Commercial property purchases: legal due diligence before settlement

Commercial property purchases differ from residential purchases in several important ways: there is no consumer cooling-off, GST is almost always in play, the property may be tenanted, and the purchase entity is often a company, trust or SMSF rather than an individual. That combination makes legal due diligence — the process of investigating the property, the leases and the deal structure — the central task before settlement.

Title and plan

The starting point is the certificate of title and the registered plan. Confirm:

• Whether title is registered in the vendor's name.
• Whether the registered plan matches the property being sold, including any unregistered subdivision or consolidation.
• What registered dealings — mortgages, easements, covenants, caveats — affect title.
• Whether the boundaries on the ground match the plan (a survey may be prudent for older or irregular sites).

Planning and zoning

Confirm the zone under the applicable planning scheme, any overlays and any planning permits attached to the land. If your intended use is different from the current use, check the position under Clause 62 of the planning scheme (existing use rights) and whether a planning permit will be required.

Existing leases

If the property is tenanted, the leases are as important as the title. For each lease, review:

• Parties, premises, term and options.
• Base rent, review method and any outgoings recovery.
• Assignment and sub-letting rights.
• Make-good obligations at end of term.
• Security — bank guarantee, bond, personal guarantees.
• Any current disputes or arrears.

If the leases are governed by the Retail Leases Act 2003 (Vic), the review must consider the statutory overlay — including restrictions on outgoings, disclosure obligations and dispute resolution through the Victorian Small Business Commission and VCAT.

GST and duty

Most commercial sales are taxable supplies. The contract must be clear on whether the price is GST inclusive or plus GST and, where applicable, whether the going-concern exemption is claimed. The going-concern exemption typically applies to a tenanted property being sold as an operating enterprise — both parties must be registered for GST and agree in writing that the supply is of a going concern.

Duty for commercial and industrial property in Victoria has been transitioning to an annual property tax regime for transactions on or after 1 July 2024, subject to the specifics of the property and transaction. The State Revenue Office publishes the current position.

Environmental considerations

For older buildings and former industrial sites, consider:

• Environmental audit history under the Environment Protection Act 2017 (Vic).
• Presence of asbestos, particularly in fit-out and roof structures.
• Underground storage tanks on former service station or industrial sites.
• Contamination notices or clean-up orders.

A Phase 1 environmental report can be obtained where the site history warrants it. Contamination discovered after settlement is almost always the purchaser's problem.

Building compliance

• Occupancy permit or certificate of final inspection.
• Building permits for any recent works.
• Essential safety measures maintenance schedule and current occupancy status.
• Fire safety and disabled access compliance.
• Structural condition — a building condition report is often prudent.

Rates and outgoings

Order current rates, water and land tax certificates. Confirm the property's land tax classification — particularly whether any principal place of residence exemption previously applied and whether the property currently attracts an absentee owner surcharge.

Purchase structure

Confirm the buying entity before contract. Buying in the wrong name — for example, an individual instead of a trust, or one company instead of another in a group — usually requires an additional transfer to correct, attracting additional duty. This is one of the most avoidable and expensive mistakes in commercial property.

Financing

Commercial financing usually involves:

• A commercial loan agreement rather than a standard residential home loan.
• A registered mortgage over the property and, in many cases, general security over the borrower.
• Personal guarantees from directors and, sometimes, related parties.
• Conditions precedent — valuation, environmental report, insurance, tenant estoppels.

Insurance and risk

Insurance passes to the purchaser at contract, and the risk of loss generally shifts from the vendor to the purchaser at that point. Confirm insurance is in place from contract, not settlement.

Foreign ownership rules

Foreign purchasers may require FIRB (Foreign Investment Review Board) approval. Victorian foreign purchaser additional duty and absentee owner surcharge apply in defined circumstances. Structure the transaction so approvals are in place before completion.

For legal advice on a commercial property acquisition, see our commercial property conveyancing service or contact us.

Structuring the due diligence

Due diligence on a commercial property purchase is normally structured around three streams: legal, financial and physical. The legal stream examines title, planning, leases, contracts, environmental history and disputes. The financial stream examines income, outgoings, historical performance and forward projections. The physical stream examines the condition and compliance of the building, services and site. Each stream produces a written report, and the purchaser's decision to proceed, renegotiate or withdraw is made against those reports.

Leases in particular

Where the property is tenanted, the leases are the single most important document set. We obtain copies of each lease, variations and side letters, rent and outgoings schedules, bank guarantees or security deposits, and any correspondence about arrears, disputes or option exercises. We also check whether any lease is a retail lease governed by the Retail Leases Act 2003 (Vic), because the Act carries statutory obligations that affect the landlord's position on and after settlement.

Environmental history

Contaminated land liability is one of the areas where the purchaser's caveat emptor position is at its most stark. A purchaser who acquires a property with historical contamination may bear responsibility for remediation. Where the property has previously been used for industrial, automotive, dry cleaning, petrol station or similar operations, an environmental report from a specialist consultant is prudent.

GST and other tax questions

Whether the sale is a taxable supply for GST purposes, whether the going concern concession applies, and whether the margin scheme is available all depend on the specific facts and should be confirmed by the parties' tax advisers. The contract of sale is drafted to reflect the position agreed with those advisers.