Purchasing commercial property for your business involves considerations that depend on a variety of factors, such as the physical features of the property, your intended use of the property, the type of property (freehold, condo, etc.), and history of the land (title issues), to name a few.
These may influence the level and type of due diligence required, including environmental reports, review of existing/assumed tenants, chosen structure for the transaction, review or commissioning of surveys, and title and off title searches. The choice of how to proceed on these items will not necessarily be the same for each property you are considering. Keep in mind that your situation is unique, including your business, your intentions for the property and the property itself.
Here are some questions to consider at various stages in the transaction (particularly when negotiating the purchase agreement) and there may be other issues to be addressed with your agent, lawyer, tax advisor or other professionals.
Taking Title & Financing
What legal entity will take title? An individual, a corporation, a limited partnership? Are you obtaining financing? Financing may affect the choice of entity and the level of due diligence required (such as obtaining environmental reports, which also may be in your interests if there is a chance there is environmental contamination at or near the property).
Title Insurance
If an issue is discovered, will it be dealt with by negotiating with the seller or through title insurance? These two options may not be mutually exclusive and may involve reviewing both options with your lawyer. Depending on your intended use, the remedies available with title insurance might not be satisfactory. For example, a claim payout might seem paltry if you cannot use the property for your intended purpose.
Road Access
Is there road access? There are many ways a road can be created, and it may not always be that certain that your property has legal access. Some ways to create roads include opening road allowances by municipal bylaw, historical expenditure of public funds on roads (tread lightly), or by the registration of a plan of subdivision. Even when a municipality has dedicated a public road, it is possible that the road ends at a reserve that prevents access to that road.
Title Search
Are there historical remnants on title such as old mortgages that should have been discharged, or expired restrictions? This typically would be dealt with through your lawyer, but it is why you want to engage a lawyer early in your due diligence process. Depending on the nature of the instrument on title, it can be a time-consuming process to find a solution. This might be when you start drafting the purchase agreement, before waving a due diligence condition, before the title search date, or at another time hopefully before the deal becomes firm so you have more options depending on the severity of the issue. Standard agreements of purchase and sale obligate a purchaser to take title subject to certain restrictions, easements, and encumbrances. Those title matters could prevent your intended purpose. The only way to know is to conduct searches before signing or include appropriate conditions.
Work Orders or Open Building Permits
Have you checked for building department work orders with your lawyer or your agent? It may not always be obvious whether work was done properly by the previous owners, it may even have been done without a permit. A lawyer would only be able to search whether there are open building permits or work orders. You may want to consider obtaining the opinion of a reputable property inspector if you think that work has been performed at the property, as a search of the building department may not disclose work done without a permit, which may impact you in the future. For commercial properties, there is no coverage in regular title insurance policies for open building permits or work orders, amongst other exclusions that require an off-title search, so it is important to understand your transaction and perform the searches within the relevant timelines. That might be before you waive any due diligence conditions, or before your title search date, depending on how your purchase agreement is drafted.
Zoning
Have you reviewed the zoning and compared it to your intended uses and plans for construction?
Occupancy/Compliance Certificates
Do you need an occupancy or compliance certificate? Several municipalities require an occupancy or compliance certificate to be issued whenever there is any physical change to a commercial property or any change of use. Any physical change or change of use could require permits and significant work to the property.
Type of Property: Freehold vs Condominium
What type of property you are buying? Is it freehold or a commercial condominium? Both options have benefits depending on your ownership interest and goals for the property. You should ensure that you make the purchase agreement conditional on the review of a status certificate if you are purchasing a commercial condominium unit, as you would want to know the health of the condo, has it been sued (among other things)? Are there increases anticipated in the amount of common expenses or special assessments? There are requirements under the Condominium Act that must be met as well and may not have been followed. Just because it looks like a condominium, doesn’t mean that all the requirements have been met.
Conclusion
The discussion above is a non-exhaustive list of some of the items you may need to consider in your purchase of a commercial property but illustrates how nuanced your transaction and planning should be, as you tailor it to your plans and situation. Ultimately, engaging the right professionals early in the process will help you get ahead of issues and deal with them.