The sale of a commercial property is a significant transaction and obtaining advice from experienced professionals including a solicitor and accountant is recommended before any Contract is signed.
1. Before You Sell
Advice from your Accountant
Your Accountant can advise you on:
- the apportionment of the sale price between goodwill and plant and equipment, and any additional GST issues.
- the financial and taxation implications of a sale such as capital gains tax or the treatment of a capital loss.
Review Your Finance Arrangements
- Where the property has a mortgage, confirm your Lender’s requirements regarding the sale proceeds. As you should not rely solely on the information provided by your Lender, discuss your circumstances with a quality finance broker.
- Confirm the costs to release any mortgage over the property, including any early repayment charges.
- Where your Lender holds collateral security over other properties, the sale of one property may result in your Lender obtaining valuations of other properties to determine the amount it requires to be repaid at settlement.
Leases & Service Agreements
- Check that any leases or service agreement are current and correctly documented, and complete any outstanding matters.
- Where the tenant is a company or trust, the Buyer will want to verify whether the lease contains personal guarantees from the directors or trustees; and whether there a sufficient rental bond or bank guarantee in case the tenant defaults?
2. Contract Document
- The Real Estate Institute of Queensland (REIQ), in consultation with the Queensland Law Society, have prepared Contracts which are often used for selling commercial, industrial, community titles scheme and retail properties.
- The Contracts comprise:
- Items Schedule –contains the specific information relevant to the property being sold
- Standard Conditions – standard terms and conditions
- Special Conditions – additional conditions which add to, delete or vary the Standard conditions
3. In what name is the property being purchased?
- Where the Buyer fails to complete the Contract in breach of its contractual obligations, you may be unable to recover any money if the Buyer owns no assets.
- Where the Buyer is a company or a trustee of a trust or superannuation fund, the Seller should include in the contract a personal guarantee from the directors of the company or the trustees.
- You will be entitled to sue the guarantors personally and any assets such as the family home in the guarantors’ name may be available to seize and sell to pay any judgement.
- Where the standard Contract does not contain a personal guarantee, a special condition will need to be inserted to protect your interests.
4. Goods and Services Tax (GST)
- The obligation to pay GST depends on whether you are registered (or required to be registered) for GST purposes.
- If you are not registered and not required to be registered, then generally no GST will be payable on the contract.
- If you are registered, you are obliged to pay GST unless some special exemption applies.
- The most common GST concessions or exemptions are the Margin Scheme and the Going Concern.
The Margin Scheme concession
- If the Margin Scheme is to be applied to the Contract, GST is payable by you at a reduced rate.
- The Margin Scheme may be applied if you purchased the property before 1 July, 2000.
- The Margin Scheme may also be applied if you purchased the property from 1 July, 2000 and the Margin Scheme was applied in the contract between you and the previous owner; or the previous owner was not registered for GST and was not required to be registered. You and the Buyer must agree to apply the Margin Scheme before the settlement of the contract.
The Going Concern exemption
- The Going Concern exemption may apply if you supply to the buyer all the things that are necessary for the continued operation of an enterprise. A common example is where the property is leased to a tenant on a fixed term written lease that continues after the settlement date.
- Where, sometime after settlement, the ATO advises that the Going Concern exemption was invalidly applied to the contract, then GST penalties and interest may be payable to the ATO. You can only claim the GST from the Buyer (not the penalties and interest) unless a special condition was inserted in the contract.
- Alternatively, before completing the Contract, you or the Buyer can apply for a private tax ruling from the ATO. The parties can either wait for the private ruling before completing the contract; or a special condition inserted in the Contract outlines what is to occur if an unfavourable tax ruling is made. If the Contract is completed and no moneys are held in trust, you would pay the GST to the ATO and attempts to recover the GST from the buyer.
5. Insurance for the property
- The Contract states that the property is at the risk of the buyer from 5pm on the next business day after the contract has been fully signed. However, you should maintain insurance policies until the Contract is completed.
6. Disclosure to the Buyer
6.1 Existing leases
- You are required to disclose the key terms of any existing leases in the Contract and provide a copy of all leases. The buyer has seven days to terminate the contract if not satisfied with the lease terms and conditions.
- Where the tenant is a company or trust, does the lease contain a personal guarantee from the directors or trustees? Is there a sufficient rental bond or bank guarantee in case the tenant defaults?
- If any information in the lease or service contract schedule is incorrect, the buyer may terminate the contract at any time before settlement.
- Where the lease is a retail shop lease, the Contract contains a statement that the Seller has complied with the Retail Shop Leases Act. This reduces the risk to the buyer that a new tenant may terminate an existing lease within six months of the lease commencing, and after the property is sold.
- You cannot do any of the following without the written consent of the Buyer: accept a surrender of lease; grant a new lease; vary an existing lease; assign an existing lease; or negotiate or set new rent.
- Any encumbrances affecting the property (any leases, easements, covenants etc that remain after settlement) whether they are registered on the title or not, must be disclosed in the contract. If an encumbrance was not disclosed, a buyer may terminate a contract (if they would be materially prejudiced) or claim compensation.
6.3 Building covenants
- You should check the contract when you purchased the property to determine whether the property is affected by building covenants. If applicable, these covenants will need to be disclosed to the Buyer in the sale contract.
6.4 Vacant land
- Where using a real estate agent to sell vacant commercial land, before any contract is signed, you must give the buyer a signed written notice stating that the land is of a commercial nature and is not capable of being used for residential purposes. This notice is not required if a real estate agent is not affiliated with the sale.
- If the correct notice is not given, the buyer may have the right to terminate the Contract or recover compensation from you or the Seller’s Agent.
6.5 Community Titles Scheme (Body Corporate)
- You must provide a signed disclosure statement. If any information in the disclosure statement is incorrect, the buyer may give written notice to terminate the Contract within fourteen days of receiving the signed contract if the buyer would be materially prejudiced.
- If the building was constructed after 1 January 2004, there are no obligations imposed on you.
- Any building constructed prior to 1 January 2004 requires the person in control of a workplace to develop and implement an Asbestos Management Plan (in addition to other obligations).
6.7 Certificate of Classification
- The Contract requires a certificate of classification to be provided for each building permit issued pursuant to the Building Act. The local council is required to conduct a final inspection of all construction work completed from 1975 to determine if it complies with the building standards. If compliant, a certificate of classification is issued.
- If a certificate does not exist for every building permit, you must arrange for the council to inspect the property and issue a certificate – where compliant. If the building does not comply with the applicable building regulations, you are required to complete any necessary building works so that a certificate of classification can be issued.
- You may want to consider inserting a special condition in the contract removing the obligation to provide any ce