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What Does Due Diligence Involve When Buying Commercial Property?

While the commercial property market in Australia has provided somewhat patchy returns in recent years due to a static economy, it remains a strong option for investment if you choose the right property in the right location.

How do you do this? The due diligence process undertaken before committing to a big investment such as commercial property is crucial to making the right decision.

This article will outline some of the key things you need to do when assessing commercial property. You should also always seek out the guidance of a legal firm with expertise in commercial property transactions to help you during the due diligence process, as well as with the contractual agreement should you proceed to purchase.

Key things to consider in performing due diligence

A thorough due diligence process will encompass investigations and research into the technical, legal, financial, planning and environmental, and risk management issues involved in the commercial asset.

Those people looking to purchase commercial property valued at over $1 million will generally employ building consultants to assess the structure and complete a technical report that covers everything from the façade to walls (external and internal), roof and guttering, ramps and stairs, entry lobbies, floors & floor finishes (carpets, tiling, etc.),  ceilings, stairways and amenities such as kitchenettes.

Technical: A technical report will also assess any mechanical and electrical systems such as lifts, escalators, switchboards and airconditioning, and also address fire protection systems, water supply, sewerage and stormwater systems.

Planning and environment: Due diligence on these sometimes neglected issues might encompass, among other things, reviewing current zoning and height restrictions, reviewing changes made to the original development application, obtaining copies of original occupation and development certificates, fire safety statements, recent environmental or heritage assessments, and any existing contamination issues (e.g. asbestos, etc.).

Financial: Financial assessment of the property will take into account the status of any existing lease of the building and, if not leased, the current market conditions that determine the likely value and potential of renting the property.

Assessing lease arrangements involves locating all lease documents (the current owner may furnish these) and reviewing them for:

  • expiry dates and options to renew, including how and when rent is reviewed;
  • planning approvals granted prior to entry into the lease;
  • confirmation there are no ‘first rights of refusal’ to purchase;
  • confirmation there are no other restrictions within leases that might affect the sale or your capacity to operate or expand the building;
  • details of any bonds/deposits/bank or personal security guarantees held;
  • details of tenant’s agreements regarding maintenance and repair;
  • details of any caveats lodged;
  • whether the tenant/s are in arrears;
  • whether GST is being charged (longer-term leases may not include this provision, which may affect your decision to purchase).

Legal: Many of the aspects outlined above can be handled by legal professionals experienced in the handling of commercial property. Thorough lawyers will also review existing maintenance contracts (everything from cleaning to mechanical systems); confirm details of current insurance policies and that they conform with lease requirements; check whether the building name is a registered business name and/or trademark, as well as signage rights; check there are no previously unknown interests, including unregistered interests such as car parking arrangements; conduct ASIC and court registry searches (including bankruptcy register) on existing tenants; review all documents for details on easements, caveats, restrictive covenants, notifications, memorials or other encumbrances.

Specialist lawyers can compile much of the detail above, including the reports of building consultants, valuers and others, into one document in order to complete the due diligence process and help you, as the prospective purchaser, make a properly informed decision about the property.

While a vendor might typically supply some documents to help with the due diligence process, the onus remains with the buyer to thoroughly investigate the past and current arrangements of the building before proceeding to purchase.

How we can help

At McNamara Law we have a reputation for expertise in the area of commercial property. We can provide high-quality legal advice and guidance during the due diligence process and in the signing of a contract to purchase a commercial property. Contact our Ipswich lawyers today on 13 58 28 to arrange a consultation if you have a commercial property in your sights.

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