Buying commercial property in Victoria: legal issues before signing

Why commercial property is different from residential property

Residential conveyancing in Victoria runs on a familiar framework: a standard form contract, the section 32 vendor statement under the Sale of Land Act 1962 (Vic), a cooling-off period in most private sales, and a relatively consistent settlement process. Commercial property transactions share some of that framework — but in practice the differences matter more than the similarities.

• Bespoke contracts. Commercial contracts are usually heavily varied by special conditions drafted for the particular property and parties. The standard form is a starting point, not the finished document.
• Limited consumer protections. The statutory cooling-off period in section 31 of the Sale of Land Act does not apply to most commercial purchases. Once the contract is signed, the buyer is generally bound.
• GST and tax complexity. GST commonly applies to commercial property and significantly affects the funds required at settlement.
• Leases and tenants. Tenanted commercial properties transfer the landlord's rights and obligations under each lease to the purchaser at settlement.
• Use restrictions. Planning controls and permitted use can be decisive in whether the property is fit for the buyer's intended business.

Contract review before signing

The single most important step in a commercial property purchase is the contract review before signing. Special conditions in commercial contracts can shift risk significantly in either direction — on deposit, settlement extensions, default, GST, vendor warranties, condition of the property, existing leases and limitation of liability.

A focused pre-signing review usually identifies:

• the conditions that should be negotiated before signing;
• the risks that need to be priced into the offer (or that warrant walking away);
• the protections that should be added — for example, due diligence periods, finance conditions or specific warranties on tenancies and outgoings; and
• the GST clause and whether the transaction is being treated as a going concern or otherwise.

Once a commercial contract is signed, the opportunity to negotiate is largely gone. A short legal review at the front end is one of the most cost-effective steps a purchaser can take.

Due diligence: title, planning, zoning and permitted use

Due diligence on a commercial property typically covers:

• Title. Encumbrances, easements, covenants, restrictions, registered leases, mortgages, caveats and any unregistered interests disclosed in the contract.
• Planning scheme and zoning. The applicable zone and overlays, permitted and prohibited uses, and any planning permits attaching to the property.
• Building approvals. Permits and occupancy permits for existing buildings, including any unapproved works that may require regularisation.
• Environmental risk. Past uses, contamination risk, EPA notices and (where appropriate) an environmental assessment of the site.
• Services and capacity. Power, water, gas, telecommunications and trade waste — particularly where the intended business has specific service requirements.
• Owners corporation. For commercial strata properties — the rules, levies, sinking fund, insurances and any current or proposed major works.

A buyer's permitted-use assumption is often the most consequential issue in commercial property. The fact that the existing business operates on the site does not automatically mean a buyer's intended business will be permitted. Confirm planning before contract.

Existing leases, tenants and occupancy issues

Where the property is tenanted at settlement, the buyer steps into the shoes of the landlord under each lease. The economic outcome of the purchase is significantly affected by what those leases actually say. Review of each lease should cover:

• term, options to renew and any notice deadlines;
• rent, rent review mechanism and timing (particularly reviews falling shortly after settlement);
• outgoings recovery, including any caps or carve-outs;
• permitted use and any restrictions on assignment or subletting;
• make-good obligations at the end of the term;
• security — bank guarantees, personal guarantees or security deposits — and whether they transfer cleanly to the buyer at settlement;
• any incentives, side letters or unregistered arrangements the vendor has agreed with tenants; and
• whether the Retail Leases Act 2003 (Vic) applies — see our article on when the Retail Leases Act applies in Victoria.

GST, duty, land tax and tax issues to flag

GST, stamp duty and land tax can each apply differently to commercial property than to residential property. The legal contract drafting should align with the tax position confirmed by the buyer's accountant. Common issues include:

• GST treatment. Whether GST is added to the price, whether the going-concern exemption applies and how the margin scheme is dealt with.
• Stamp duty. Duty is generally calculated on the GST-inclusive price; landholder duty rules may apply where the purchase is structured through entity acquisition rather than a direct land transfer.
• Land tax. Commercial property is generally subject to land tax in Victoria; absentee owner, vacant residential and other surcharges may also be relevant depending on the property and the buyer.

This article does not provide tax or accounting advice. Buyers should obtain specific tax advice from their accountant in addition to legal advice on the contract.

Finance, deposits and settlement conditions

Commercial finance typically takes longer and is more heavily conditional than residential finance. Lenders may require valuations, environmental reports, lease reviews and updated financial information from the buyer. Where the buyer's funding is not already approved, a properly drafted finance condition is essential — and the wording of that condition (including notice mechanics on non-approval) needs close attention.

Deposit, settlement period and default provisions should also be reviewed before signing. Standard residential penalty interest and notice-to-complete provisions are often varied or replaced in commercial contracts.

Building, services, compliance and outgoings

For commercial buildings, due diligence often extends to:

• essential safety measures and the annual essential safety measures report;
• fire services and compliance certificates;
• the condition of building services (HVAC, lifts, electrical) and any deferred capital expenditure that will fall to the new owner;
• disability access compliance where relevant; and
• outgoings — rates, water, owners corporation fees, land tax and any other recurring costs — both in absolute terms and as they are recoverable from tenants under existing leases.

Buying through a company, trust, SMSF or other structure

The choice of purchasing entity affects almost every layer of the transaction: contract description, finance and security, stamp duty, GST, land tax, asset protection and future succession. Common structures include direct individual ownership, a private company, a discretionary trust, a unit trust or a self-managed superannuation fund (SMSF).

SMSF purchases are subject to specific rules under the Superannuation Industry (Supervision) Act 1993 (Cth), including restrictions on the type of property an SMSF can acquire and how borrowing arrangements can be structured. Structuring decisions should be made before signing, with integrated legal and accounting input.

For broader commercial structuring issues, see our Commercial and Business Law service page.

Common risks for purchasers

• Signing without legal review. The risks that legal review would have flagged usually cannot be addressed once the contract is binding.
• Assuming permitted use. Confirming permitted use after signing is too late — and may require a planning permit that is not granted.
• Inadequate lease review. Options, outgoings caps and make-good obligations can materially affect the value of the investment.
• Misunderstanding GST. A miscommunicated GST position can mean the buyer has to find materially more cash at settlement.
• Weak finance conditions. A finance condition that lapses without proper notice can convert a conditional contract into an unconditional one.
• Wrong purchasing entity. Restructuring after signing is generally costly and sometimes not possible without unwinding the contract.

Practical checklist before signing

1. Confirm the purchasing entity and have it ready to sign.
2. Obtain the contract and section 32 statement in advance.
3. Engage a lawyer to review the contract and special conditions.
4. Obtain accounting advice on GST, duty and land tax.
5. Confirm permitted use against the planning scheme and any relevant permits.
6. Complete title, building, environmental and services due diligence proportionate to the property.
7. If tenanted, review every lease and any side arrangements.
8. Confirm finance arrangements and align the finance condition wording with the lender's actual process.
9. Confirm settlement period and any vendor-side dependencies (for example, vendor finance discharge).
10. Negotiate special conditions before signing — not after.

When to seek legal advice

Legal advice should be obtained before signing — ideally before an offer is submitted. Once a commercial contract is signed, the buyer is generally bound and the opportunity to negotiate is significantly reduced. Where disputes arise after signing — for example, on disclosure, tenant arrangements or settlement default — early advice is also important. See our Property and Conveyancing and Litigation and Dispute Resolution service pages, or browse other guides in the Information Centre.

Frequently Asked Questions