books of that activity. Specialised contractors do this work for the property owner. Importantly when you list or inspect a property you should ask about any outstanding notices relating to occupational health and safety matters. If such notices do exist then it is advisable to get a full update on the situation and even an engineer’s or contractors report that details the full rectification process and timing.
- Service Contracts: All buildings will have service contracts relating to the function of building. This can be for operational things such as lifts, air-conditioning, gardening, security, electrical, water and drainage. In the event of a sale, it is important to know what impact these contracts will have on the sale. Some complex service contracts remain with the property for a great number of years for the simple reason that the costs of maintenance are very high, and the respective contractor will have amortised the cost of their activity over an extended maintenance period. In the case of lifts and escalators it is not unusual for this to be a period of 10 or 20 years and the relative maintenance contract to be agreed with the property owner on that basis. Given that most properties will sell a few times in that time frame, the service contract will need to be assigned to the new property owner. What contracts will travel to the new owner of the property and on what basis?
- Statutory Notices: The local planning authority or council can have issued a statutory notice requiring or ordering certain actions of the property owner. The notices can be for an array of issues, so your main focus is to question the owner as to the existence of any such notices. If in doubt it is best to consult with the local council. Naturally you would need a copy of such current notice and an awareness of the rectification expectations and time line. Statutory notices can include extended matters of extra charges on the property or even a covenant or restriction on future occupation or property use.
- Due Diligence: It is common for a buyer of a property to undertake a due diligence process over a property that they purchase. This will be between the date of the contract and the settlement. Every element of the property will be checked and recorded as part of the process. The contract will normally be subject to the satisfactory outcome from the due diligence process. Importantly if a due diligence process is to apply to the sale of a property, then the contract should be subject to the satisfactory completion of the due diligence and the time frame allowed for the due diligence process needs to be sufficient for the event to occur. In large and complex properties it is not unusual for due diligence to take some weeks for completion.
- Title Searches: Every property will have some document or certificate of title to prove and support ownership. You need a copy of this and you must check its validity and currency for today (old title searches are exactly that and must not be trusted or relied on). If any encumbrances, easements, rights of way, claims, liens, caveats, or other instruments exist in registrable or un-registrable form on or around that property title or claim, then you also need a current copy of them. As an agent or broker interested in acting on the property you need to review and understand the impact that all these documents make on the property. You must to do this before you take any action in promoting the property for sale or for lease.
- Unregistered documents: These are documents that relate to the subject property and are not (for whatever reason) registered on the title. They can have impact on your sale and or your actions on the property. An unregistered document can still have impact at common law and therefore needs to be understood. If such documents exist it is best to seek legal comment from the clients solicitor as to what the documents are for and how they impact the property usage or sale.
- Right to Sell or Act: This is an interesting question but essential to the sale or any other property activity. Does the owner of the property (your client) have the full right to sell or undertake transactions on the property and are you dealing with all the property owners completely and correctly? Is there anyone else involved in the ownership equation that is hidden from you or unaware of the property activity? Corporate situations and partnerships are cases in point. Also be cautious of marital disputes in property ownership situations. If in doubt get the full property ownership detail explained to you in writing from the client’s solicitor. Always take notes of client’s instructions and comments. Any verbal instructions should be confirmed back to the client in writing before you take any action.
- Zoning Restrictions and Property Use: Most properties will exist within approved zonings and areas as detailed in the local development plans. Importantly you need to know that the property complies with the existing and or intended planning codes. Copies of the planning precincts from the local planning authority are an essential part of your ‘toolbox’ to use in discussion with any property owner. If you identify a matter of non-compliance or non-approval to the zoning and development plan then seek more detail from the local planning authority and the client. Some property occupancy can be granted for a non-compliant use and in such case you will need a copy of the relative approval or grant. Also remember that the local development plan can and will be regularly updated, so you need to stay close to the changes and approvals as they occur in your area.
This ends the topic of ‘legal’ property detail, however we emphasise that the matter can involve other and further issues on your property. We have just given you the most common matters to question. Be aware of what you are looking at on a commercial property and ask questions. Always take notes of the comments and finding from that process.
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