Call 07 834 6000

Due Diligence

31 May 2017

BUYING A COMMERCIAL BUILDING OFF THE PLANS

 

With the current state of the commercial property market it’s becoming more common for purchasers to enter into agreements to purchase commercial buildings well before their actual construction. This might include the keen investor looking for an early investment opportunity or the growing business keen to update to more modern premises, or switch from a leasing to an owner operator model.

In doing so, these purchasers rely heavily on the general concept of the building and the developer’s representations of what will be built and how that will be achieved. Buying off the plans comes with a number of risks, so the need to complete proper due diligence is important to ensure the purchaser is clear on what they are getting, when, and details of costs. The following are a few things to consider when contemplating such an arrangement.

Plans and specifications

Plans for the building and surrounding development, as well as specifications for the build should be attached for reference in any sale and purchase agreement of this type. These plans and specifications should provide as much detail as possible and specify everything from what the building will look like (internally and externally), its measurements, and the materials to be used. A potential purchaser should have these plans reviewed by an expert, such as a builder or an engineer, to ensure the details outlined are achievable and will ultimately be fit for purpose.

Variation procedure

It’s almost inevitable that changes will need to be made to the plans and specifications once construction starts. Unforeseen ground conditions may be uncovered, the local council may impose additional requirements during inspection, or specified materials may not be available. A clear process for such variations needs to be specified in the sale and purchase agreement, with the purchaser having approval rights for anything significant.

Timeframe for completion

The accuracy of the estimated completion date is vital for further planning and works. Once the building shell is complete other tradespeople might be engaged to complete other works, including any fit out specific to the building’s operational use. Any delays can push back the date the building can be opened for business or occupied by a tenant. Although delays are often unexpected and unavoidable, the proposed completion date should allow a certain amount of time for the unexpected and provide for an estimated completion date which is as accurate as possible. The completion date should be reasonable for the magnitude of the project, and should allow enough time for an issue to occur without it resulting in a massive set back. Expert advice should be sought to ensure the estimated time for completion is realistic and achievable.

Third party interests in the property

It’s essential that potential purchasers check to see if there are any third party interests in the property registered against the title to the land. These might include any leases, easements, encumbrances or land covenants, the presence of which may impose restrictions on the purchaser’s free use of the land. A title search of the land should show if any interests are present.  It’s essential that the purchaser is aware of these and understands how they will affect their future use of the land and the proposed building.

Final points

Maintaining good communication between parties is vital in these types of arrangements. Good communication is essential to ensuring the quick and easy resolution to any issue that may arise, avoiding unnecessary delay or expense. The agreement entered into by the parties should be comprehensive and fairly allocate the risks inherent in such a deal. Undertaking proper due diligence with the help of your lawyers and other qualified consultants before any commitments are made, is essential to ensuring that a purchaser gets what they pay for.

 

Phil Hyde is a Senior Associate in the Commercial Corporate team at Norris Ward McKinnon. You can contact Phil at phil.hyde@nwm.co.nz 

Norris Ward McKinnon - Home Header - Phil Hyde