Buying Commercial Property in BC: Due Diligence Before You Remove Subjects

When you buy a commercial building, warehouse or strip-mall unit, the subject period is your chance to find out what you are really buying. Once subjects are removed, the contract is firm and most problems become yours.

This guide sets out the main areas of due diligence for a BC commercial purchase, and why it pays to involve a lawyer from the offer stage rather than at completion.

Why commercial deals need more time

A commercial contract is usually drafted and negotiated for the deal in front of you. There is no standard checklist built into it, so the buyer has to ask for what it needs: enough time for inspections, a list of documents the seller must deliver, and subjects that let you walk away if the results are not satisfactory.

Build the subject period around the slowest item. Environmental reports, lender appraisals and municipal enquiries often take weeks, not days. If you sign with a short subject period, you may be forced to choose between removing subjects without the answers or losing the deal.

Title, charges and the survey

Start with a title search from the Land Title and Survey Authority. Look beyond the owner's name to the charges registered against the property:

• Mortgages and liens that must be paid out or discharged on completion.
• Easements, rights of way and covenants that can limit where you build, park or load, or require you to allow access to others.
• Leases registered on title that may bind you as the new owner.

Compare the title with what is on the ground. A survey can show whether buildings, fences or paving cross a boundary or encroach on a right of way.

Zoning and permitted use

Do not assume that because the current owner runs a particular business, you can run yours. Confirm with the municipality that the zoning allows your intended use, and ask about outstanding work orders, building permits that were never closed, and any business licence requirements. If you plan to renovate, expand or change the use, find out early whether a rezoning, development permit or variance would be needed.

Environmental history

Environmental liability is the risk that most separates commercial from residential deals. Under BC's Environmental Management Act, the people responsible for remediating a contaminated site include a current owner or operator, as well as previous owners and operators. That liability is absolute, retroactive, and joint and separate. In other words, you can become responsible for contamination you did not cause.

The Act also requires a vendor to give a prospective buyer a site disclosure statement if the vendor knows or reasonably should know the property has been used for a specified industrial or commercial use. Ask for it, but do not stop there. Buyers commonly commission a Phase I environmental site assessment, and further testing if the Phase I raises concerns. Your lender may require it anyway.

Existing tenants and leases

If the property is tenanted, the leases are a large part of what you are buying. Ask for every lease, amendment and renewal, a rent roll, and records of deposits and arrears. Then check:

• Rent and term: whether the rent shown in the listing matches the leases, and when each lease expires or can be renewed.
• Rights that bind the owner: options to renew or purchase, rights of first refusal, exclusive-use clauses and landlord repair obligations.
• Estoppel certificates: signed confirmations from tenants that the lease terms and rent are as stated and that the landlord is not in default.

If you will occupy part of the building yourself, check that you can recover the space when you need it. Our guide to commercial lease clauses explains the terms that matter most.

GST and other taxes

Sales of commercial real property are often taxable for GST. Under the Excise Tax Act, when the buyer is registered for GST (and, for an individual buyer, the property is not a residential complex), the seller is not required to collect the tax. Instead, a registered buyer that acquires the property primarily for commercial activities must self-assess and report the GST on its own return. In other cases the buyer must pay the tax and file a separate return by the end of the month after the month the tax became payable.

Get the GST clause right in the contract, confirm registration numbers before completion, and speak with your accountant about input tax credits. Budget separately for property transfer tax; see our overview of property transfer tax in BC.

How you will hold the property

Decide early whether you will buy personally, through an operating company, or through a separate holding company. The choice affects financing, liability, tax and how easily the property can be sold or passed on later. The name on the contract should match the buyer that will actually complete.

Buying commercial property? Talk to us before you remove subjects

Our real estate lawyers can review the contract and title, coordinate due diligence on leases, environmental reports and GST, and handle the conveyance through completion.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.