Purchasing a commercial property can be a significant financial investment for a buyer. To protect any potential investment, a buyer should take steps to investigate the risks of acquiring a commercial property and how to reduce those risks where possible in a process known as due diligence.
Why undertake technical due diligence?
There are a number of reasons why engaging an expert to undertake technical due diligence on a commercial property is important. The objective of technical due diligence is to carry out investigations including reviewing information made available by the vendors agents to identify any issues with the property. Subject to the type of Commercial property, these can include reviewing Council development consents, obtaining environmental reports, building reports and reviewing licensing files.
Technical due diligence might identify such things as latent defects, environmental risks, licensing deficiencies and/or necessary capital expenditure.
Any information about the property, which arises out of the due diligence process, might enable the buyer to negotiate a price reduction or include specific contract clauses to deal with potential issues. In this way, technical due diligence allows a buyer to mitigate its risk associated with the purchase of a commercial property.
Searches and investigations
Technical due diligence is typically undertaken by specialist consultants, and generally takes between 2-4 weeks. The process can be as comprehensive or limited as a buyer requires, but would normally include the following searches and investigations:
- Building structure and fabric: this might involve obtaining a building report and having an inspector undertake a visual inspection of the structural elements of the building to identify any shortcomings such as spalling of concrete, subsidence and other structural distress. The building fabric will also be identified such as roof coverings, balconies and window facades.
Specific Due Diligence for Purchasing a Petrol Station:
- Environmental: Conduct thorough checks for soil and groundwater reports for fuel contamination, obtain and review environmental reports, and understand the site’s history and your environmental obligations. Inspect the age and type of underground storage tanks.
- Equipment and Infrastructure: Inspect all equipment (fuel pumps, tanks, lines, etc.) and convenience store equipment. Verify the ownership of the equipment in the sale inventory (whether it’s owned outright or part of a franchise agreement) undertake a Personal Property Security Register (PPSR) search for any loans or encumbrances. Consider the requirement to upgrade any operational items.
- Regulatory: Review all necessary licenses and permits for operation, fuel storage, and the convenience store (including food and alcohol if applicable). If it’s a franchise, review the agreement terms. Check for compliance with state-specific laws.
- Operational: Review any fuel agreements and any other existing supply agreements, review the station’s performance data, including fuel and convenience store sales. Analyse financial records to assess the business’s health.
Specific Due Diligence for Purchasing a Licensed Premises:
- Liquor Licence: Thoroughly review the liquor licence file and compliance history. Ensure the entire premises is licensed and trading hours align with the licence plans, especially if the premises enjoys an extended trading authorisation.
- Operational: Review supply agreements, any accommodation revenue, inventory included in the sale (undertake a PPSR searches for any loans or encumbrances), performance of food & beverage revenue centres and gaming machine revenue (if applicable). Analyse financial statements. Review staffing and employee entitlements, online reviews, and the condition of all amenities.
- Regulatory: Review all required licenses and permits (building, fire safety, health, food, asbestos register and gaming if applicable). Check compliance with local council regulations and any relevant development consents.
- Technical Building: investigate the quality and condition of the hotel infrastructure like guest rooms, any lifts, kitchen equipment, air-conditioning, plumbing, electrical, and fire safety systems. Review maintenance records and consider specialist consultants.
- Depreciation: Review depreciation schedule and ascertain what the proposed price apportionment is under the contract.
- Capital expenditure: review if available any Capital expenditure forecasts (CAPEX) set out the likely expenditure required to maintain the building and keep it in working order for a period of usually between 10-15 years.
Conclusion
The importance of carrying out a thorough legal and technical due diligence process when considering purchasing a commercial property should not be underestimated and should be undertaken with the assistance of specialist legal and other professional consultants experienced in the process. This is particularly critical when purchasing specialised commercial properties like petrol stations or licensed hotels, which have unique operational, regulatory, and environmental considerations.
This is general information only and you should obtain professional advice relevant to your circumstances.
Get Expert Advice from a Commercial Property Lawyer in Sydney
If you are considering purchasing a Commercial Property in NSW, our expert lawyers can provide legal guidance to help you undertake technical due diligence on commercial property in NSW.
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Let SlaterWatts Lawyers assist you to undertake your technical due diligence to help protect your investment from any potential pitfalls.