Commercial Property Traps: What to be aware of when buying

Those looking to buy into commercial property need to be aware of the risks it involves and carry out proper due diligence so as not to be caught out on the other end of the sale, Auckland based Prendos Director Sean Marshall says.

The importance of carrying out thorough technical due diligence before purchasing a property has been highlighted in a case out of the Court of Appeal late last year.

APN New Zealand Ltd sold its premises to Overton Holding Ltd in 2007. The sale also involved the property being leased back to APN. Several years after the sale Overton was found liable for the cost of significant seismic strengthening works.

APN New Zealand Ltd had owned and occupied the building in Hastings for many years prior to the sale and lease back agreement with Overton Holdings Ltd in 2007.

Overton paid $4 million for the land and buildings; APN agreed to lease them back for eight years at a rental of $340,000 per annum.

The sale information memorandum contained a disclaimer about the structural integrity of the building and stated that “no undertaking is given about such matters”.

There were no issues apparent with the building until 2011. Following a structural engineering assessment, the Council informed Overton that the properties they had purchased off APN in 2007 did not pass the threshold of 33 per cent of new building standards (%NBS) – the buildings were deemed ‘earthquake prone’ and will be listed on the Council’s earthquake prone buildings register.

APN and Overton each took the position that it was the obligation of the other to remediate the earthquake prone buildings. Overton claimed that APN had misrepresented the property as fit for APN’s use and sought to cancel the sale agreement and the lease. APN claimed that

Overton was legally liable to remediate the buildings under the lease, the Building Act 2004 and the Health and Safety in Employment Act 1992.

For the following three years APN left the building but continued to pay full rental to the end of the eight-year lease. Overton sued APN for $1.6 million, the estimated cost to strengthen the buildings to 67 per cent NBS.

The Court ruled there was no implied representation by APN during the sale, that the property would be fit for purpose.

The Court did not accept that the seismic issues meant the property was ‘fundamentally different’ from what Overton contracted to buy, rather, that it received something not fit for its intended purpose.

Prior to entering into a commercial building lease or purchase decision, it will generally be on the purchaser/lessee to be satisfied that the property is fit for purpose.

Investors require independent and accurate technical information on the property or development in order to make informed and potentially cost saving decisions.

This will enable new owners and occupiers to concentrate their efforts on running their business, in the knowledge that they have significantly reduced the potential for disruptive and costly surprises with their building(s), not to mention highly disruptive High Court and Court of Appeal cases.

By Sean Marshall, Prendos Director, Registered & Chartered Building Surveyor

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