Real Estate Sale or Lease Subject to Development Consent

Risk Mitigation or Minefield?

To mitigate risk some real estate sale and lease transactions are made conditional upon development consent being obtained and generally all commercial leases place the onus on the tenant to obtain and comply with the requirements of any and all authorities with development consent by local government being the principal focus.

Increasingly stringent building, environmental, operational and work place safety regulations and compliance requirements can however turn what may seem straight forward risk mitigation into a legal and financial minefield where real estate sale or lease documentation provisions do not adequately envisage the intricacies of possible outcomes.

Real Estate sale and lease documentation that merely treats the issuing of a consent as the determining factor as to whether a transaction becomes unconditional fail to recognise that such consents contain conditions and in the current environment an increasing number of conditions growing evermore complex.

For example, in the case of a real estate lease where there is a change in use the relevant local government may impose a condition on the consent for the tenants’s use of the property to upgrade the premises to meet the requirements of a certain building code category. The practical implications of complying with the requirements of that category may not be apparent until a building code consultant report is commissioned to determine upgrades that are required. Questions that then complicate the situation may include:

• Whether the tenant reasonably wants to meet the costs of an adequate consultant report given they do not own the building.
• Whether the landlord and tenant are in agreement with the selection of the consultant and their scope.
• Whether the tenant seeks alternate solutions which may not meet with the landlords objectives for their asset.
• Whether some or all the items are of a capital nature or not specific to the tenant’s use which they may argue are therefore the responsibility of the landlord.
• Whether a further development application to local government is required specific to any works.
• What a reasonable time frame is to comply with the conditions of consent and or complete required works.
• Whether a bond or guarantee should be in place to safeguard the interests of the landlord should the tenant not comply or not complete the works.
• Who is to take carriage of the works in the case that they are of a capital nature or integral to the fabric of the building.
• Whether there is a need for a formula to re-calculate the financial terms of the transaction in the event that the costs are material.
• How the parties will proceed or terminate in the event that the tenant already has occupation of the property.

The same questions may equally apply to circumstances where a real estate investment or sale and lease back is entered into in circumstances where the tenant or vendor (intending to become the tenant) has not previously obtained development consent for their occupation however which may be required by a purchaser as a condition of sale with the added complexity that the contract of sale may typically oblige the purchaser to accept the property in its current state which may be inconsistent with the tenant or vendors obligation to obtain and comply with any development consent either under the contract of sale or lease.

As a risk mitigation measure transactions conditional upon development consent may well be best structured to allow rescission at will. Should however there be a strong intention of the parties to proceed from the outset provided a consent in any form is obtained the current regulatory environment may require more in depth consideration of documentation wording to accommodate the many questions raised to avoid a legal and financial minefield.

For property management advice or to review appointing Property Sales and Leasing as your property manager please contact Tod Anderson on 0412 350 285.

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Real Estate Sale or Lease Subject to Development Consent