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How Tenants Impact the Purchase of Commercial Property

A current tenancy can influence all other decision making factors when determining whether a commercial property is worth the investment.

How Tenants Impact the Purchase of Commercial Property

Buying a commercial property can be a great investment in the long-term, particularly in areas, such as West End’s Boundary Street, where consumer’s attention and pockets are returning to high streets for their boutiques and dining experiences.

When buying a commercial property, you will have many things to consider such as; the purchase price, financing, the return on your investment and the physical state of the property, amongst many others.

However, one aspect of a property which often affects all other decision factors, is whether there is current tenant in the property and how long that existing lease is for.

Having an existing tenant in the property can prevent you from operating your own business out of the property or leasing the property to a new tenant for an increased price. If this is what you plan to do, then it is important to know prior to purchasing the property if the lease with the current tenant cannot be terminated. Alternatively, if the lease makes for a good investment then you want it to remain after purchasing the property.

Whether or not there is a lease in place at settlement will affect the GST treatment of the sale. As a buyer you may wish to obtain the going concern exemption by the lease remaining in place, so that GST is not payable.

The situation gets complicated where a contract is signed with a lease in place but then tenant is given notice to vacate by the seller, regardless of whether they are vacating before or after settlement. This can impact the going concern exemption.

There is also the practical concern of the tenants make good and how they leave the property upon vacating. A standard contract does not usually contain any protection for a buyer in this regard, so a due diligence special condition is needed.

These are considerations and discussions which all need to happen prior to entering a contract, so that the contract is correctly documented.

Moving forward:

Purchasing a commercial property is not always a straightforward process and so we always recommend seeking legal advice before signing any contract. The circumstances of each purchase and buyer are different; it’s important to keep in mind that what has been successful in a previous purchase may not be effective in future purchases.

If you have any questions about or require any advice on purchasing a commercial property, contact our Commercial Team for advice and assistance on 3345 4388 or at commercial@hatzis.com.au

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