Commercial real estate guidance

Commercial real estate, including letting and leasing, are specialised fields, and it’s important to understand the pitfalls and challenges.

Your fiduciary duty versus duty of care

Your fiduciary duty to your client is the highest duty in law – it’s a relationship of trust and good faith.

Your duty of care to a customer (purchaser) is less than the fiduciary obligation you owe to a client (vendor) because you are not contractually bound to the customer as you are with a client. However, you must not act in any way that is likely to cause the customer harm or fail to mention something that the customer should be made aware of.

Rule 6.4 of the Real Estate Agents Act (Professional Conduct and Client Care) Rules 2012 (Code of Conduct) provides a benchmark that applies to both clients and customers:

A licensee must not mislead a customer or client, nor provide false information, nor withhold information that should by law or in fairness be provided to a customer or client.

Your client may be a vendor or lessor, and they will be paying the commission on the sale or lease along with any agreed marketing and advertising expenses. In other situations, your client will be a prospective purchaser or lessee, and they would pay your commission fee and any other agreed expenses.

Remember, you can’t represent two clients (vendor/lessor and purchaser/lessee) in the same transaction. This is covered by rule 9.14 of the Code of Conduct:

A licensee must not act in a capacity that would attract more than 1 commission in the same transaction.

Appraisals and agency agreements

It’s a legal requirement to have an agency agreement and appraisal in place when conducting a commercial real estate transaction – this applies to all transactions, including commercial leases.

Your agreement needs to contain a written appraisal price of the business, which is required under rule 10.2 of the Code of Conduct.

A business appraisal is needed when:

  • the business is to be sold
  • ownership interest is gifted or transferred as part of an estate
  • business partners are changing
  • there is a legal separation of business owners
  • it is required for business financing purposes.

It can be difficult to find comparable data for commercial listings. However, you can use semi-comparable data when it is available and explain this to the vendor. There will often be other businesses with similar characteristics that can be used for comparison. The businesses may not be identical, but they may have comparable products, overheads and turnover.

Take the time to support your appraisal with whatever comparable information is available. Clients rely on your professional expertise and need to know what evidence supports the market value you suggest for the property. A good business appraisal must be clear, easy to understand and defensible.

Read more about agency agreements here.

Read more about appraisals here.

Legal descriptions that are included in the certificate of title

You must obtain and familiarise yourself with the certificate of title for any property you market, whether for sale or lease. The certificate of title is likely to contain critical information, such as details of any long-term leases.

In commercial and industrial real estate, you must consider:

  • the legal description of the property – whether it’s freehold or subject to some other form of tenure, such as leasehold, unit title or company share
  • any covenants or other restrictions that might affect the use of the property
  • the physical description of the property itself - this includes knowledge of the legal boundaries and any encroachments by the subject property onto a neighbouring property or vice versa
  • representations made about the quality of the property, including its potential uses, building quality, building services, licensing issues, lease conditions, insurance, and health and safety requirements.

Disclosure requirements under the Unit Titles Act 2010

It’s common for smaller commercial and industrial properties to be a unit title rather than a freehold title. This is easily identified on the certificate of title, which will be listed as ’Computer Unit Title Register’ at the top and show either ‘Stratum in Freehold’ or ‘Stratum in Leasehold’ in the ‘Estate’ section.

The main units, which are used for business or residential purposes, are known as principal units. Other units designed for use with the principal unit, such as outbuildings, car parks and exclusive use areas within the grounds, are usually known as accessory (or auxiliary) units. These can’t be sold separately to anyone who isn’t the owner of a principal unit.

When marketing a unit title property for sale, there are provisions within the Unit Titles Act 2010 that require disclosure statements to be provided. These are required at various stages throughout the transaction process and licensees should be familiar with these provisions.

Learn more about the Unit Titles Act here.

What you need to know about unit title developments

Commercial

The operational rules for commercial property developments under the unit title scheme are likely to include a reference to specific issues such as:

  • the types of business the premises may be used for (office, manufacturing, retail, accommodation) – such uses would need to be compliant with the district plan
  • any restrictions or limitations on signage or other exterior advertising, including size, materials, durability, placement, and so on – such rules must be consistent with any local bylaws that apply
  • whether the premises are permitted to be subject to lease agreements, and any terms and conditions that may apply
  • details of security measures (such as access cards and alarm codes) and any restrictions regarding who these can be made available to
  • details of any restrictions on the hours for deliveries
  • details of restrictions on the storage, use or disposal of hazardous materials on site.
Mixed-use developments

Mixed-used developments usually involve a commercial element (such as offices, manufacturing or retail) along with accommodation.

Body corporate rules may apply, and it’s likely there will be rules relating to the residential component. These may involve such things as:

  • the general behaviour of unit owners, occupiers and guests, for example, noise restrictions after a certain time
  • any restrictions on the external appearance of the building(s), such as window coverings, and the permitted uses for balconies
  • any restrictions on keeping pets
  • pest control use of the common areas for recreation purposes.

Holding and releasing deposits

One significant issue with unit title properties is when the agency can release the deposit paid by the purchaser.

Section 123 of the Real Estate Agents Act requires all licensees who receive any money in respect of a transaction to hold that money for 10 working days from the day they receive it. This applies for all transactions, including the grant, renegotiation or renewal of a commercial lease. It also applies if the sale falls over between the time the deposit is paid, and when the 10 working days is up.

The only exceptions to holding money for this are if:

  • there is a court order requiring the agent to pay the money before the 10 working days expires
  • there is an authority signed by all the parties to the transaction requiring the agent to pay the money before the 10 working days expires.

If a notice of requisition (where someone lays a claim on the property) or notice of objection to the title is made while you are holding the deposit, you must not pay the deposit to anyone except in accordance with a court order or an authority signed by all the parties to the transaction.

The agreement being unconditional is just one element that must be satisfied before you can release the deposit. The requisition period must also have expired without a claim being made.

If the property is a unit title, the Unit Titles Act disclosure requirements must also have been met.

Releasing the deposit early

If the parties are seeking the early release of a deposit for a transaction in accordance with section 123(2), you should recommend that the parties seek legal advice. They should be aware of the implications of releasing the deposit early if something goes wrong later in the transaction.

Things to consider with District Plans

  • Change of use buildings

    A change of use is where the compliance requirements relating to the new use of a building would be in addition to what is required under the Building Act 2004(external link).

    There are many examples of changes of use in the commercial and industrial sector. For example, if a building that was designed as a warehouse is converted for use as a restaurant, this is a change of use.

    The areas of major concern in cases of change of use are:

    • the structural performance of the building
    • ensuring means of escape from fire and the fire rating performance
    • protection of other property
    • sanitation
    • access and facilities for people with disabilities, if these are not already provided
    • earthquake strengthening.
  • Building warrant of fitness (BWOF) and services

    Building services include, but are not limited to:

    • elevators, escalators and moving walkways
    • heating, ventilation and air conditioning
    • automatic door systems
    • wet or dry riser mains for use by fire services
    • automatic fire sprinkler systems
    • emergency warning systems for fire or other dangers
    • emergency lighting systems and signage
    • building maintenance units that provide access to the interior or exterior walls of buildings.

    These components are listed on a compliance schedule for the building. Each component on the compliance schedule is subject to an annual building warrant of fitness (BWOF), which must be completed by the building owner or their authorised agent. BWOFs must be publicly displayed on the site.

    Before listing a property, you should check that the BWOF is current and obtain a copy for your files. If the BWOF is not current, you must alert any prospective purchasers and recommend that they take appropriate advice before proceeding.

  • Local authority licensing issues

    Many types of business are subject to local authority (or other) licensing issues. These can relate to:

    • premises for food preparation, handling and service
    • personal services, for example, hair salons, tattoo parlours and massage therapists
    • recreation services, for example, public swimming pools, saunas and camping grounds.

    You must check whether the premises have the necessary licences and the duration of any existing licences. It’s also important to check the conditions under which such licences may be transferred to a purchaser and any restrictions that may apply.

  • What you need to know about seismic factors

    Owners of commercial and industrial property and multi-storey multi-unit buildings throughout the country are often required by lenders and insurers to demonstrate that the building is not earthquake-prone.

    Read more about earth-quake prone buildings here(external link).

    Buildings constructed before 1976 that are for commercial use, publicly accessible, multi-storey, or multi-unit residential complexes, may be assessed under the relevant council’s earthquake-prone buildings policy. You will need to check with the relevant local council for these requirements.

    Buildings that are identified as earthquake-prone, will be recorded on the local council’s record of that property and will be included in any land information memorandum (LIM) or project information memorandum (PIM).

    Owners who have a detailed engineering evaluation (DEE) or detailed seismic assessment (DSA) should be able to provide this documentation for you, and prospective purchasers and tenants to review. The DEE or DSA should include the percentage of the new building standard (NBS) that the building meets and a basic understanding of any specific issues. You should recommend that your prospective purchasers and tenants seek expert or legal advice to understand these documents.

    Read more about the Building Act 2004 here.

Lease documents you need to be aware of

A lease is a contract in which the owner of the property (the lessor) permits another person or organisation (the lessee) to use and occupy the property for a period in exchange for payment of a specified sum of money. You’ll need to distinguish between ground leases, which relate to the lease of the land only, and premises leases, which relate to the lease of land and buildings.

It’s best practice to get a copy of the lease before marketing the business so that you can familiarise yourself with the details.

Lease documents are typically prepared by solicitors acting on behalf of their owner clients. When dealing with a property that is subject to a lease, it’s important to read the lease document carefully and seek specialist advice for any part of the lease that you don’t fully understand. Don’t rely on information from the vendor as this may not be fully accurate.

Some large organisations have their own specific lease documents. Others use either the Property Council of New Zealand lease or the Auckland District Law Society (ADLS) lease. There are several versions of each lease, and you need to be able to distinguish between these.

Lease assignments

There are assignments of leases where the original lessee (the assignor) transfers their interest to another party (the assignee), who becomes the lessee (with the approval of the lessor).

The assignor is still responsible to the lessor for any default by the assignee for the duration of the original lease. Subleasing, however, is different because the sublessee engages in a contract with the original (head) lessee rather than the lessor.

It’s important to note that, when a lease is assigned, in most cases, the assignor (or vendor in the case of a business sale) will still have obligations to the landlord (lessor) for the lease even following the assignment to the purchaser. This applies until the end of the lease term.

If the lease is to be assigned, the deed of assignment of the lease will need to be completed within the timeframe specified on the front page of the agreement. You’ll need to explain to both the vendor and purchaser who is responsible for the costs involved in this process.

If you’re aware of any issues or problems relating to the existing lease, you must disclose the issues to the purchaser. You must also discuss whether they require any alterations to the lease to suit their proposed use of the premises.

Property alterations and business use changes

Often the purchaser or assignee will tell you that they wish to make minor or major alterations to the premises. Usually, they will specify that the changes will be at their cost. If the purchaser or assignee wishes to change the business use, the landlord needs to approve this.

It’s imperative that you insert a clause in the agreement that allows for the purchaser or assignee to obtain the landlord’s approval of such alterations. The clause must state the precise nature of the work. If the changes are structural, they will require a building consent from the local territorial authority. You may want to seek expert or legal advice to determine the appropriate clause to insert. 

Alterations to the premises may have implications for any current licences or business use rights. The sale and purchase agreement needs to reflect protection for the business purchaser in this regard.

Business use

You must ensure that:

  • the business is currently trading in accordance with the business use specified in the lease
  • the purchaser or assignee intends to continue to trade in a similar manner and not contravene the permitted use
  • the purchaser or assignee is aware that adding new products or services or changing a menu may be contrary to the lease provision.

Commercial related documents

Marketing commercial and industrial properties are likely to involve a range of documents.

These may include but are not limited to:

  • lease documents – there must be one for each tenancy if the property has more than one tenant
  • seismic evaluations
  • building warrant of fitness (BWOF)
  • licences.

In some situations, such as a mortgagee sale or when the client is the receiver or liquidator, it is likely that there will be certain documents and information that parties cannot provide to the agency. 

Understanding the importance of contract confidentiality

When the sale contract is signed, the purchaser may wish to use a nominee to protect their identity from the client. If this is the case, you must make the client aware of this before encouraging them to sign an agreement.

If your client asks you whether the purchaser plans to pass their rights to a specific party that your client clearly does not want to become the owner of the property, you must answer truthfully.

Issues that arise between contract and settlement

There are occasions when new information will become available between the dates of contract and settlement.

For example, the vendor may receive notification of a designation being placed on the property for road widening or the installation of electricity or telecommunications equipment or a maintenance inspection may reveal a significant hazard or indicate a need for expensive repairs.

If the property is subject to a body corporate, a change in the rules that would affect the purchaser’s use of the property, perception of its value, significant increase in levies or insurance premiums must be disclosed. Similarly, if during this period there is new information about a current or future tenant that might affect the purchaser’s perception of the quality of the property, this must also be disclosed.

Any information of this nature or information that would otherwise affect the purchaser, must be disclosed immediately to the purchaser.

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