Our Commercial and Property Lawyer has considerable experience in handling commercial, retail, industrial, hotel/motel and rural property sales and purchases.
Commercial conveyancing can be a complicated process and often involves tax and leasing issues, freehold and business structures, and management arrangements. We will work in conjunction with you and your accountant in relation to these issues to ensure the transaction is negotiated and finalised in an efficient and timely manner.
At RBF Law we understand commercial transactions so we can provide advice and legal services to best suit your transaction.
Our legal services include:
- structuring of entities and preparation of documents (companies, partnerships, or trusts)
- partnership/joint venture arrangements
- put and call options
- operators/management agreements
- shareholder/unitholder agreements
- asset sale agreements
- personal property security agreements
- negotiating, preparing and reviewing commercial sale contracts/agreements
- commercial due diligence.
What types of business structures are there?
Choosing the best legal structure for a business is one of the most important decisions to be made.
The 4 most common structures are:
1. SOLE TRADER
- the business is owned and run by an individual without partners or a company structure;
- a sole trader has full control of the business including ownership of all profits; and
- a sole trader is solely responsible for all business debts.
- a partnership involves 2 or more co-owners (or partners) who participate in a business together;
- the partners may carry on the business under a trading (business) name;
- there is an intention among the partners to make and share profits;
- there is an understanding that all partners act on behalf of each other in the business;
- each partner is individually liable for the debts incurred by the other partners during the partnership;
- the partners are obliged to keep the other partners properly informed at all times;
- a partnership is not a separate legal entity (i.e. the partnership entity is not separate from its owners);
- the Partnership Act 1891 (Qld) sets out various rules governing a partnership; and
- to ensure that all partners have a clear understanding of their rights, responsibilities and obligations, a written partnership agreement is strongly recommended.
Limited liability partnership
A limited liability partnership can be formed where the liability of some of the partners is limited. This type of partnership is formed to conduct business in Queensland, must have its registered office in Queensland and only exists in law after it is registered. A partner in this type of partnership can be either an individual or a legal entity such as a company.
In such a partnership there must be at least 1 general partner (who runs the daily business of the partnership and has unlimited liability) and at least 1 limited partner (who can live outside of Queensland and must not take part in the running of the partnership or enter into a contract on behalf of the partnership). The limited partner is only liable for the amount shown on the register and the unpaid remainder of that amount.
- a company is a distinct legal entity which is separate from its shareholders;
- legal arrangements are in the name of the company;
- the most common types of companies are:
- a proprietary limited company or a Pty Ltd company (which cannot raise money from the sale of its shares to the general public); and
- a public company (company shares are usually listed on the stock exchange);
- a company has a constitution which is a formal document setting out the rules governing the company. It also defines the relationship between the company, the directors and the shareholders;
- companies must have directors:
- a Pty Ltd company must have at least 1 director, who must ordinarily reside in Australia; and
- a public company must have a minimum of 3 directors with at least 2 who must ordinarily reside in Australia;
- if a director fails to meet their legal obligations then they may be held personally liable;
- generally, shareholders can only lose the value of their shares and are not liable for the company’s debts;
- lessors, suppliers and lenders are reluctant to lend money or enter into a contract or lease with a Pty Ltd company unless the directors provide personal guarantees;
- a company is governed by the Australian Securities and Investments Commission(ASIC);
- companies must comply with the Corporations Act 2001 (Cth);
- public companies must also comply with the rules of the Australian Stock Exchange; and
- a company business structure ensures continuity of management and ownership in the event of death or disability of key people because company shares can be transferred.
- a trust is a complex legal structure and is not a separate legal entity;
- a trust is a legal relationship where a trustee (either an individual or a company) carries on business or holds property for the benefit of other people (the beneficiaries);
- the trustee has a strict obligation to hold and manage the business or property for the exclusive benefit of the beneficiaries;
- a trust separates the control of an asset from the owner of the asset;
- a trust must have a principal (or an appointor). That person essentially controls the trust as they have the power to hire and fire the trustee. This issue of control must be addressed in the trust deed for operation, succession and asset protection reasons;
- the trustee of the trust cannot be the same as the default beneficiaries as they are then essentially declaring that they hold the property on trust for themselves (which is not a trust);
- a trust can provide asset protection and can limit liability in relation to a business;
- there are extensive regulations that trusts must comply with;
- a trust is also governed by the terms of the trust deed;
- the beneficiaries of a trust are generally not liable for the trust debts; and
- there are different types of trust structures:
- discretionary (commonly known as a family trust) – the trustee decides how profit will be distributed to the beneficiaries;
- fixed – the trustee is bound to make a distribution to the beneficiaries in a pre-determined manner as set out in the trust deed;
- unit – allows for distribution of income and capital in fixed proportions according to the number and class of units held by the unitholders. Units are akin to company shares; and
- hybrid – a mixture of both a unit trust and a discretionary trust. This means that beneficiaries have some fixed entitlements while other benefits under the trust are discretionary.
You will need to consider many legal, financial and tax issues before deciding on the best business structure for your needs. It is for this reason we strongly recommend you seek professional advice from an accountant, solicitor or financial adviser before deciding on a business structure.
(This is only a general overview of the available business structures and such information should not be used or treated as legal advice.)
What is a joint venture?
A joint venture is when 2 or more parties (the participants) come together for the purpose of a specific single business venture of a limited duration. It is not designed for an ongoing business venture.
A joint venture can be used for both residential and commercial ventures. For example, the participants may wish to develop a parcel of land into residential vacant land blocks or develop a parcel of land into commercial lots or build an apartment complex. The joint venture is referred to as a joint venture project which is usually referred to by a specific name.
Each joint venture participant compliments each other by combining their resources, knowledge and skill to achieve the end result. The product of the joint venture, rather than the profits, is shared between the joint venture participants. Ownership of the joint venture assets is retained separately by the contributing participant and the joint venture activities are carried out by a manager (or operator) and not by the participants.
A joint venture is not a partnership. A partnership is where the partners are agents of each other and can make binding contracts on behalf of the partnership. The joint venture participants are not agents for each other (except where an appointed manager (or operator) acts as an agent of a joint venture participant). It is therefore necessary for the terms of the joint venture agreement, along with the actions of the participants, not to give rise to a partnership. Stating that the parties are joint venture participants and not partners will not of itself make the association between the parties a joint venture rather than a partnership.
A joint venture agreement should address issues such as:
- the terms of the joint venture undertaking (the business venture);
- participants’ details;
- roles and performance indicators of all participants;
- keeping of financial records;
- contributions (or resources) being made by each participant;
- agreed value of each participant’s contribution;
- marketing and sale of the joint venture project;
- each participant’s share of the product; and
- an exit strategy.
There are 2 types of joint ventures:
INCORPORATED JOINT VENTURE
This type of joint venture is where the participants arrange for the incorporation of a separate legal entity to undertake the agreed joint venture project on their behalf.
UNINCORPORATED JOINT VENTURE
This type of joint venture is one:
- which is not an entity in its own right;
- all dealings must be in the name of each participant;
- the participants are taxed independently of each other;
- all property of the joint venture is owned by the participants as tenants in common in accordance with their respective percentage interest in the joint venture;
- the participants are severally liable for all expenses and for any liabilities which arise in relation to the joint venture in accordance with their respective percentage interests;
- individual participants do not have the authority to bind the other participants unless the joint venture agreement provides otherwise; and
- the participants would need to agree as to the terms upon which they are to contribute staff to the joint venture undertaking (where necessary).
A joint venture can vary depending on your business goals and the level of commitment you want to give to a project. It is highly recommended before you enter into a joint venture you seek professional advice from an accountant, solicitor or financial adviser.
(This is only a general overview of a joint venture and such information should not be used or treated as legal advice.)
What is a put and call option?
An option allows one party the enforceable right to buy property (or another type of asset) from another party at a future time and for a particular price. This is called a ‘call option’.
A ‘put and call option’ is an agreement which achieves much the same effect as a normal sale contract. This is because if the buyer (the grantee) doesn’t exercise the ‘call option’ then the seller (the grantor) has the right to compel the buyer to buy the property (or the asset) at a future time and for a particular price. This is known as the ‘put option’. (It is rare for a ‘put option’ to exist in a real estate transaction by itself).
It is usual for an ‘option agreement’ to include special conditions (just like a normal sale contract) such as:
- finance approval;
- due diligence enquiries;
- access arrangements;
- FIRB approval;
- obtaining development approval; and
- any other conditions the buyer (the grantee) requires.
If any of those special conditions are not satisfied then the buyer (the grantee) may terminate the ‘option agreement’.
An ‘option fee’ is also payable by the buyer (the grantee) at the time of entering into the ‘option agreement’. The ‘option fee’ is usually a nominal amount. Transfer duty (or stamp duty) will be payable by the buyer (the grantee) on the ‘option fee’. If the ‘option’ is exercised then it is usual for a credit to be obtained for the transfer duty paid on the ‘option fee’ (if any) when the formal sale contract is later required to be stamped by the buyer. It is also usual for the ‘option fee’ to then form part of the deposit payable by the buyer under the formal sale contract.
The ‘call option’ is normally exercised by the buyer (the grantee) during a defined period of time known as the ‘call option period’. The seller’s ‘put option period’ then follows. Once the ‘option’ has been exercised by either party then those parties enter into a formal sale contract (unless notice of a nominee has been given by the buyer/grantee). The form of sale contract to be used is attached to the ‘option agreement’. That sale contract is usually required to be unconditional as the ‘option agreement’ previously provided for all special conditions.
A ‘call option’ commonly includes a provision in the ‘option agreement’ for the buyer (the grantee) to be able to nominate another party (the nominee) to exercise the option by delivering a completed ‘nomination form’ to the seller (the grantor). The ‘nominee’ is then the buyer under the formal sale contract and that entity cannot then be changed again.
An ‘option agreement’ has a wide range of uses and may offer benefits over a normal sale contract. You should always seek professional advice from an accountant and a solicitor before entering into this type of arrangement as there are a number of significant legal and tax issues that need to be considered.
(This is only a general overview of option agreements and such information should not be used or treated as legal advice.)
What is the difference between a deed and an agreement?
You may have noticed that some formal commercial arrangements are either documented in the form of a ‘deed’ or an ‘agreement’. The differences are:
An agreement (or contract) must satisfy 6 elements:
- There must be an ‘offer’ from one party to another party;
- The offer must be ‘accepted’;
- ‘Consideration’ must flow between the parties;
- Each party must have an ‘intention’ to be legally bound;
- The parties must have ‘capacity’ to enter into legal relations; and
- There must be ‘certainty’ as to the terms of the contract.
A deed is a special type of contract or binding promise or commitment to do something. To be valid, a deed must:
- Be in writing;
- Be signed;
- Be witnessed by a person who is not a party to the document;
- Use words to indicate that the document is a deed such as ‘this deed’ or ‘executed as a deed’ or use the words ‘signed, sealed and delivered’ in the execution clause;
- Be delivered to the other party; and
- Be supported by evidence that the parties intended the document to be a deed.
THE DIFFERENCE ...
The major difference between a deed and an agreement is that ‘consideration’ is not required for a deed to be legally binding. ‘Consideration’ means that each person promises to do something or give some value to create a binding contract such as one person pays money and the other person provides goods or services.
EXAMPLES OF DEEDS
- Deed poll;
- Confidentiality deed;
- Deed of termination;
- Deed of covenant;
- Deed of variation;
- Deed of release and indemnity;
- Deed of variation;
- Deed of assignment;
- Deed of rescission;
- Restraint deed.
What types of agreements should be considered in a commercial transaction?
There are numerous agreements to be considered. Here are just a few….
- COMPANY CONSTITUTION
A company constitution is a formal document which sets out the rules governing a company. It also defines the relationship between the company and its directors and shareholders. If a company doesn't want to have a constitution, then it can use the replaceable rules instead. Replaceable rules are in the Corporations Act 2001 (Cth) and are a basic set of rules for managing a company. If a company wants to change or remove a replaceable rule then it will need to have a constitution that outlines those changes. A company constitution or replaceable rules are compulsory.
- SHAREHOLDERS’ AGREEMENT
A shareholders’ agreement regulates the relationship between a company’s shareholders, the management of the company, the ownership of the company shares as well as provides protection for the shareholders.
- PARTNERSHIP AGREEMENT
A partnership agreement is an agreement between 2 or more parties who wish to enter into business together in the form of a partnership. The partnership agreement regulates the purpose for which the partnership is being established, it details each partner’s financial investment as well as establishes directives. A partnership agreement ensures that all partners have a clear understanding of their rights, responsibilities and obligations.
- JOINT VENTURE AGREEMENT
A joint venture agreement is used when 2 or more parties come together to perform a specific business venture. A joint venture agreement should address issues such as:
- the terms of the joint venture undertaking (the business venture);
- the objectives of the joint venture;
- the participants’ details;
- roles and performance indicators of all participants;
- the keeping of financial records;
- contributions (or resources) being made by each participant;
- agreed value of each participant’s contribution;
- marketing and sale of the joint venture project;
- each participant’s share of the product; and
- an exit strategy.
- OPERATOR/MANAGEMENT AGREEMENT
The purpose of an operator (or management) agreement is to govern the internal operations of a business in a way that suits the specific needs of the business owners.
- DISTRIBUTION AGREEMENT
A distribution agreement is a form of commercial contract where one of the parties (the distributor) is granted the right to distribute (or sell) goods or services of a supplier to customers or clients in a defined territory. The supplier may be the manufacturer or it maybe a distributor re-selling another entity’s goods. A distribution agreement usually details how those goods or services will be sold, how they will be advertised and the amount of supply to be made available. A distribution agreement may be either exclusive or non-exclusive.
- SUPPLY AGREEMENT
A supply agreement regulates obligations between parties to sell and buy quantities of goods over a specified period of time and how those goods may be on-sold.
- CONSULTANT AGREEMENT
A consultant or consultancy agreement is used when a party (the customer) wishes to hire another party (the consultant) to perform specific tasks on their behalf or to provide advice in exchange for a specific fee. This type of agreement is most commonly used for hiring sales people or external advisors.
- TRUST DEED
Trusts are legal arrangements where a person or company holds property (or other assets) for the benefit of someone else (the beneficiaries). A trust deed is a legal document that sets out the rules for establishing and operating a trust fund. It includes such things as the fund’s objectives, who can be a member and how profits are to be distributed. A super fund is a special type of trust, set up and maintained for the sole purpose of providing retirement benefits to its members (the beneficiaries). The trust deed and the superannuation laws together form the fund’s governing rules.
- UNITHOLDERS’ AGREEMENT
A trustee of a unit trust holds the trust assets for the benefit of the unitholders. A unit trust apportions trust assets according to units. As a unitholder you get beneficial ownership of trust property according to the number of units you own. The legal document between the unitholders setting out their rights and obligations is called a unitholders’ agreement. As the trustee of a unit trust is often a company, then it is also common for a shareholders’ agreement to be used. These 2 agreements will sometimes be drafted either separately or into 1 document.
- LICENCE AGREEMENT (carpark licence, outlet licence, licence to occupy, licence to advertise, licence to use name, etc)
A licence agreement is used where the licensor and the licensee have an intention to create a legal relationship but the licensor will not provide the licensee with exclusive possession of ‘something’ as is the case with a lease. That ‘something’ could be the use of a carpark space, the use of an outlet, occupying premises, to display advertising or the use of a business or trade name.
- CONTRACTOR AGREEMENT
Contractors run their own business and sell their services to others, unlike employees who work in someone else’s business. Contractors are hired:
- for labour or skills where payment is made on the basis of hourly or daily rates; or
- to achieve a result where payment is made on the basis of a fixed fee.
Contractors generally use their own processes, tools and methods to complete the work. They can delegate or subcontract some of the tasks if they need, and can work for a number of different clients at the same time. Contractors have different workplace rights and protections to employees. They also have different responsibilities relating to workplace safety, insurance, taxation and superannuation.
- EQUIPMENT HIRE AGREEMENT
An equipment hire agreement is used when a person or business wishes to hire out equipment for use by another.
- HEADS OF AGREEMENT
A heads of agreement is commonly used as part of the process of negotiating commercial transactions with the intention of the parties continuing negotiations and ultimately entering into a binding contract. Provided a heads of agreement is properly drafted it is a non-binding document which sets out the key terms of a proposed agreement between the parties. A heads of agreement can provide a degree of confidence that a deal is probable and can provide evidence to a third party (such as a bank or potential investor) of a party’s commitment.
- CONFIDENTIALITY AGREEMENT
A confidentiality agreement is a legally binding contract. It can also be referred to as a non-disclosure agreement. This type of agreement is used where one or more parties provide confidential information to the other. Those parties must then keep the information provided secret and must use it only for the agreed purpose and must only disclose it in accordance with the terms of the agreement.
This is not an exhaustive list of the commercial agreements available. Agreements rangefrom being very simple and straightforward through to complex relationships depending on the nature of the transaction. One or more agreements may be required to be used in a transaction. You should always seek advice from a commercial lawyer as to the most appropriate agreement or agreements to be used for your transaction.
What is commercial property?
A commercial property can include an industrial property, vacant land, a single stand-alone building, a lot in a commercial community titles scheme or more complex transactions such as the purchase and sale of a retail shop, hotel, motel or rural or farming property.
What type of contract should be used?
A commercial sale contract is usually prepared by the selling agent. There are 2 forms of standard commercial sale contracts developed by the Real Estate Institute of Queensland and The Queensland Law Society:
- Commercial land and buildings; and
- Commercial lot in a community titles scheme.
When buying in a community titles scheme the seller is also required to provide the buyer with a signed and completed disclosure statement setting out certain information about the body corporate prior to the buyer entering into the contract.
We strongly recommend that legal advice be sought before either a buyer or seller signs a contract to ensure that any specific requirements are correctly shown in the contract which could include special conditions. This is particularly important as a buyer to ensure the right ownership structure is used to purchase the property, the price is apportioned between goodwill and plant and equipment, GST issues are addressed, the seller’s financial/business records are reviewed and to ensure all conditions are included in the contract to protect your interests.
For more complex transactions, it may not be appropriate for a standard form commercial sale contract to be used and a solicitor may need to draft an appropriate contract for you.
When is the deposit required to be paid?
A contract will state the total amount of the deposit required to be paid by the buyer and the date for payment will also be stated. The deposit should not exceed 10% of the purchase price.
A buyer must pay the deposit strictly in accordance with the terms of the contract. If a buyer proposes to pay the deposit by direct debit or bank transfer, then they should endeavour to ensure it is received by the deposit holder by the date stated in the contract. If not, the seller may argue the buyer has breached their obligations under the contract.
If the deposit is not paid by the buyer on the due date, then the seller may have a right to terminate the contract and claim compensation from the buyer, even after the deposit is paid.
To reduce risk, a buyer should consider paying the deposit by cheque and deliver it to the deposit holder on or before the due date. A buyer should always have sufficient evidence of when they paid the deposit to the deposit holder.
Can the buyer entity be changed once a contract is signed?
In Queensland, once a contract has been signed by the buyer and the seller the buyer’s name cannot be changed.
If another party needs to be added to the contract, or the buyer entity needs to be changed to a corporate entity, then the buyer and the seller would need to agree to rescind the contract and enter into a new contract on the same terms as the previous contract but noting the correct buyer details.
Most sellers will agree provided the buyer pays their legal costs associated with this process and a transfer duty (stamp duty) indemnity is also provided in the event the Office of State Revenue assesses double stamp duty (stamp duty on the original contract and stamp duty on the new contract).
A buyer should always bear in mind that a seller is under no obligation to agree to a rescission of a contract due to an incorrect buyer entity being noted on a contract.
If only a minor change needs to be made to a buyer’s name such as correcting a misspelt name, or adding or deleting a middle name, then this can usually be corrected by formal agreement of both the buyer and the seller through exchange of solicitors’ letters. These types of amendments are usually required because the buyer’s name on the contract does not correlate with the buyer’s formal identification such as a birth certificate, passport or driver’s licence which prevents a bank from being able to formally identify that person and provide finance for the purchase of the property.
Can the words ‘or nominee’ be noted after the buyer’s name on a contract?
The short answer is ‘no’.
The most common reason for a buyer wanting to include the words ‘or nominee’ on a contract is that they have not had time to speak to their accountant as to the entity they should be using to buy the property and they want to be able to change that entity at a later stage.
The use of the word ‘or nominee’, or substituting a buyer entity, could result in the buyer having to pay transfer duty (stamp duty) twice. The buyer and the seller would need to agree to rescind the contract and enter into a new contract on the same terms as the previous contract but noting the correct buyer details. A seller may agree to this provided the buyer pays their legal costs associated with this process and a transfer duty (stamp duty) indemnity is also provided in the event the Office of State Revenue assesses double stamp duty the buyer will attend to payment.
A buyer should be aware that a seller is under no obligation to agree to a rescission of a contract due to an incorrect buyer entity being noted on the contract.
The only time ‘or nominee’ should be used is where:
- the buyer knows who the nominee is when the contract is signed;
- the buyer was appointed in writing as agent for the nominee buyer prior to the contract being entered into; and
- the nominee buyer pays the deposit.
Another alternative, if the buyer does not know the correct buyer entity, is a put and call option agreement with a right for the buyer to nominate another buyer entity. This operates like a normal sale contract in that the buyer has an option to buy, and the seller has an option to sell, so neither party can walk away from the sale. The buyer can nominate another entity to exercise the option and complete the purchase without incurring double stamp duty. However, a seller would need to agree to this type of transaction and extra legal fees would be incurred to draft the put and call option agreement.
Are guarantors required?
The standard form REIQ commercial sale contracts do not contain a provision for a buyer’s guarantee. If you are a seller, and in order to protect your interests, you should include a special condition in the contract for a buyer’s guarantee to be provided if the buyer is a company or trust entity.
Is there a cooling off period with a commercial purchase?
No. A cooling off period does not apply to the purchase of commercial property.
What special conditions should be included in a commercial contract?
As the standard form REIQ commercial sale contracts do not contain all conditions which may be necessary to protect a buyer’s interests, then it may be necessary for special conditions to be included.
A special condition needs to be included in the contract at the time of negotiations and before the contract is signed by the buyer and the seller. Two useful special conditions are:
- Due diligence; and
- If buying a commercial lot in a community titles scheme, a body corporate inspection of records search.
If the buyer is unable to satisfy a special condition, then the buyer can terminate the contract whereupon the deposit is required to be refunded in full.
It is recommended that you seek legal advice as to the conditions best suited to your transaction.
What is a ‘due diligence’ special condition?
A buyer should consider including a due diligence special condition. This enables the buyer to conduct searches, enquiries, investigations and tests in relation to the property (such as soil test, town planning and development searches, whether there are any restrictions on the use of the property, present use is lawful, etc) within a specified period of time. If the buyer is not satisfied with those enquiries, then the contract can be terminated and the deposit refunded.
It is recommended that you seek legal advice as to whether or not a due diligence condition is appropriate for your transaction.
Should searches be carried out when buying a commercial property?
There is no obligation on the seller to tell a buyer about the property, any of its defects or any other issues (except for limited contractual warranties and statutory disclosure).
Therefore, a buyer should undertake searches to identify:
- the property under contract is in fact the property which was inspected and for which an offer was made;
- the legal ownership of the property (the seller is in fact able to sell the property);
- whether there are any encumbrances on title to the property (such as mortgages, easements, covenants, caveats or any other administrative advices);
- whether the property is contaminated;
- whether there are any adverse property issues (which may give rise to termination of the contract or a claim for compensation from the seller);
- whether there are any restrictions on the use of the property;
- so that the required adjustments can be calculated;
- the seller has met their disclosure obligations; and
- the warranties in the contract are correct (the seller warrants various things that could affect the property such as correctness of title, capacity to complete, no judgments, orders or writs affecting the property, no unregistered dealings, no notices of body corporate meetings and no obligation to give notice of contamination).
It is common practice for a contract to be signed first and searches conducted afterwards. A buyer can protect themselves from unsatisfactory search results by including a special condition in the contract such as a due diligence special condition.
It is recommended that you seek legal advice on the searches best suited to your transaction.
Does GST apply to the sale of a commercial property?
The obligation to pay GST will depend on whether the seller is registered (or required to be registered) for GST purposes.
If the seller is not registered, and is not required to be registered, then generally no GST will be payable on the supply of the property.
If the seller is registered for GST purposes, then the seller will be required to pay GST unless some exemption applies. The most common exemptions are the ‘margin scheme’ and ‘going concern’. If the ‘margin scheme’ is to be applied, then the seller is still required to pay GST but at a reduced rate. The ‘going concern’ exemption may apply if the seller supplies to the buyer all of the things that are necessary for the continued operation of an enterprise such as the existing lease of the property on terms that continue after settlement. The seller must also continue to carry on the enterprise right up until settlement. Both the buyer and the seller must agree that the ‘going concern’ exemption is to apply to the transaction. The buyer must be registered for GST as at settlement otherwise the ‘going concern’ exemption cannot be claimed.
As a buyer, where GST is payable in addition to the purchase price, then transfer duty (stamp duty) will also be increased because it is payable on the purchase price plus GST.
(This is only a general overview of the GST law and such information should not be used or treated as legal advice. You should always consult your solicitor and accountant in relation to GST issues and what your obligations are.)
What happens if the sale price (or market value) of a commercial property is $750,000.00 or more?
The Foreign Resident Capital Gains Withholding Tax Regime will affect real property if the sale price (or market value) is $750,000.00 or more.
Despite the Regime referring to ‘foreign residents’, it is important to note that it will apply to all sellers (whether a foreign resident or an Australian tax resident). It is important to understand that this regime is different to the requirements of the Foreign Investment Review Board where foreign persons generally need to apply for approval, or obtain a no objection notice, before purchasing property in Australia.
An Australian tax resident selling real property with a market value of $750,000.00 or more will need to obtain a clearance certificate from the ATO prior to settlement to ensure they do not incur the 12.5% withholding tax.
A foreign resident seller can apply for a variation of the withholding tax rate, or make a declaration that a membership interest is not an indirect Australian real property interest and therefore, not subject to withholding tax.
If a clearance certificate, or a variation notice, is not provided by the seller at settlement, then the buyer must retain 12.5% of the purchase price and pay this amount to the ATO as a withholding tax following settlement. Penalties may apply if a buyer does not comply.
A clearance certificate is valid for 12 months and is specific to a particular entity (i.e. the registered owner recorded on title) and not linked to a particular property.
This regime applies to a range of transactions beyond the sale of taxable Australian real property. You should speak to your solicitor and your accountant if you think this regime may apply to your sale.
Does the GST Withholding regime apply to a commercial sale?
Even though commercial property is being sold, the GST Withholding Regime may apply if the ATO considers the property to be ‘new residential premises’ or ‘potential residential land’ for the purposes of the relevant GST Withholding laws. The GST Withholding regime will not apply to the sale of commercial residential properties such as a hotel, boarding house or caravan park.
If the GST Withholding Regime does apply, then the seller is required to give the appropriate withholding notice to the buyer prior to settlement. The buyer is then required to complete certain forms online with the ATO and provide copies of those forms to the seller at, or prior to, settlement. Payment of any required GST Withholding amount is the buyer’s responsibility and a failure to pay may render a buyer liable for the withholding amount as well as penalties.
(This is only a general overview of the GST Withholding Obligations and such information should not be used or treated as legal advice. You should consult your solicitor and accountant as to whether the GST Withholding regime applies to your transaction and what your obligations are.)
Who is responsible for payment of transfer duty?
Transfer duty (also referred to as stamp duty) is a tax charged by the State Government on a purchase contract.
Transfer duty is calculated on the purchase price and different rates apply depending on the purchase price.
It is usual for all sale contracts, including the standard form REIQ commercial sale contracts, to include a provision that the buyer is to pay transfer duty. It is important to note that if the buyer does not pay the transfer duty, then the Office of State Revenue can require the seller to pay the duty. The seller would then need to recover this amount from the buyer as a liquidated debt.
The buyer will need to have documents stamped and pay transfer duty either 30 days from when the contract becomes unconditional or on settlement (whichever occurs first). If the contract is not stamped and duty paid when due, then penalty interest can be imposed by the Office of State Revenue.
Who is responsible for insuring a commercial property?
The standard form REIQ commercial sale contracts provide that the property is at the risk of the buyer from 5pm on the next business day after the contract date.
As a buyer, you will need to arrange for all required insurances to be taken out. You should consult with an insurance broker to make sure adequate insurance is taken out. If the property is damaged between the contract date and settlement, the buyer is still required to settle unless the property is destroyed or damaged as to be unfit for occupation. If damage occurs, the buyer may, in some circumstances, gain the benefit of the seller’s insurance.
If you are the seller, it would be prudent for you to also maintain existing insurances over the property until settlement occurs. This will protect you in the event the buyer does not take out insurance and something happens to the property such as the property burning down.
(You should always check with either your solicitor, your financier, your insurance broker or your insurance company that you have taken out the appropriate insurance. If you are obtaining finance then your financier may require to be noted on your insurance policy as 'mortgagee'.)
Does a seller have to provide the buyer with a certificate of classification when selling a commercial property?
If the sale comprises commercial land and buildings (a stand-alone building), and that building was constructed on or after 1975, or an approval has been given by council to alter the building after this time, then the Building Act 1975 (Qld) will apply to the sale. This means that the seller is required to provide to the buyer at settlement a certificate of classification for each building permit issued. A building is not able to be lawfully occupied unless a certificate of classification has been issued. The building may also not be covered by the owner’s insurance if a certificate of classification does not exist.
A buyer should conduct a search of council’s records to obtain a list of all building approvals, the final inspection certificates for each permit as well as a copy of all issued certificates of classification.
If a certificate of classification does not exist, then the seller will be required to arrange for council to inspect the property to ascertain whether the building work complies in order for a certificate of classification to be issued. If the building does not comply, then the seller will be obligated to perform any necessary building works so that a certificate of classification can be issued and provided to the buyer on settlement. A seller is also able to insert a special condition into the contract to provide that the buyer is purchasing the property ‘as is’ and a certificate of classification is not required to be provided by the seller on settlement.
It is strongly recommended that you discuss the provision of a certificate of classification with your solicitor prior to signing a contract whether you are a buyer or a seller.
What happens if asbestos is present in the property?
The rules for dealing with asbestos apply to buildings used as a ‘workplace’, which is likely to be most commercial property. The standard conditions of the standard form REIQ commercial sale contracts do not allow a buyer to terminate the contract if asbestos is found in the building.
If you are selling a commercial building which was built before 31 December 2003, then you will have an obligation to comply with the Asbestos Management Code. As an owner of commercial property, you will be obliged to keep an Asbestos Materials Report and Register at the property. You will also be obliged to develop and implement an Asbestos Management Plan. Copies of both of these documents are required to be provided to the buyer both prior to the buyer entering into a contract and at settlement.
A commercial building should not contain asbestos products or materials if built in or after 2004.
It is strongly recommended that you seek legal advice regarding your obligations under the Asbestos Management Code whether you are a buyer or a seller.
What the requirements for the seller to provide a building energy efficiency certificate?
This commercial building disclosure regime will apply when commercial office space with a net lettable area of 1000sq.m. or more is offered for sale (unless an exemption applies).
Prior to advertising the property for sale, the seller needs to obtain (and display) a building energy efficiency certificate and register the property on the Building Energy Efficiency Register and the Register of Recognised Ratings.
The seller will also be required to provide a copy of the building energy efficiency certificate to a buyer if requested.
What is the effect of the Combustible Cladding Regulation?
An owner of a private building is required to undertake a process to identify whether the building is affected by combustible cladding. The Cladding Regulations will apply to certain buildings. If a building has non-conforming cladding, then a notice to that effect must be displayed in a conspicuous part of the building for so long as the cladding remains in place. Every lot owner and tenant must be given a copy of that notice (including new tenants and new owners).
Sellers of buildings subject to the Cladding Regulations are now required to disclose whether the seller has complied with the relevant provisions of the Regulations and copies of those documents are to be provided to the buyer prior to settlement.
If you are selling a commercial lot in a community titles scheme where cladding is present, you are not required to give disclosure to the buyer ,but, you should carefully consider whether you should disclose the existence of combustible cladding in the sale contract, as the non-conforming cladding may be considered by the buyer as a defect in common property which you were aware of (or ought to have been aware of) which may then give rise to the buyer terminating the contract.
If you are a buyer of a commercial lot in a community titles scheme, then you may wish to include a special condition in the contract for a comprehensive search of the body corporate records to be conducted to ascertain whether combustible cladding is present. If it is present, then the contract can be terminated and the deposit refunded.
(This is only a general overview of the Combustible Cladding Regulation and such information should not be used or treated as legal advice. You should consult your solicitor.)
Is a buyer bound by any existing lease and service contract?
Where a commercial property is being sold which has an existing lease and/or an existing service contract, then the details of those agreements are required to be disclosed to the buyer as those agreements will continue after settlement.
The standard form REIQ commercial sale contracts include both a lease and service contract schedule which the seller is required to complete at the time of providing the contract to the buyer.
The seller is required to provide true copies of all leases and service contracts (and a written statement to that effect) to the buyer after the contract is signed. The buyer should then undertake a complete legal and financial review of those documents. The buyer can then terminate the contract if not satisfied with the terms and conditions of any lease or service contract. If the buyer does not terminate the contract, then the buyer will be bound by the disclosed leases and service contracts after settlement.
What does ‘time is of the essence’ mean?
This is a legal term that means both the seller and the buyer must perform their obligations strictly by the due date. For example, both parties must settle by 4pm on the settlement date.
If either the seller or the buyer, after making all reasonable efforts, is not able to meet their settlement obligations because of a natural disaster then, in certain limited circumstances, time will no longer be of the essence. When the natural disaster no longer prevents performance of the parties’ settlement obligations, then a notice must be served to make time once again of the essence. Both parties will then be obliged to settle on the date stated in the notice.
What happens on settlement?
Settlement is the day noted in the contract when all of the parties’ legal and financial representatives meet at a pre-arranged place and time. Settlement must take place between the hours noted in the contract which is usually between 9am and 4pm. If the settlement date falls on a public holiday, or a weekend, then settlement must occur on the next business day. At settlement, all of the required legal documents are exchanged for payment of the purchase price and possession of the property is then given to the buyer.
What happens if either the buyer or the seller cannot settle on the settlement date?
The party who is unable to settle usually requests an extension of time from the other party.
If the buyer requests an extension, then the seller is able to impose a monetary penalty which is determined by the terms of the contract. This usually involves default interest being charged on the balance purchase monies calculated daily from the original settlement date through to when settlement actually occurs. If the contract does not stipulate the default interest rate, then that rate is usually the rate determined by The Queensland Law Society at that particular time. The seller may also require settlement adjustments to be calculated as at the original settlement date and may also require the buyer to pay their additional legal fees.
If the seller requests an extension, then the buyer may impose similar conditions to those a seller can impose on a buyer.
If an extension of time is granted by either the seller or the buyer, then it should be granted on the basis that time will remain the essence of the contract. This will then enable a party to force the performance of the contract should they be required to do so at a later date. If time is not of the essence, then a party cannot force settlement to occur on a specific date which can have significant implications for the party who wants to settle at a later time.
If an extension is not granted then:
If the buyer defaults:
The seller can either affirm or terminate the contract.
If the seller affirms the contract, they may sue the buyer for:
- damages; or
- specific performance (where the seller will require the buyer to comply with their contractual obligations and settle); or
- damages and specific performance.
If the seller terminates the contract, they may do all or any of the following:
- take back possession of the property;
- claim the deposit the buyer has paid and any interest earned (if the deposit was invested);
- sue the buyer for damages;
- resell the property. If the property is resold at a lesser value, then the seller may sue the buyer for the difference in the resale price. The seller may also sue the buyer for any expenses relating to any repossession, any failed attempt to resell, and the resale of the property. However, this is on the basis that the resale of the property settles within 2 years of the contract being terminated by the seller.
If the seller defaults:
The buyer can either affirm or terminate the contract.
If the buyer affirms the contract, they may sue the seller for:
- damages; or
- specific performance (where the buyer will require the seller to comply with their contractual obligations and settle); or
- damages and specific performance.
If the buyer terminates the contract, they may do all or any of the following:
- recover the deposit they paid and any interest earned (if the deposit was invested); and/or
- sue the seller for damages.
Whether you are a buyer or a seller, the best way to make sure that you are protected is to make sure that you do everything that you can to prepare for settlement on the due date.
Disclaimer: This information is a guide only and is not a detailed explanation of the law. This information should not be used, treated or relied upon as proper legal advice and you should contact a solicitor before making any decisions concerning your requirements.