Creative Commercial Property Contracts

Residential property investors understand conditional contracts.

To sign a contract subject to a pest inspection, for instance, is fairly common practice around Australia.

In fact, conditional contracts are a great way to lock in a deal but give you an out based on certain conditions. Sometimes these conditions are based on your personal conditions as they purchaser; sometimes they are to do with the property itself.

checklistCommon property based conditions are having the purchase being subject to a pest inspection, or a building inspection, etc., so that if you get the inspection done, and you find things that were not disclosed in the listing, or things that you couldn't have known about ahead of time. A good example of this is finding termites during the pest inspection, in this case, you can either back out of the deal, or you can renegotiate.

During this conditional time, the vendor cannot sell to someone else or sign an unconditional contract with another person.

As a buyer, you can also sign a conditional contract subject to finance, which means that if you do not get approved for finance for any reason you can cancel the deal and the vendor can take the property to any other interested parties or continue to list the property as for sale.

These are a great legal loophole in property, but there are only so many conditions you can feasibly use with investing in residential real estate.

In commercial however there are many more things you can negotiate. In fact, you can practically be as creative as you like. It all comes down to what you can negotiate and what vendors will agree to.

One of my students did a deal recently where he bought a strip of 8 shops on 4 titles, but he realised that this titles boundaries were almost arbitrary, they didn't actually line up with the walls of the shops.
This meant that they could not, at the time of purchase be sold off as 4 groups of 2 shops, greatly reducing the value of the property.

To strata title the shops into 8 would be the best thing to do with these shops, however, that could be a long and expensive procedure. The simpler and faster strategy was to so a boundary realignment.

The question was, how long would it take the council to put those changes in place? Creating this realignment would potentially increase the equity in the property, so it was an integral part of the investment.

Rather than waiting and even potentially fighting the council for these changes, he simply made it a condition of sale.

Basically – I'll buy subject to the council boundary realignment going through. It was a very clever move. He wasn't committed until he knew there was all this additional equity waiting for him in the property.

In the council had nothing to do with the purchase itself, but he was able to negotiate that condition into the contract.

Knowing this can be useful if you are ever looking at purchasing a vacant property. You could negotiate, for instance, a condition that you won't settle until you've found a tenant and got a lease signed. This means that you are probably likely to buy below the truly leased value of the property but not handing the money across until you have a lease and an income locked in.

It would also mean that you would settle, get the lease signed and immediately you could get the property revalued with the lease in place.

If the new tenants were going to do any fitout of the property, then you'd get the valuation done as soon as they finished.

There are a huge number of things you can negotiate into a purchase agreement and in a lease agreement that I discuss in my course, but you can see from these examples, knowing what, and how to put these conditions in place, can create very fast equity, remove the risk and turn an average investment into an absolute winner.

Get your lawyer to advise on how to insert clauses that will protect you and make the deal go more your way.