Purchasing a commercial property can be a significant financial investment. To protect your investment, a buyer should investigate the risks of acquiring a commercial property and learn how to reduce those risks through a process known as due diligence.
Why undertake technical due diligence?
Engaging an expert to undertake technical due diligence is important for several reasons. The objective is to carry out investigations, including reviewing information made available by the vendor’s agents. This helps identify any issues with the property. Depending on the type of commercial property, these checks may include Council development consents, environmental reports, building reports, and licensing files.
Technical due diligence can reveal latent defects, environmental risks, licensing deficiencies, or necessary capital expenditure.
Any information uncovered during due diligence may allow the buyer to negotiate a price reduction or include specific contract clauses. Therefore, technical due diligence helps mitigate risks associated with purchasing a commercial property.
Searches and investigations
Technical due diligence is typically undertaken by specialist consultants and usually takes 2-4 weeks. The process can be as comprehensive or limited as a buyer requires. Normally, it includes the following searches and investigations:
Building structure and fabric
This might involve obtaining a building report and having an inspector check the structural elements. They look for issues like spalling concrete, subsidence, or other structural distress. The building fabric, such as roof coverings, balconies, and window facades, is also assessed.
Specific Due Diligence for Purchasing a Petrol Station:
Environmental
Conduct checks for soil and groundwater contamination. Obtain and review environmental reports, and understand the site’s history and environmental obligations. Inspect the age and type of underground storage tanks.
Equipment and Infrastructure
Inspect all equipment, including fuel pumps, tanks, lines, and convenience store items. Verify ownership in the sale inventory. Conduct a Personal Property Security Register (PPSR) search for loans or encumbrances. Consider upgrading any operational items.
Regulatory
Review all licenses and permits for operation, fuel storage, and the convenience store. If it’s a franchise, check agreement terms. Ensure compliance with state-specific laws.
Operational
Review fuel agreements and other supply contracts. Analyse station performance data, including fuel and convenience store sales, and financial records to assess business health.
Specific Due Diligence for Purchasing a Licensed Premises:
Liquor Licence
Review the liquor licence file and compliance history. Ensure trading hours and licence coverage are correct, especially for extended trading authorisations.
Operational
Review supply agreements, accommodation revenue, and inventory. Conduct PPSR searches for loans or encumbrances. Analyse food, beverage, and gaming revenue, as well as staffing and employee entitlements.
Regulatory
Review all required licenses and permits, including building, fire safety, health, food, asbestos, and gaming. Check council regulations and development consents.
Technical Building
Investigate the quality of hotel infrastructure, including guest rooms, lifts, kitchen equipment, air-conditioning, plumbing, electrical, and fire safety systems. Review maintenance records and consult specialists if needed.
Depreciation
Review the depreciation schedule and proposed price apportionment under the contract.
Capital expenditure
Review any CAPEX forecasts. Assess likely expenditure required to maintain the building over 10-15 years.
Conclusion
Carrying out thorough legal and technical due diligence is crucial when purchasing a commercial property. This is particularly important for specialised properties like petrol stations or licensed hotels, which have unique operational, regulatory, and environmental considerations.
This is general information only. You should obtain professional advice relevant to your circumstances.
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