Acquisitions and leasesOwnership and occupancy
Describe the various categories of legal ownership, leasehold or other occupancy interests in real estate customarily used and recognised in your jurisdiction.
In Australia, land tenure is either:
- freehold: mostly held under Torrens title; or
- leasehold: granted either by the freehold owner of the land, or the Crown in respect of Crown land (land owned by the Commonwealth, a state or a territory).
Both freehold and leasehold tenures can be held jointly by co-owners, as either tenants in common or joint tenants.
Leasehold ownership allows a person to exclusively occupy the leased premises, but occupation is subject to the terms of the lease. Retail and residential leases are governed by additional statutory requirements.Pre-contract
What are the typical pre-contractual steps?
The following pre-contractual arrangements are often used in real estate transactions.
Heads of agreements
A heads of agreement sets out the key commercial terms agreed by the parties. This document will generally specify whether the entire document or any particular provision, is intended to be binding.
Exclusive dealing agreements
An agreement of this nature is entered into when the seller agrees not to deal with any party other than the purchaser during a specified time period.
Such agreements are often used when the parties have reached an agreement on the terms of the contract but are not in a position to enter into an unconditional contract. This occurs, for example, when a purchaser’s commitment is conditional on the completion of satisfactory due diligence. It is common for such agreements to include both a call option (under which the purchaser has the right during a fixed period to call on the seller to sell it the property) and a put option (under which the seller has the right during a fixed period to require the purchaser to acquire the property).Contract of sale
What are typical provisions in a contract of sale?
Contracts of sale typically require the purchaser to pay a 10 per cent deposit to a stakeholder on exchange, and the balance of the price (plus or minus adjustments for rental income and outgoings such as rates and utilities) on closing. The date for closing is a matter of commercial negotiation between the parties.
In some jurisdictions, a seller must make certain mandatory disclosures. In some jurisdictions, a seller provides certain statutory warranties to the purchaser. The warranties vary between jurisdictions and include warranties as to the status of the land or any adverse orders affecting the land.
The scope of a seller’s contractual warranties is a matter of commercial negotiation. A purchaser should undertake extensive due diligence, but it can also seek warranties from the seller concerning issues that it is unable to confirm.
The risk as to loss may pass to the purchaser on the contract date or when the purchaser takes possession of the property (generally on closing), depending on the law in the relevant jurisdiction and the parties’ agreement.Environmental clean-up
Who takes responsibility for a future environmental clean-up? Are clauses regarding long-term environmental liability and indemnity that survive the term of a contract common? What are typical general covenants? What remedies do the seller and buyer have for breach?
Contaminated land is regulated differently in each state and territory.
Generally, the range of people who may be liable for remediating contaminated land include, as well as the person responsible for the contamination, the owner of the land at the time the regulatory action is taken. Accordingly, an owner may be ordered to clean up contamination that was caused prior to the purchase of the land.
Generally, a polluter cannot transfer risk of liability contractually. However, it is common for a seller to seek a release and indemnity from a purchaser in relation to the cost of remediating contaminated land.Lease covenants and representation
What are typical representations made by sellers of property regarding existing leases? What are typical covenants made by sellers of property concerning leases between contract date and closing date? Do they cover brokerage agreements and do they survive after property sale is completed? Are estoppel certificates from tenants customarily required as a condition to the obligation of the buyer to close under a contract of sale?
Typical warranties regarding existing leases in contracts for sale include:
- current rent levels and the arrears position;
- any outstanding incentives; and
- the existence of any breaches by a tenant or the seller.
It is common for the seller to covenant with the purchaser that it will not take certain actions (such as granting a new lease or agreeing to a variation of a lease) between the contract date and closing date, unless the purchaser gives its consent.
Contracts for sale typically include a warranty by the purchaser (which survives completion) that has not been introduced to the property by any broker other than the seller’s broker named in the contract.
The concept of estoppel certificates does not exist in Australia.Leases and real estate security instruments
Is a lease generally subordinate to a security instrument pursuant to the provisions of the lease? What are the legal consequences of a lease being superior in priority to a security instrument upon foreclosure? Do lenders typically require subordination and non-disturbance agreements from tenants? Are ground (or head) leases treated differently from other commercial leases?
A mortgagee takes its interest over the property subject to any existing leases, which are either:
- registered on title; or
- not required by law to be registered on title.
A lease created after the grant of the mortgage will bind the mortgagee if the mortgagee gives its consent to the lease. If the mortgagee enforces its security over the property, it will do so subject to the terms of any leases binding on it.
It is not typical for lenders to require subordination and non-disturbance agreements from tenants.
Where a lender is providing finance to a tenant under a ground lease, in most instances the lease will contain very limited, if any, termination rights for the landlord. However, if this is not the case, the lender may require a tripartite deed with the landlord so that the lender may step in and cure any defaults by the tenant.Delivery of security deposits
What steps are taken to ensure delivery of tenant security deposits to a buyer? How common are security deposits under a lease? Do leases customarily have periodic rent resets or reviews?
If there are leases in place, the contract of sale will require the seller to allow or transfer security deposits to the purchaser on closing. If there are any bank guarantees, the seller will be required to deliver the original bank guarantees, and assign its rights under them, to the purchaser on closing.
It is common for landlords to require tenants to provide security under a lease, generally calculated as a multiple of one month’s rental payments. Landlords will usually require the tenant to provide a bank guarantee because it is more secure than a cash deposit.
Leases will usually require the rent to be reviewed every year and on renewal. It is common for the rent to be reviewed annually by a fixed percentage or by the consumer price index. It is also common for leases to require a market rent review on lease renewal. Where the rent increases under the terms of the lease, it is usual for the tenant to be required to provide a new bank guarantee for an increased amount.Due diligence
What due diligence should be conducted before executing a contract? Is any due diligence customarily permitted or conducted after contract but before closing? What is the typical method of title searches and are they customary? How and to what extent may acquirers protect themselves against bad title? Discuss the priority among the various interests in the estate. Is it customary to obtain government confirmation, a zoning report or legal opinion regarding legal use and occupancy?
Purchasers in significant commercial transactions will usually undertake due diligence prior to the exchange of contracts. From a legal perspective, a purchaser’s due diligence would usually include:
- a title review;
- a review of leases and tenancies (for tenanted properties); and
- conducting enquiries with the relevant authorities including zoning for the property and whether there are any restrictions on the use and development of the land.
Purchasers of residential property generally conduct due diligence between exchange of contracts and closing.
Title searches are typically ordered electronically from the land titles registry in each jurisdiction.
Under the title legislation in each jurisdiction, a person who suffers loss or damage as a result of the operation of the Torrens system may be entitled to compensation from the state or territory. Most jurisdictions have established a statutory compensation regime or assurance fund.
Title insurance is available in Australia. However, because registration of title gives the registered proprietor an indefeasible title (subject to certain exceptions, such as fraud), title insurance is not commonly used.Structural and environmental reviews
Is it customary to arrange an engineering or environmental review? What are the typical requirements of such reviews? Is it customary to get representations or an indemnity? Is environmental insurance available?
It is common for a purchaser to carry out a building inspection of a property focusing on structural issues, the existence of asbestos and the existence of pests. An environmental review may also be carried out for significant transactions or where contamination is suspected, based on the property’s historical uses or listing on government registers. A preliminary environmental review typically includes a review of existing environmental reports and historical uses of the site and limited sampling.
Sellers do not typically provide representations or an indemnity relating to structural, engineering or environmental issues.
Environmental insurance policies are available in Australia. However, the market is not well developed and environmental insurance plays a limited role in Australia.Review of leases
Do lawyers usually review leases or are they reviewed on the business side? What are the lease issues you point out to your clients?
Lawyers will usually review the leases. The lease issues that the lawyers will point out to their clients can range from very comprehensive summaries to reporting on key areas of concern. The scope will depend on various factors, including whether the client proposes to acquire the property for redevelopment or investment. The financial terms of the leases are generally also reviewed by the purchaser’s business advisers.
Lenders do not require that property management agreements be subordinate to financing security instruments.Other agreements
What other agreements does a lawyer customarily review?
A lawyer acting for the purchaser will usually review all the title documents, including any easements and restrictive covenants. It is not common for the lawyer to review broker agreements or utility contracts, as they are not usually novated or assigned to the purchaser. The lawyer may review other service contracts if the contracts are proposed to be assigned or novated to the purchaser. The purchaser may decide to review such contracts itself.Closing preparations
How does a lawyer customarily prepare for a closing of an acquisition, leasing or financing?Acquisition
The main tasks of the seller’s lawyer in preparing for closing of an acquisition (completion) include:
- confirmation of the amount payable on completion;
- where completion is not required to take place on an electronic platform, the delivery of the original certificate of title and the discharge of any mortgage on closing; and
- where completion must take place on an electronic platform, the consent of the seller or the mortgagee to the transfer of the property.
The main tasks of the purchaser’s lawyer in preparing for completion include:
- preparing a transfer form, either in paper or on an electronic platform;
- obtaining an updated title search on the date of completion;
- confirmation of the amount payable on completion;
- if stamp duty must be paid before completion, attending to the payment of the stamp duty; and
- payment of the settlement funds on completion as directed by the seller.
Generally, the tenant’s lawyer will need to provide the following items to the landlord’s lawyer before the lease commences or the tenant takes possession of the premises, whichever is the earlier:
- the lease documents, signed by the tenant;
- certificates of currency in respect of the tenant’s insurances;
- any security deposit or bank guarantee the tenant must provide under the lease; and
- if the lease is to be registered on the title of the property, the registration fee.
In most jurisdictions, a lease is not signed in counterpart, so the landlord’s lawyer will arrange for execution of the lease by the landlord after the tenant has signed it.
For closing, in addition to the due execution of each of the finance documents, the lender will typically require the following:
- certified copies of the constitutional documents of the entities;
- certified copies of the corporate authorisation documents;
- certified copies of any underlying transaction documents, such as acquisition documents and leases;
- a legal opinion with respect to the entities and the finance documents (and sometimes also the underlying transaction documents);
- registration of securities and delivery of title documents;
- evidence as to insurance of the properties, with the lender’s interest noted; and
- due diligence reports together with reliance letters.
Is the closing of the transfer, leasing or financing done in person with all parties present? Is it necessary for any agency or representative of the government or specially licensed agent to be in attendance to approve or verify and confirm the transaction?Acquisition
In a number of jurisdictions, closings may be, or are, required to take place on an electronic platform established by a third-party provider and is accessed on a membership basis. In the balance of jurisdictions, the seller’s lawyer and the purchaser’s lawyer will meet at the offices of the seller’s lawyer to close. Where closings take place in person, they are often conducted at the offices of the seller’s lawyer or a settlement room operated by a service provider. It is not common for the parties to be present at in-person closings.
Usually, the lawyers acting on a leasing transaction will not meet in person, but will deliver originals to each other’s offices. In a number of jurisdictions, leases are exchanged and registered on an electronic platform.
In some jurisdictions, closing can be done in person with all parties present at the offices of the lender or borrower’s lawyers, but is more often done by way of all parties signing the documents and circulating scanned copies, with original documents delivered afterwards. Usually, conditions precedent documents are delivered to the lender and their lawyers in the days leading up to closing, and on the date of closing the lender’s lawyers will undertake all searches, issue their legal opinion and deliver their conditions precedent sign-off letter to the lender. Registration of mortgages occurs on an electronic platform in some jurisdictions.Contract breach
What are the remedies for breach of a contract to sell or finance real estate?
Time is usually not of the essence for closing under a contract of sale. Therefore, if a party does not close on the due date, the innocent party will usually need to issue a notice on the defaulting party requiring performance within the required time frame. If the defaulting party fails to close within the required time frame, the innocent party may then terminate the contract. However, this varies from jurisdiction to jurisdiction.
Unless completion of a contract is expressly stated to be conditional on the purchaser securing finance, completion of a contract in Australia is not subject to finance.
If the seller terminates the contract for the purchaser’s default, the seller will be entitled to retain the deposit and may sue the purchaser for damages. If the purchaser terminates the contract for the seller’s default, the seller is required to refund the deposit, and the purchaser may sue the seller for damages.
If a party is in default, the remedy of specific performance may be available to the innocent party.Breach of lease terms
What remedies are available to tenants and landlords for breach of the terms of the lease? Is there a customary procedure to evict a defaulting tenant and can a tenant claim damages from a landlord? Do general contract or special real estate rules apply? Are the remedies available to landlords different for commercial and residential leases?
The general law of contract and legislation enacted at the state or territory level regulate the rights and obligations of landlords and tenants.
A commercial lease will usually specify the grounds on which a landlord can terminate the lease. These can include the following acts of default by the tenant:
- non-payment of rent after a specified time;
- failure to perform certain covenants; and
- an insolvency event.
There is a statutory requirement in every jurisdiction on the landlord to serve a formal notice of breach on the tenant and allow an opportunity to rectify the breach, except in limited circumstances. An exception, which applies in most jurisdictions, is when the tenant’s breach is non-payment of rent.
The termination rights of a landlord under a residential lease are regulated by specific residential tenancy legislation in each jurisdiction.
It is unusual for a tenant to have any express termination rights under a commercial lease. If the landlord defaults under a lease, the tenant may be entitled to claim damages or terminate the lease under the general law of contracts.
In most jurisdictions, the tenant has the right to seek relief against forfeiture if the landlord terminates the lease for the tenant’s breach.