Commercial property due diligence for investors in KZN is not a bigger version of the checks a home buyer does. A house is bought for the owner to live in. A commercial property is bought for the income it produces and the way the purchase is financed, which means the legal risks sit in different places that the tenants, title conditions, zoning and the security the bank or lender will want.
What financing and security issues arise?
Most commercial purchases are financed, and the finance shapes the legal work. A lender will not advance funds until the property, the buyer and the income are all documented to its satisfaction. That brings in matters a residential buyer never faces.
- The security package. A bank will usually take a mortgage bond over the property, and it may also ask for a cession of the rentals, so the lender collects the income if you default. It may require suretyships from directors, a holding company or related entities. Each of these has legal consequences that go well beyond the purchase price.
- The buying structure. A property may be bought in a company, a trust, a syndicate or a fund. The structure affects who signs, who carries personal liability, how the bond is registered and how tax is treated. Investors should take tax advice separately, because this article is about the legal side.
- Financing conditions. Bond approval, a valuation, tenant verification and acceptable lease terms are often conditions in the agreement. If the lender is not satisfied by the date in the contract, the deal can lapse. The dates must match what lenders actually take.
- Existing bonds and encumbrances. A seller’s bond must be cancelled at registration, and other registered rights, such as servitudes and long leases, stay with the property. A Deeds search helps establish which rights and encumbrances are registered against the property.
- VAT or transfer duty. A commercial sale is generally subject to either VAT or transfer duty, depending on the circumstances. SARS explains the distinction. The applicable treatment should be established and properly reflected in the sale agreement, as it affects the buyer’s costs.
- Going concern sales. A sale of a let property together with the lease business may qualify for special VAT treatment if strict conditions are met, and those conditions must be recorded in the contract.
An investor who assumes the bank’s lawyers will protect their interests has the wrong picture. The bank’s attorneys protect the bank. Gordon De Beer’s commercial property lawyer services include advice on security packages and financing structures for investors and developers.
What questions should investors ask before committing?
A proper due diligence checks the property, the income and the paperwork before you are legally committed to buy. It should include a deeds search, a zoning compliance check, a review of the municipal records and a check on registered encumbrances. Where possible, complete these checks before paying a deposit or becoming contractually committed. If the transaction is already underway, identify outstanding checks and consider whether the agreement needs appropriate protections. The questions below turn those checks into practical points.
- Who owns it, and who can sign? Does the seller’s name match the title deed, and has the company or trust properly authorised the sale?
- What conditions are on the title? Are there restrictive conditions, servitudes or rights of way that affect use, development or letting?
- Is the zoning right? Does the zoning allow the current use and the use you plan? Zoning is controlled by the municipality, for example eThekwini Municipality in the Durban metro area.
- Are the buildings approved? Do the structures match the approved plans, and are the required occupation certificates in place? Unapproved structures or missing approvals can create legal, compliance and financial risks.
- What do the leases say? Get a lease schedule showing each tenant, rent, escalations, term, renewal rights, deposits and arrears. Read the leases themselves. A short lease, a below-market rent or a tenant with a termination right changes the value of the building.
- Are the municipal accounts and levies up to date? Check rates, services and, where relevant, sectional-title levies and any planned special levies.
- What was disclosed? Establish what the seller has disclosed about defects, disputes, notices and other matters that could affect the property’s use or value. Make sure important disclosures and representations are properly documented.
- What happens if finance falls through? Is there a suspensive condition, and does it have a realistic deadline and a clear result if it lapses?
Ask for the answers in writing and keep a record of who gave them. Verbal assurances can be difficult to rely on once a dispute arises, so ask for important representations and disclosures to be documented in writing.
When is specialist commercial advice essential?
Commercial property due diligence for investors requires more than a standard residential conveyancing check, and a few situations make the difference obvious.
- When the purchase is financed on a commercial bond with a security package. The documents are more complex, and the personal exposure is larger.
- When the building is let to several tenants. Each lease is a contract that comes with the building and may restrict you.
- When you are buying through a company, trust, syndicate or fund and need to structure signing authority and liability correctly. My investor mandates are designed for property funds, syndicates and private investors working through acquisitions, financing structures, lease assignments and registration.
- When the property is being developed or rezoned, and your return depends on conditions being met by a date.
- When the price is large enough that an undiscovered problem would damage your capital.
- When timing is tight and several conditions need to be watched together.
The earlier a specialist is involved, the more options you may have to address risks through the contract, its conditions or the purchase price before signing. Gordon De Beer advises commercial property investors on acquisitions, financing structures, lease assignments and related legal matters. Explore Gordon’s commercial property lawyer services or arrange a free initial consultation to discuss your transaction.
The short answer
Commercial property due diligence for investors requires more than a standard residential conveyancing check.
Investing in commercial property in KZN? Protect your capital with proper due diligence before you commit.
Book a free 30 minute consultation or call +27 31 765 1777 (Upper Highway) or +27 82 519 5401 (North Coast).
