EPISODE 15: Unlocking the Power of Legal Knowledge in Commercial Property - Property Inc

[ Podcast Transcription ]

This is the Commercial Property Investing Explained Series brought to you by Steve Polisi. Find out how commercial property really works and start investing like the pros. Your education starts now.

Welcome to the Commercial Property Investing Explained Series. My name is Andrew Bean and I’m here with new dad, Steve Polisi. How are you, mate? I’m good, Andrew. I’m tired, but a really good I bet you are tired, mate. How is the experience? Please tell all. No, it’s really cool. She’s a little champion and she is sleeping.

Well, most nights. What I find funny is most people come up and they say, Oh, say goodbye to sleep. The thing is, I want to point out is I’ve had no sleep before, but normally there’s a really big fun part to the no sleep. Like you’re out at the pub or you’re doing something social. This is the no sleep, but without the fun.

It’s a crying baby for four hours at night. Yeah, that’s it. Although the fun is transcends into like when she does sleep, you get this high of, yes, we’re getting three hours sleep straight. And how’s the missus doing mate? She handling it all right? Yeah, she’s all right. She wants to get back and active.

She was an ultra distance trial runner before. So she’s trying to get back to that, but with a C section that takes time, but she’s loving motherhood. It’s really cool. Yeah, no doubt. And as I’ve protested to before, it’s just going to get harder. So enjoy it while it’s easy while you can put the baby down and the baby will still be in the same spot you left it because once they can crawl, once they can roll, once they can start walking, my God, I mean, just.

Well, you’ve got two as well, so how are you finding that? Yeah, that’s double trouble. I thought that having one became easy enough. So I thought, hell, let’s just throw another one in the mix. And, uh, it’s a whole new ball game. But I reckon the third is where it really would get hard because then you don’t have a parent for each baby.

So at least now I’ve got one for one, one boy for girl, one girl for boy, and it’s easy to do it that way. But once the kids… Outnumber you as the parents, then I think you’re in trouble. Yeah. We’re in this discussion before how you said, when I get to a certain age where they start crawling around, you have to remove all the objects in like the lounge room so they can’t touch it.

But if you’ve got a second child who’s older, who can obviously move objects, then I, that’s another layer of complexity to it. Yeah, that’s it. So mate, we’ve got another guest today, which is really, really cool. Who do we have on? I’ve got Richie Muir. So he’s a licitor slash lawyer. What I like about Richie is he deals with all the different states.

So he gives you a good overview of like how each state acts differently. And there’s actually, you’ll hear on the podcast, there’s quite vast differences between each state as well. So I thought he’d be a good person to encapsulate all of Australia with commercial combating. Yeah, he absolutely crushed it.

I mean, there’s so many differences between states and usually when you’ve got a deal in like Queensland, you go get a solicitor from Queensland and you have one in New South Wales, you go get a solicitor in New South Wales. And I think on the podcast, you said they say that they’re a market expert, but Richie really does cover everything, which is really cool because there’s So many different clauses, like assignment clauses, the way that you have to put your entity down on the contract, which is different and the lingo, some of the lingo is different, which I had no idea that, Oh, and the retail leasing act, how that changes in different states as well.

Yeah, that’s it. All right. So. Basically, this one’s really, really interesting because Richie gives us a step by step of the legal process of going through a deal from go to woe. He gives us his most common clauses. He gives us his favorite clauses that he likes to use, not just in a contract of sale, but also in the lease.

So it’s a really, really good one to check out. And also he has a killer horror story at the end as well that guys, uh, you got to hear this one. So Anything else to say about Richie before we bring him into the studio, mate? Yeah, he drops heaps of nuggets in this one, so it’s definitely worth a listen, guys.

Yeah, definitely. All right, without any further ado, let’s bring him in. Welcome to the show, Richie. How are you, mate? Very good, thanks, Andrew. And Steve, how are you guys doing? I was just telling Andrew before we jumped on how tired I was. Bubs, I got a three week old, so she decided not to sleep last night before the podcast, which is always fun.

Ah, good stuff. Well, the, uh, it’s getting close to the ashes starting, so as long as we can finish this up for the coin toss, that’ll be good. Fair enough. Mate, so for the listeners who don’t know you already, can you just give us a little bit of a background of what you do? So, I’m the legal director at LawLab.

LawLab is a national law firm that specializes in conveyancing, both residential and commercial. Awesome, mate. And how long have you been doing that for? I’ve been a lawyer since 2008, so that’s 15 years now. Oh, wow. And how long do you actually have to study to be a lawyer? It’s not a quick thing, is it?

Well, I actually went to university in Glasgow and I was there for four years. So, on average, lawyers complete a legal degree and that can take four to five years. After that, they do some practical legal training as well. So, it’s a decent stint and that’s all before, you know, you get qualified and actually practice.

You raise a good point, Richie. So a lot of kind of like buyers always suggest like, Oh, do you go a conveyancer or do you go solicitor? What are your thoughts on that? Obviously you’re a solicitor, which is a more qualified one, but what are the pros and cons of using a solicitor versus conveyancer? Yeah.

The first thing to understand is the differences between the two. So a lawyer is someone who’s completed a law degree at university, usually four to five years, and then it’s completed some practical legal training before they can actually practice. Conveyances usually complete a deployment which takes about a year and then they have to complete another year of practical experience too.

In Queensland, only solicitors can do conveyancing, in WA they call conveyances settlement agents. The key difference is that lawyers are usually trained longer and have a broader legal knowledge which helps in commercial deals. But you do need to engage a lawyer who’s experienced in property law and ideally someone who specializes rather than just a general legal practitioner.

You know, lawyers are heavily regulated, one of the most regulated professions out there. So clients do have a lot more avenues to follow if they’re not happy with their experience. Whilst lawyers and conveyances both need professional indemnity insurance, conveyances insurance doesn’t actually cover fraud.

So with lawyers, you’re more protected essentially and you have that broader knowledge base. So mate, did you say that you’re a solicitor or a conveyancer? So I’m a lawyer. Yep. Solicitor, lawyer, same thing. They generally call it lawyer now in Australia. Our firm is, we have both conveyances and lawyers, mostly lawyers.

They’re all employed lawyers and it’s a national firm. So we’ve got lawyers based in Victoria, New South Wales, Queensland, Darwin, and we practice nationally. Oh, awesome. So, mate, a conveyancer can actually do the legal work for a commercial deal, can’t they? They can, but we don’t deal with conveyances that much in commercial deals.

It’s usually lawyers who are engaged both sides of the transaction to do commercial deals. Yeah, one of the main reasons for that, I imagine, Richie, is because there’s a lot more complexities to a commercial deal with the leases and credit history checks and all that type of stuff, whereas a simple residential deal where you’re just checking like searches, and you’ll know this better than me, obviously.

The searches and titles and handing over the actual title is a bit simpler. Yeah, commercial deals are usually much more involved and require more legal advising and consideration of legal issues compared to a standard residential deal. The deals are often higher value too. So investors usually feel more comfortable when they’re dealing with a lawyer rather than conveyancer.

I like to say clients, you know, think of it like insurance policy. So you want the most coverage possible when you’re dealing in the commercial space, as long as it’s affordable to you. Yeah, and we, we know we’ve worked together what 50 plus times now, pretty much no commercial deal is smooth sailing.

There’s always hundreds of emails back and forth every single deal. Yeah, it’s definitely not smooth. We like to make it appear to clients as smooth as possible, like a duck on water. It’s very calm at the top, but underneath the padding like crazy just to get the deal done and check things in the background.

And so, mate, in terms of doing the legal work for commercial property deals, how much more is involved in a commercial property deal than, say, a residential deal? So, with commercial deals, often there can be a lot of negotiation before you get the contract. The sales process can be different. Often there will be a tender process or an expression of interest process.

So we usually have more opportunity to advise clients about what to put in a contract and review a contract before you sign it. You know, a contract is the most important thing. It sets out clearly each party’s rights and obligations and both parties have to comply with that until settlement. So with a commercial deal, you’re making sure that the contract’s right and there’s a few additional things to look at.

You’ve also got the complexity of commercial leases in a commercial deal. So it’s really important to review those thoroughly. Often the strength of a commercial deal is based on the strength of the lease covenants. Part of the lawyer’s role here is to make sure we’ve reviewed everything thoroughly and the client knows what they’re getting.

Yeah, I find Richie as well, especially when a client’s not using a buyer’s agent, that generally takes on a little more of the role of the due diligence as well. Whereas when a buyer’s agent involved, there’s actually a bit of a crossover where we kind of have to outline what the tasks are. But what type of due diligence do you have to do outside of the contract?

Yeah, so scope of work for the legal due diligence usually falls into two parts. There’s the lease due diligence, which is a review of the lease and associated lease documents. And then there’s the property title due diligence, which includes searches of the property. They’re the two main parts of the DD for lawyers.

And obviously there can be a bit of crossover with the buyers agents. And buyers agents will be looking at. A lot of the financials, for example, with the deal and making sure that the rent and the outgoings and some of the key lease covenants from a financial aspect reflect what’s going on with the actual lease.

Learning about how commercial property really works. Has never been easier with so many great resources around like this podcast and Steve’s book. And he’s giving it away for free if you use discount code PODCAST on his website. So go to www. policeyproperty.

com Use discount code PODCAST to get the book free. All you have to pay for is shipping. What a great deal. So mate, when you’re doing your commercial due diligence on the lease and also the contract of sale, obviously like that can be a really big beast and like Steve and I always really preach the investor to do your own mini due diligence as well.

How do you actually present your findings in the contract of sale and and the lease for your client to be able to understand as well as you do? We’ve obviously done a lot of commercial deals, and so we’ve created a consumer friendly template that our legal advisors will complete. Clients don’t want us to repeat all the legal jargon to them.

They want something easy to understand so they can make an informed decision. So our reports are for the review of the contract and the lease. And we detail as many, any of the material issues from the property due diligence searches. So for example, our lease review report for each critical clause, we have a list of the most common types of terms within the industry, and we’ll select the one applicable to the lease that we reviewed.

This means the client is given context. And for example, knows that in this lease, then your rent review is Fixed of say 3 percent rather than a CPI. So we’ll list all the different options within the industry parameters so that they know that even though the lease says X, they can compare it to Y and Z and understand if their lease is a good one.

One of the cool things Andrew is Richie’s um, company actually uses an online software so the client can actually see exactly where they’re up to in terms of like the conveyancing, soliciting, the due diligence, the lease review, et cetera. So it’s all in one platform. You don’t have to trawl through thousands of emails.

Oh, so you actually just like log into the platform and then it just basically gives you a percentage of completion. Yeah, the platform is an online secure platform that we’ve developed called Rundle, R U N D L, and we want to make the transaction as transparent and easy, both for the client, but also for their other advisors, like your buyers agents and real estate agents.

So we invite them all into that space, secure online space. Much more secure than email. Of course, we all know that there’s been hacks through email, phishing hacks, where people have had money misdirected to fraudsters accounts. It’s a real issue in the industry. So Rundle certainly helps from that perspective as well.

Um, but it does track the, the deal for everyone. And obviously as a volume business like ours, it means that we can use the templates within Rundle to give the information that clients need and when they need it. We’ve also developed videos within Rundle. So we all know that clients don’t always read letters of advice.

So a quick 60 second video in Rundle at critical stage in the transaction gets their attention more and they understand what they need to do and when they need to do it. So is that a video that you record just explaining that to them, like, deal for deal? Is that how you do it? So, the Rundle videos are at Key Steps and they’re, they’re the same across the board, so they’re more to explain the steps in a transaction, what generally happens, so they’re not deal specific.

Okay, so these are like generic conditions that you would just be explaining to make it easier for for your client to understand. It’s not like this is happening. This is happening when blah, blah, blah, like dates and for do do it and things like that. So that’s all done in messages within Rundle. It’s we have like a Facebook feed, for example.

So every time you post a message, we make it visible to the participants or we can select individuals if it’s just relevant to them. Attach documents. Um, the video is at critical steps. So it might be when we reviewed a contract. Okay. Well, here’s a video of what happens next. A video of when you’ve, we’ve exchanged a contract.

Okay, well, here’s what happens next and what you need to do. Even simple things like the client needs to verify their identity. They need to sign this or do that. It’s got, it’s explained in a video rather than them having to read through a long winded letter. Yeah, because I’ve had a lot of different experiences with different solicitors.

So like you might have a solicitor that rings you up and they want to give you the whole spiel on the phone, which is fine, but then you don’t really have that record and say you forget everything and like it’s a lot of information to take in. And then you have these other solicitors that really like writing a massive email to you.

And it’s just like you go into a mini coma reading it. And what you’re describing sounds like it’d be a very, very refreshing. doing it with video and everything with the platform. It sounds really cool. Yeah. That’s exactly what our clients think. The common theme in all our reviews is, is how easy we make it and it’s a breath of fresh air.

You know, we like to, you know, because we do high volume and, and our fees very competitive, we need to make sure that we’re efficient as well. Rather than writing something over and over again for each client about what to do next, we’ve templated that, we’ve made a video at key stages. So that means everyone’s getting a consistent experience and it makes us more efficient too.

The video is quite an important one as well because a lot of people are visual learners and I’ve actually found that like even in my buyers agency, like you go under contract and then I send them a PDF of three pages of the next steps and there’s like nine different steps they need to follow. I can tell you probably three quarters of the clients don’t actually read it.

Or they do and they forget because they ask the same question that’s in that document a week later. But I think if you shorten it up into a sharp video, it actually quite helps. Absolutely. Yeah, we’ve found that the number of what do I do next questions or phone calls have reduced dramatically since we introduced both videos, but also templated messages and steps that our guys just need to click a button and all the information is there for the client rather than having to write that out every time.

Works well for my clients as well, because obviously they normally probably would ask me what’s coming up next. But once I’ve introduced them to you, they can actually just watch the video and it saves me explaining the whole soliciting process to them. That’s it. And there’s a lot of thought that goes into these videos as well about the key messages that our clients want to know.

So we try and keep it in layman’s terms and keep the legal jargon out of it. Do you want to maybe then cover like, what’s the actual typical process? So once they go under contract from the commercial point of view, what do you guys actually do for the next three, four, five weeks of settlement period?

The first thing in the process is we’ll review the contract that involves both what may seem basic stuff like checking the buying entity is correct. And the property description is correct all the way through to making sure that the terms and the heads of agreement have been incorporated in the contract and then recommending any changes to the contract to protect our client based on our experience.

You know, it’s really surprising the number of times that I guess in the rush to secure the deal and sign a contract that the buying entity is overlooked and not really considered. And if you get that wrong, it can be difficult to change the contract or have it rescinded and get a new contract because, you know, relying on the seller then to agree to all that.

And some states, if you know, there can be duty consequences as well. So that’s the first thing. Yeah. I do find it confusing even for buyers agents and the clients, because it is a confusing process, like understanding how you need to present a trust. For instance, I have to say as trustee for, or if you have a self managed super fund, setting up bear trust and things like that, it is a really complicated process.

Absolutely. And it changes in every state. Every state’s got different requirements on how to present names on contract, particularly with trust and self managed super funds. If you’re buying individual names, but as joint tenants with someone for tax reasons, you might want to have different ownership percentages.

So getting that right is important as well. Sometimes that needs to be done when you sign the contract shortly after. So yeah, it’s often seems something quite basic, but it is often overlooked. I just want to reiterate. So that’s a little nugget there. Like most people don’t realize different States. You have to present the entity different.

You can do particularly with self managed super funds. Yes. And trusts. So after reviewing the contract and making sure we’ve incorporated all the right legal terms for our client, we’ll then attend to exchange. So that’s essentially where both parties, you know, sign the contract and they call it exchange because in the old days they used to physically exchange the counterparts of the contract with each other.

Once again, different states have different names for that. In Western Australia, for example, it’s called offer and acceptance. And other states that might just call it an executed contract. So once that’s done, you need to make sure that the deposit is paid on time. Once again, something that seems basic but is often overlooked.

The payment of the deposit is usually a time critical requirement and the fundamental breach of the contract if you don’t do it in time. So, the client needs to be aware of when they need to pay the deposit and if they can’t pay it on time and they haven’t been able to negotiate that in the contract, then they need to ask for an extension and it’s not advisable to pay a deposit after the due date unless you have that extension because you’ve still breached the fundamental term of the contract.

So, that’s an important point that a lot of people don’t, or often overlook. I think it’s worth listeners knowing as well, you actually can negotiate when you pay the deposit, you don’t have to pay it on date of signing the contract. It’s certain states will have two, three, five days later. You can have it due on due diligence period.

So you can negotiate it. But just because you can negotiate it. It doesn’t mean you can go to every agent being like, yeah, I don’t want to pay the deposit for 21 days. Just leave it with me. That’s absolutely correct. Yeah. The deposit amount and the deposit payment timeframe are always negotiable. A deposit is usually up to 10 percent of the purchase price, but of course you can negotiate a lower amount and you can negotiate that being paid in installments.

So. It might be a low initial payment, could be 5 percent initially or within a day or two of the contract date just to give that time to make the transfer and then the balance might be payable once it goes unconditional. So once due diligence has been satisfied or once finance has been satisfied, so yeah, it’s absolutely negotiable, but you do need to factor in market conditions.

Obviously, if you’re competing against other buyers, you need to consider, well, if you have the means to pay that deposit straight away, then your offer may look more attractive to the agent. It also shows a level of seriousness as well that you’re actually putting money down, you’re not just going under contract on 10 properties that you plan to crash.

Absolutely. The, the payment of deposit is a sign that you’re serious about this property and agents always look at that as a real offer that you can complete. So it’s important to get that right. So I just want to jump back there, mate, if I could, and I just wanted to highlight just this for the listeners because I think some people don’t really understand that every single thing in a commercial contract actually is negotiable.

This is one of the reasons why I love commercial property because you can pretty much negotiate anything into the deal if the other party will accept it. Is there anything else that’s not negotiable? Within reason, everything’s negotiable. Same with residential property, but it’s about striking the right balance and market forces may impact what you can negotiate and what you can’t.

But in our experience, there’s certainly things that most sellers will agree to if you do need them. It’s about being reasonable, of course, as well, you need to balance the deal. So both parties rights and obligations need to be balanced. You can’t have unreasonable terms that benefit someone over the other, unless it’s good reason.

So the next thing in the process would be dealing with due diligence, the outcome of due diligence. If that’s satisfactory, we’ll give notice that the contract condition is satisfied and the contract will go unconditional. Sometimes there is something in the due diligence process revealed that the client might want to negotiate the terms as a result of that.

So it might be a price reduction or there might be something that the seller has to fix as a result of the due diligence results. So we’ll do that. And then the contract will go unconditional. The key thing that is overlooked is giving notices on time. So contracts often have conditions where time is of the essence, which means that if you say you’re going to do something by a certain time, or if you have to do something by a certain time, it must be done by that time.

And if it’s not done, Then you lose your rights. So, for example, if there was a due diligence clause, sometimes they have what we call deeming clauses, which means that your opportunity to terminate a contract under the due diligence clause is lost after a certain time. So you need to make sure that you’re giving notice either way well before that time, and that’s notice of either terminating or notice that you want to negotiate something.

The next step in the process is preparing for settlement. So that will include calculating settlement adjustments for outgoings, contacting the property manager for rental adjustments, and calculating stamp duty. We also need to deal with lender’s requirements if there’s finance involved. Sometimes that can extend to giving independent legal advice to the borrower and the guarantor the mortgage and guarantee documents.

We also need to deal with the leases in relation to obtaining the landlord’s notice of atonement, which essentially notice the tenant, which is provided to the buyer to give to the tenant after settlement, saying the tenant that the landlord has changed and you need to start paying rent to the new landlord.

We also need to deal with any bank guarantees. So bank guarantees obviously often a security for the lease. So they should be considered like cash. So you need the original one if you’re going to call on that bank guarantee. So we would ask for undertakings from the landlord solicitor to provide that original bank guarantee within a reasonable time after settlement.

So it might be a couple of days after settlement. So that’s another thing we need to do before settlement and settlement these days is completed electronically for the most part. Uh, Richie, with the letter of atonement and the bank guarantees, if the client’s got a property manager, do you generally find the property manager manages that or the client has to manage it and liaise with the property manager?

Well, what we’ll do is contact the property manager before settlement and ask them what they intend to do. Usually, if the client is keeping the same property manager, then the property manager is more likely to deal with any security bond that they hold or make it easy. to either provide us with the original bank guarantee or keep the original bank guarantee and arrange for the swap of the bank guarantee after settlement.

The bank guarantee will be made out to the landlord and obviously that has to change to the new landlord. So what that involves is actually turning up at the bank and asking the bank to redraw the bank guarantee and making that into the new landlord’s name. So what’s next in the process mate? Once settlement’s done, then it’s really, there’s a little bit of post settlement work, but you know, the clients, they’re the proud owner of a new commercial property, and they should be obviously engaging a good property manager to deal with issuing the notice of attornement and dealing with bank guarantee swaps and making sure the tenant’s happy because they’re obviously a critical part of owning commercial properties is making sure you have a happy tenant.

One of the ones that’s often forgotten as well is handing over keys, swipe cards, passcodes, things like that. I find that’s always forgotten and trying to chase that up three, four days after settlement is always a, always a pain. Yeah, it makes good sense to try and arrange all that stuff before settlement and making sure that whoever’s got the keys, whether that’s the property manager or the selling agent, that they know what they need to do and when they need to do it.

So they should be handing those over to the new property manager or the client, if the client’s local, immediately after settlement. You, you mentioned during the due diligence period, you’ll sometimes have like extensions or changes of purchase price and things like that. What are some of the common ones that you have to do and common red flags during the process that you say?

So in commercial contracts, there’s a few things that can be red flags. The critical is getting the GST clause, right? For example. So if the intention is to buy this property as a going concern, then we need to make sure that there’s actually a lease in place. And it happens time and again where the parties.

Uh, preparing the contract, have selected the wrong GST clause, or they’ve selected it assuming that there’s a lease in place, but the lease has expired, or they’re thinking about making it a go and concern by having a new lease in place before settlement, but there’s no new lease provisions in the contract to deal with that.

So, GST go and concern. which is the most common taxable status of a commercial property deal. It’s really important to get that right in relation to making sure that there is a existing and ongoing lease before settlement that continues until after settlement. Another red flag is, and it’s quite common for sellers to give essentially no warranties about the property or the information that they’ve given to the buyer during due diligence.

Period. So essentially they’re saying to the buyer, well, you’re buying the property as is now on the face of it. That’s fine. It’s by beware up to the buyer to do their due diligence. But if the buyer is having to rely on information that they’ve been given by the seller or the seller’s agent, they want to make sure that that information is correct.

So we’d want to see special conditions in the contract, essentially making the seller warrant that the information they provided is true and accurate to the best of their knowledge. So Matt, I just wanted to jump back to the leases because I wanted to ask, how do you actually check if a lease is legitimate if it’s not registered?

Because in some states, particularly New South Wales, if it’s under one year, I think you don’t have that lease registered or three years maybe. If it’s under three years, you don’t have to have a lease registered. How do you check? It’s always recommended to have a lease registered, certainly from the tenants.

There’s what we call indefeasibility of title in Australia, which essentially says that for the tenant to have their rights protected as a tenant of that property, if their lease is three years or more, they have to register that lease. So that’s to protect everyone in the scenario where, so indefeasibility of title is used to protect the situation where, for example, the seller sold a property without advising the buyer that there was a lease.

And obviously, if the lease wasn’t registered, and the lease was over three years, and the buyer had no notice that that lease was in place, they would not have to honor that lease. So the law essentially says, well, you need to register leases over three years so that tenant is protected. But anything under three years is fine.

So what we’re looking at for those leases is really making sure that they’ve been executed. Properly that there are documents that exist for an extensions of the lease term and that we’re getting Warranties from the seller that the tenant isn’t in breach of the lease or that the lease has ended Notice is robert you a lot of times put special conditions in the contract for things like this Yeah, absolutely.

And one example, one unusual scenario is in Western Australia, where if you have a lease that’s over five years and it’s not registered, after the property is sold and transferred, either party, landlord or tenant, can terminate that lease, which seems like quite an odd scenario. So what we do in those situations is we either ask the landlord to have that lease registered before settlement, but…

At the moment, certainly Landgate and WA can take quite a while to register a lease. I’m talking several weeks, if not several months. So the alternative to that is to have a special condition whereby the parties sign a deed of covenant between them, acknowledging that after settlement, the lease will still remain binding and neither party will terminate that lease.

Yeah, we’ve actually had to do that quite a lot of times together, haven’t we, Richie? We have, yeah. And it can be a bit of a process and not everyone understands it and why it’s been done, but I think we’ve got there in the end on most of those deals. And I think that’s a good point as well, because people think a good deal means smooth sailing, but not necessarily.

There are a lot of moving parts and things like this you have to deal with, even if the tenant’s legit and they’re on a good long lease. Yeah, there’s lots of things that can be revealed during the DD process that you don’t expect. It’s about rolling with the punches and making sure that you’re protecting the client and getting what they bargained for in the end and they’re not exposed to any risk.

Yeah, it’s quite interesting about how leases actually work because in some states, if the lease is under three years and correct me if I’m wrong, Richie, if some states, if the lease is under three years, the agent can write that lease and it doesn’t have to be registered. But if it’s over five years, it has to be written by a solicitor.

Is that correct? So in a lot of states, the Real Estate Institute will have essentially a template, commercial tenancy agreement, which is, makes it easier to transact and often agents can complete a standard form template as long as they’re not drafting any additional legal terms and they’re filling in a reference schedule.

So yes, that, that is quite common, but you usually find that for leases over that three year period that need to be registered or should be registered, they’re always prepared by lawyers. I think that’s probably a good follow up question as well. So what are the main differences between the states Richie and one of the reasons I like working with you is you’re experienced in all the states, whereas most conveyances and lawyers generally stick to their one state, which they’ll argue they’re experts in it.

But I can guarantee it sounds like I’m giving you a bloody talk out. I got no financial, no financial benefit from having you on this or working with you, but you are experiencing all the states. So what are some of the main differences between the states? My background’s obviously Queensland, where I’ve lived for the last 15 odd years.

But since joining Law Lab, which is a national firm, essentially I’ve had to learn quickly all the other jurisdictions. So that’s, I’ve been at Law Lab now for over 10 years and experienced in that time in all the other jurisdictions. And we’ve obviously got a big team. Each of them are experts in those jurisdictions.

So we’ve built up a great knowledge base in each of those states. Some of the, I mean, the differences I’ve already mentioned the, the interesting one in WA, but the main least. Generally, commercial leases are much of a muchness between the states. The big difference you can get into is the retail leases.

So every state has their own retail lease laws, and whilst they generally follow a similar set of rules, there are some unique differences between them. But your listeners may not know, for example, that for retail leases, that there are certain restrictions on what a landlord Can do or what they can charge.

For example, most states land tax is not recoverable as an outgoing for retail lease and also ratchet clauses are banned as well. So ratchet clause is essentially a mechanism within the lease that deals with rent reviews and it will usually say the rent is the greater of. A fixed amount or CPI, or it may say that, for example, on the commencement of a, of a further term that the market review rent at that time is to be no less than the rent as it was the previous year.

So, for retail leases, that’s obviously banned and landlords need to, need to factor that in when they’re buying retail shop leases. I believe property management fees you can’t pass on in some of the states as well. There’s exceptions in every state about what you can charge and what you can’t. And even there’s differences between what is considered a retail shop lease as well.

So some states will say, for example, that even though it is a technically a retail lease in the face of it, if the tenant is a listed corporation or if the premises are large and a thousand square meters, then it falls outside the retail shop lease laws. In Victoria, for example, there’s the what they call the ultimate consumer test.

So even though you may not be, you have a shop front selling retail goods, if what you’re doing in that business is ultimately used or sold to consumers, then your use of that premises can be a retail shop lease. We had a difficult one recently, I think we bought a gym in an industrial complex, but all the other industrial properties in the complex had retail tenants that had like homeware stores and barbecue shops.

And then it was like a fitness gym and one of them, and we had that discussion then is, is this actually a retail lease? So it should be an industrial property. Yeah, it’s a really important question within your legal due diligence working out whether it is a retail lease or a commercial lease because it can have big impacts on the outgoings, for example, and also the landlord’s rights and obligations in a retail lease.

The landlord might have to give certain notice periods the tenant before the lease expires or the tenant can stay on. There’s a lot more disclosure required as well. There’s landlord disclosure statements that are required to be given to tenants at the start of the lease. And in some states, if there’s inaccuracies in that or they’re not given, that actually gives the tenant the right to terminate the lease within a certain time frame.

So one of the things that is quite interesting for me, and I know a lot of listeners also have this as well, is the and or nominee clause. Because if you don’t have an entity already set up and you want to get the deal under contact pretty quickly, and you want to use the this is the buyer and or nominee, as you would know, in some states, if you do that, It can trigger stamp duty, but say like a state like South Australia, you can use the and or nominee clause all day and it doesn’t trigger stamp duty.

Can you just share with us what states you can use the and or nominee clause without triggering stamp duty? Yeah, well, I guess the first starting point for that is that generally common law, right? to nominate a nominee under a contract. So you don’t necessarily have to use the words and or nominee. You do have a common law right to do that.

But of course, what you do need to think about is the stamp duty implications. If you do nominate another purchaser, usually in, for example, starting at the bottom of the East coast in Victoria, it’s a nominations, I would say relatively common and for a straight nomination, there’s usually no stamp duty issues.

There can be stamp duty issues if you’re nominating and it’s deemed to be a subcell, where, for example, you nominate someone and getting a consideration for that, or if there’s been land development that has occurred from the time you sign a contract and when you nominate. So that’s important to remember.

New South Wales. You can do what’s called a transfer not in conformity. So as long as it’s a related party. So for example, if you haven’t set up your entity, you sign your own name, but you’re a sole director of a company and you want to purchase that entity, you can do a transfer not conformity and there’s stamp duty exemptions for that in New South Wales.

In Queensland it’s much more difficult. You essentially need to rescind that contract and enter into new contract. Otherwise, the revenue office consider that two separate transactions. In that example I gave before, they would consider it was one transaction you’ve purchased in your own name and then another transaction.

You’ve transferred it to the company name, even though there’s technically no separate registration of the transfers. There’s an equitable transfer and they’ll deem that to be too lots of stamp duty. So you do need to rescind the contract and enter into new contract. There are ways around that. Of course, if you haven’t set up the entity just yet, an option.

Agreement is one way to do it. So that’s where, for example, an option is essentially the, the right, but not the obligation to buy a property. So you can have a call option and a put option, call options for the buyer’s benefit. So if I just wanted the option, but not the obligation to buy a property, I would sign a call option.

But if it was going to be, uh, the equivalent of a contract. The seller would want a put option. That’s their right and obligation to essentially force you to buy the property from them. So in that example where you haven’t got the entity sorted yet, or you may want to defer the creation of the contract until after 1 July for CG2 reasons, from the seller’s point of view, both parties would sign a put and call option.

They would exercise that option. Either the buyer exercise the call option or the seller exercise the put option after that one July and in the buyer’s case, they would nominate the entity to be the party within the contract. So that’s a process that can defer tax liabilities, but also change the entity without any stamp duty issues.

Would a conveyancer be able to do this or only solicitors? In theory conveyances can do it, but we usually find that anything that’s not a standard residential transaction, you should find lawyers do that work. Alright mate, so do you have any specific clauses that you always put into your contracts, like the ones that are your favourites, like the ones you have to have in there to make sure that your client is protected?

Sure, there’s obviously the due diligence clause. Yep. It’s very rare that a buyer’s completed all their due diligence before going to contract. I mean, there are ways to deal with that. They might be able to have an exclusive negotiation period in the heads of agreement in which to do their DD, but heads of agreement’s not legally binding, or certainly not usually, and so they haven’t at that stage secured the property.

So, of course, either party can change their mind at any stage. You don’t have a legally binding deal until that contract is signed. So, ideally, if you’re going to contract, have a due diligence clause, and that may give a buyer 14 or 21 days or longer to do all their investigations, make sure they’re satisfied with the property, and then they can go unconditional.

If they’re not satisfied, they can use that clause to terminate the contract and get their deposit back. One of the hard things with heads of agreement, though, you can’t get your finance ball rolling because you’re trying to do all your due diligence, but because you don’t have an executed contract, the banks won’t look at it.

So even though you might spend 14, 21 days doing your due diligence, then the clock will start ticking on the finance part. So that’s one of the hard parts with heads of agreements. Absolutely, yeah. I mean, the best you can do is get a pre approval, but banks will want to see a fully executed contract before they give any kind of final approval.

One thing to remember is that a due diligence condition is usually a cover all, so you don’t necessarily need to have a due diligence clause and a finance clause. You can use your due diligence period in which to undertake finance, and if you don’t get finance approval, you can once again terminate under due diligence.

Yeah, so I mean, in contracts, we seem to like to put in both clauses as in the due diligence and subject to finance clause. You just said we don’t really need to do that, but sometimes Steve will protest to this, you know, once you can satisfy due diligence and then the, the seller knows, okay, it’s just up to finance now, it seems to be more palatable to them.

Can you just confirm, do we actually need to have that finance clause in there as well, or should we just leave it as one clause? I think that’s a really useful negotiation tactic if the seller is expecting that you will need finance and you can get it in the contract and it’s still a strong offer, then by all means go for it.

And if one or the other satisfying that before you go complete unconditional, that gives the seller some comfort that this deal is progressing, then that can be really useful. Yeah, especially if you have like say you have satisfied the due diligence clause. And then you’re basically waiting for the valuation.

If for whatever reason, the valuation say came in short, then all of a sudden the seller knows it’s just a negotiation on that price. They might actually just say, look, I’m happy to match the valuation fee. And it’s a bit easier than having all these balls in the air with due diligence and finance. It just keeps it simple.

And people are more likely that there’s just one speed hump to accept, and then the deal’s done and locked in. That sounds absolutely right. And I think it’s worthwhile that the client speak to the buyer’s agents, particularly with those kinds of concepts because the buyer’s agents are negotiators. So speak to your buyer’s agent.

They’ll certainly give you some advice about the best way to present your offer and deal with things like that. Stay up to date with all the hints, tips and tricks in commercial property by following Policy Property on Facebook. Go to Policy Property, hit that follow button and never miss a beat with Policy Property.

Are there any states where you need to give proof of that failure for due diligence or finance or any clauses like that? Not usually due diligence. It’s a get out of jail free card. Essentially, you can terminate for whatever reason finance. Yes, there can be some strings attached to that. It comes down to the specific finance clause.

There are standard contracts in each state. Sometimes there’s. different types of standard contracts in each state. Often there’s one prepared by the law society, another prepared by the real estate Institute. Sometimes together, sometimes there’s common software providers that provide a standard form contract.

So you do need to look at the specifics of the finance clause, but yes, definitely in some States, they will require you to provide a letter of decline from the bank before you can actually terminate under the contract. And if you can’t provide that, Then, you’d be in breach of the contract, essentially terminating the contract without that.

And another, uh, actual variant of the finance clause that I’ve used in the past, because usually when you’re putting in a finance clause, it might be, uh, your finance clause is like 42 days, 21 days, whatever. They usually have a number assigned to it. But in the past, I’ve actually used finance clause is, uh, Until I receive formal approval of finance from the bank, so there’s no time on it, and then if you never receive the formal approval from the bank, then you always have an out.

Yeah, I mean, that’s quite a, well, lawyers don’t like that because there’s no certainty, um, um, lawyers like certainty, but arguably the contract can remain conditional until settlement in that case. Yeah, that’s the reason why we use it. Yeah, but there may be other arguments as well about the uncertainty of that clause and whether that particular clause could be void for uncertainty.

So it’s a bit of a dangerous game. And I think if you can, it’s better practice to put in a specific date. Similar with like settlement periods that can sometimes in some states be after certain periods. So it’d be after finance approval, settlement will be 14 days or 21 days after, as opposed to at the start, just nominating a number and hoping you hit it.

Absolutely. And I think that’s better practice as well, having a settlement date that is a number of days after the last condition is satisfied. So you might have a 21 day finance period or due diligence period, and you might have the settlement date 14 or 21 days after that. And the reason being is, of course, is that if you need finance and your finance is getting approved after 21 days, but you only have a 28 day or 30 day settlement, that only gives the bank essentially a week to get ready for settlement.

But after finance approval, the bank has to draft the loan and mortgage documents, send those to you, get them signed, review them, make sure there’s no inaccuracies, get the funds together, you know, have their settlements team prepare for settlement. Sometimes that process usually takes 14 days and a lot of banks will actually have some strict time frames that they will not be ready to book settlement until X number of days after they’ve received the signed loan documents.

So you do need to give yourself some time after finance approval to be ready to settle. So are those the only two clauses that you really see all the time? Are there any other unique clauses that you see apart from those two clauses? Well, I like to add in clauses that deal with leases. Usually the standard form of contract clause that deal with that aren’t sufficient.

So I want to make sure that the landlords, sort of the sellers, warranting there are no existing breaches of the lease. I want clause in there that essentially say that the landlord will provide a letter to the bank for any redraw of bank guarantee. I want something in there, if the lease requires a deed of covenant, how that’s dealt with at settlement, making sure we don’t have any issues with the lease and the changeover of landlord.

That’s a big one. And then with incentives. So a lot of lease have incentives. So particularly if the lease is only relatively new lease, those incentives may not have been satisfied, paid out by the landlord by settlement. So you want something in there essentially saying that the landlord is going to cover and pay out those incentives so that the new owner is not left having to pay these incentives that the landlord originally agreed to give the tenant as an inducement to enter into the lease.

Yeah, that’s normally one of the big red flags we come across is the incentives that are under the table, for instance, and you don’t know about them, and then the new buyers just basically just shafts himself a little bit. And it’s also who owns what, right? So, like, if there’s a fit out, who actually owns that fit out?

The incentive could have been that the landlord pays for that fit out, but they might retain it. It’s so complicated with all these different handshake deals sometimes. That’s why reviewing the lease is arguably one of the most important things to do when you’re buying a commercial property. You want to make sure you understand exactly what has been agreed to.

Some of the key things that we would consider in a lease review, for example, number one sounds basic again, the description of the premises. Are they leasing the whole of the land or the whole of that particular lot title or as a part of the land? If it’s part of the land or part of a building, is there a plan attached to the lease?

You wouldn’t believe how many times that there’s no plan attached and then we’re working at, well, what are they actually leasing? The next thing is rent reviews. So, making sure that the landlord can actually increase the rent annually and how they do that, particularly with Inflation recently, if the landlord has a standard fixed rent review of two or three percent, but all their other costs have gone up by, you know, inflation has increased all other costs, they’re losing out there.

So ideally the landlord would want to have a rent review clause in the contract saying that the lease is increased annually on the greater of a fixed percentage or CPI. We’re also looking at the security in the leases. So security is essentially a backup for if the tenant is late on payment or rent or they go out of business, the landlord will want as much security as possible.

The standard is usually three months of rent, either a cash security bond or bank guarantee. But if the tenant was a company or trust that also want a personal guarantee from the controllers of that trust or the company directors, so that if the tenant did default, they could personally sue the tenant for breaching the lease.

And in theory, the landlord can sue for the balance of the term of that lease. If something happens, you know, two years into a three year lease and the tenant defaults, then the landlord can sue for that one year of rent remaining. However, they do need to mitigate their losses, which means they do need to take active and reasonable steps to try and re let the property so that their losses and damages are reduced as much as possible.

And of course, in that scenario where there’s a year left to go on the lease, the three months security bond or bank guarantee is only going to cover that part. So, that ideally won’t. that put those personal guarantees from the tenants usually find that tenants will do everything they can to comply with the lease if they’ve given a personal guarantee because the risk is of course that the landlord will sue them and if they can’t and if they’re successful and can’t pay then they could be bankrupted so it is a very important security for the landlord to have.

Another big one is outgoing, so we need to understand if it’s a net or gross lease, i. e. is it, is the landlord entitled to charge the base rent plus outgoings on top, which is a net lease, or is the rent that they can charge inclusive of all outgoings? Really important to understand that. And of course, what outgoings can they charge?

So is it just the rates, water, land tax, if it’s not retail, what are corporate levies, or are there other things that they can charge like property management, insurance, and things like that? And lastly, make good provisions. At the end of a lease, the landlord wants to know that the tenant’s going to leave the property in the state that they’re supposed to leave it.

Now, that could be converting it back to a basic shell, or it could be leaving it as it was when they started the lease. Certainly, usually requires the tenant to remove all their own possessions and keep it in a clean and tidy state. Often, the landlord will require the tenant to paint the premises and potentially replace the carpets and the window furnishings and light bulbs and things like that.

What are the rules there about quality of that type of stuff? Because like, can in and put the cheapest carpet you can get in? And then the owner is going to be like, well, I’m gonna have to replace this now anyway. Cause I think I can get better tenants by having it done nicely. Some leases go into that detail.

They often refer to it. As being done to a tradesman like standard, some leases will say that these things obviously require the landlord to approve what’s being done. Some leases will say that at the landlord’s discretion, they can decide the tenant doesn’t have to do it, but the tenant will pay the landlord at cost to do it themselves.

Ideally, what happens is that you’re as specific about this as possible. You have a, the equivalent of a residential entry condition report at the start of a commercial lease. So both landlord and tenant report exactly what the condition of the property is, document that, refer to it in the lease, and then at the end of the tenancy, making sure that if it’s required to be made back to those standards, then that’s done in accordance report and there’s, there’s no arguments there.

So mate, have you seen any notable trends with the, the way that contracts are going these days, you know, according to like the interest rates and things like that? Some current trends, solar on rooftops. So a lot of my commercial landlords are now looking at the opportunity in their buildings and saying, okay, well, we’ve got opportunity here to install or get someone, a service provider to install solar panels on top.

And then we get an income from that, which is great, but we can also offer reduced power to our tenants. So it’s a win win. So I’m seeing that come into more and more into leases these days. How does that conversation normally go? Is it like, say I’ve got a freestanding warehouse and I’ve got a tenant in there and I want to put solar panels on top.

Do I have to talk to them at all or am I able to just put the solar panels on top and start actually getting their electricity cheaper for myself? It’s usually in a lease. So any new lease that I do for, for example, property fund landlords, they’ll have this as standard in their lease, giving them the discretion to have solar panels installed in the building.

And if they can supply power to the tenant, cheaper than the tenant’s normal power cost, then the tenant agrees to take that power essentially from the solar panel provider, so sort of from the power provider. Okay, so if the lease didn’t have it, you’d have to go to the tenant and ask for permission to, this is what we’re doing with it.

Certainly permission for them to use the power, but then it comes down to what part of the premises is being leased. But it’s the landlord’s building, they can install something on the roof as long as it doesn’t interfere with the tenant’s use of the premises. The other thing is a recent announcement by the Victorian government that from 1st July next year, essentially stamped due to be phased out for commercial properties.

So there’s still a lot in the details, but from my understanding what they’ll do is that for any transactions after that date, the buyer will have the option of. either paying the stamp duties lump sum as normal or paying it off in installments over 10 years and then essentially everyone from that 10 years onwards will be paying an annual property tax which is like a land tax but it will be on top of that a little bit like the New South Wales government and what the previous New South Wales government what they introduced first home buyers last year that of course now just being cancelled.

Okay. So flowing onto that, how’s AI actually affecting your legal work at the moment? Has there been any changes with softwares or checks or anything like that? I think AI will be for the better, but it obviously won’t replace lawyers. It will essentially free up low value tasks and give lawyers more time for the high value tasks that require more critical thinking and relationship.

building here at law lab. We’ve got an AI project team and they’re looking at ways to adopt new AI technology within our own business. And that the intention there is to improve some of our existing automation workflows. For example, a lot of the automation that we do is using if logic. So rather than the old old editing in word and cutting out paragraphs here and there, we have if logic.

So if it’s this state or this probably transactional or these circumstances, it generates So our guys, when they’re, as long as the data is input at the start, they’re not having to manually edit any of our letters to clients. It essentially automates that letter at the click of a button. Yeah. That’s so cool.

Is it even then logic? Is that what it’s called? Podio works on the same logic. I really love that logic. It’s awesome. So, mate, have you seen any notable trends in the shift in negotiation, like the dynamics between a seller and a buyer now that we’ve had multiple rate rises? Certainly in the residential space since the downturn, although we’ve seen that some markets are now growing again.

But in the commercial space, I think there’s always been a bit more of a balanced negotiation power between buyers and sellers. So we haven’t necessarily seen a big change in commercial negotiation dynamics, at least from our perspective, buyers agents are more at the coalface in that. So Steve may have other ideas on that, but obviously with the interest rate rises, yields are generally lower.

And so it’s important, you know, as a result of that, it’s important for landlords to think about things like the, I mentioned before the rent review ratchet clauses and making sure that the rent is going up in accordance with. CPI, for example, so that they can retain their yields. Uh, Richie, what about some horror stories?

So some stuff you’ve seen where clients have had really struggled and good and bad outcomes as well, whether you’ve been able to fix it or not. Well, one interesting one was a few years ago, it was quite a big commercial deal. And essentially what happened was the parties went to contract and the seller just changed their mind and they did not want to be bound by the contract.

And they refused to provide any due diligence material that was requested. And so our client, the buyer was obviously left in a difficult situation. Ultimately, what we did was engage a barrister and threatened to file a Supreme court application to essentially get an order that the seller provide this material that they were bound by the contract.

And after a bit of RG bargy, the seller eventually caved in, realized that there were. Being a bit pig headed and agreed to provide the information that ultimately the client obviously that was quite a distasteful experience for them and the due diligence material revealed some issues. So ultimately didn’t proceed.

But it just goes to show that if one party to a deal just completely refuses to accept that deal, even though they’ve signed a binding contract, you do have to take urgent action and legal action to enforce your rights. Thank you very much. I actually had that quite actually two times happened to me during the peak of the commercial boom about a year ago, where they’d get a higher cash offer post going under contract.

So they’ll actually trying to do everything in their power to not have the deal go ahead. And that’s how you do it. You stop giving information and then it kind of does tie your hands a little bit. You do want to tell your buyer, look, don’t buy this property. We don’t know enough about it. So yeah, that does happen quite a lot.

I’ve even had one time where the seller put it under contract with two different buyers. Because he wasn’t sure about the one, the cash offer, and then stopped giving us information. So, they were playing legal silly buggers there. Yeah, and listen, it’s very difficult to force someone to do anything, even though they’re under contract, unless you enforce your rights by going to court.

And that’s not always an easy process, and it’s certainly not a cheap process, and ultimately should be the last resort. But you do need to take that action sometimes to enforce those rights. Yeah, especially on the bigger deals because that can draw out and obviously just the costs involved in legals and due diligence, things like that.

It can rack up as well. Yeah, absolutely. And this, and this was a big deal. This was 10 million plus. So it was worthwhile spending a bit of money on barristers fees and take those initial steps to get what they needed. So in that instance, mate, people don’t really talk about the bad parts of commercial property, and I guess this is one of the bad parts where it really probably they save themselves from buying a dud property, but how much money were they actually out?

Like, how much did they lose because they backed out of a deal? I backed out of a couple of deals myself and I’ve lost a bit of money, but if it’s a 10 million deal, I’d imagine that was a fair sum of money that your client may have had to pay in professional fees. Absolutely. I mean, due diligence to do it properly, you need to engage the right professionals and they all charge that, of course.

So you do need to make sure that this initial DD done and that this stacks up in theory before you do invest a lot of time, effort and money into a deal. But there’s also some things that we would do that I don’t think we’ve mentioned in relation to. Some of the property due diligence searches. So there’s this critical searches that we would do to make sure that the legal ownership and the title checks out, you know, plans the property.

And if there’s any encumbrances on title or covenants that may limit the use of the property, but we also would recommend searches on the property that they would otherwise not know. And these are searches from government and authority records. So for example, sorry, a buyer would want to know whether there’s been any planned.

Main roads, resumptions or any illegal building works in the property and whether council were aware of those and had issued any notices or hadn’t given approvals, but also body corporate inspection records so that can reveal a lot and often sellers themselves or agents won’t know what is going on with the body corporate.

So we always recommend inspection of those records, which can reveal. Through the body corporate minutes of meeting and AGMs, whether there are any planned special levies to do major works to the common property that might be painting the building or fixing leaks and things like that, but also there’s any major defects to the common property that need to be fixed as well.

And so what platforms are you actually going to do these searches on? These are information search providers such as InfoTrack and Dian Durham. Yeah, they’re really interesting. Like, there’s so much things like you have to know to be able to get a commercial contract over the line. Like, this is just a team sport, you cannot do this alone.

Absolutely, and you need a good professional team around you which should include your lawyer, your buyer’s agent, your accountant, insurance broker. And whilst it’s important to have those, Experience professionals with you. Ultimately, you should know the deal best yourself. And even after the advice, make sure that you’re checking contracts yourself or reviewing all the report summaries yourself to make sure it meets your expectations because you may have had a conversation with the seller or the agent and you haven’t told your professionals about that.

So they’re not aware of something that you are. So ultimately got to have the right team there. But you do need to check things yourself to plan. Alright mate, so last question, where can the listeners go to find out more about yourself and your business? So they can check us out at lawlab. com. au and personally, I’m on LinkedIn.

So feel free to send me a message. Fantastic. All right. This has been Steve Polisi, Andrew Bean and Richie Muir on the Commercial Property Investing Explained series. Thanks guys. Thanks, Andrew. Thanks, Steve. Thanks, Richie. Pleasure. Thanks, Andrew. Thanks for listening to the Commercial Property Investing Explained Series.

This show has been produced by the Commercial Property Show Network.