Transactions involving the acquisition and disposal of commercial property proceed in stages:

• introduction of the parties and the property;

• negotiation;

• the parties entering a preliminary agreement such as a Heads of Agreement, a confidentiality agreement or exclusive dealing arrangement;

• the purchaser undertaking pre-contract due diligence;

• the parties entering into a formal contract;

• the purchaser undertaking post-contract due diligence; and

• completion — the passing of ownership, payment.

Prior to entering binding contracts, parties may enter into preliminary agreements such as a Heads of Agreement, which sets out the key terms of a transaction. One of the main purposes of a preliminary agreement is to protect confidentiality because due diligence involves the disclosure of commercially sensitive documents by the vendor to the purchaser. It also signifies the parties entering into a negotiating relationship. Another such purpose is so that the purchaser can secure an exclusive right to negotiate the purchase whilst pursuing due diligence.

See Heads of Agreement.

Due diligence is the process whereby the purchaser carries out an investigation to:

• determine if it is acquiring what it thinks it is acquiring;

• evaluate the benefits and risks;

• flag issues to be dealt with prior to entering into a binding contract; and

• test the representations made by or on behalf of the vendor.

If due diligence is not undertaken, the purchaser must rely on the vendor's warranties in the contract (if any) and must typically commence proceedings to enforce its rights under the warranties if they are breached. Even if the purchaser is successful, the recovery of damages will depend on the financial standing of the vendor or may be limited as a matter of law (see eg Bain v Fothergill in the states where it still applies).

Whether or not the parties enter into a preliminary agreement or formal due diligence will depend largely on the nature of the property being acquired. For instance, where the purchaser is acquiring a single retail shop which is subject to a lease due diligence may be a matter of the purchaser's solicitor requesting information and documents from the vendor's solicitor prior to exchange. The vendor's response may be the subject of vendor warranties included in the contract or rights arising if there has been a breach of the statutory obligations of the vendor under the relevant state or territory legislation.

Where the property being acquired is, eg a multi-story office building, the parties may enter into a Heads of Agreement which will contain, amongst other things, obligations of confidentiality and the key terms agreed by the parties in principle and possibly an exclusive dealing arrangement.

If due diligence is undertaken it should be concluded with a report to the client prior to the expiry of the due diligence period as the purchaser will need time to absorb it and to respond. If no due diligence is undertaken, a comprehensive letter of advice should be prepared.

Due diligence requires a team approach and usually involves at least two of the following disciplines:

• legal;

• financial;

• structural;

• contamination; and

• technical.

An effective due diligence process requires:

• the flow of information ideally coordinated by one representative from each side;

• requests for information; and

• control of the flow and management of information and documents.

See Due diligence.

The primary structures to acquire commercial property are:

• a contract with reciprocal obligations and rights to buy and sell;

• a call option;

• a call option and put option;

• acquisition of the property itself; and

• acquisition of shares in the company, or otherwise taking control of an entity which owns the property, such as a unit trust.

A call option is granted by the vendor to the purchaser. A call option gives the purchaser an option but not an obligation to purchase the underlying property at an agreed written price at a specified time in the future.

While the grant of a call option is not dutiable, the following events will give rise to a stamp duty liability assessed on the ad valorem rate of duty:

• exercise of the call option;

• an assignment of the grantee's rights in the call option; or

• exercise of the option by the nominee.

In Victoria, dealing with a lease for which consideration has been paid or agreed to be paid in respect of an option to acquire the leased land is dutiable at the time of the dealing irrespective of whether the option has been exercised at that time. However, where full value of the land is required to be paid on the exercise of the option the Commissioner will generally only require a taxpayer to pay the duty liability if the option to acquire the land has been exercised.

In some jurisdictions where statutory cooling-off periods apply in a contract for the sale of land, there is no cooling-off period if the underlying property is not residential.

In Victoria, there will be a cooling-off period (subject to the usual exceptions) other than for: s 31 , Sale of Land Act 1962 (Vic).

• land bought at or within three days before or after public auction;

• land used primarily for industrial or commercial purposes;

• land which is more than 20 hectares and is used primarily for farming;

• where the parties had previously signed a contract in substantially similar terms; or

• where the purchaser is an estate agent or corporate body.

In Queensland, in a contract for the sale of land there is no cooling-off period if the underlying property is not residential.

The acquisition of shares in a company or units in a unit trust which owns the property involves not only the acquisition of that property, but all assets and liabilities.

See Contract methods.

In Western Australia, when a simultaneous put and call option comes into existence, the call option is taken to be an agreement for the transfer of the option property to the grantee of the option, and is liable to duty accordingly, unless:

• the call option and the put option are only for the purpose of obtaining finance or making other financial arrangements; or

• the call option and the put option form part of a scheme of call options and put options given by the proprietors of a business that:

In South Australia, unless the purchaser is a body corporate buying non-residential property, there will be a cooling-off period (subject to other specified exceptions) even if the land being purchased is used primarily for industrial or commercial purposes: s 5(7) , Land and Business (Sale and Conveyancing) Act 1994 (SA).

Most contracts in use in South Australia specify that risk passes to the purchaser at the date of the contract. Accordingly, a purchaser may still be obliged to proceed to settlement where the property is damaged between the date of the contract and the date of settlement,

In Tasmania, under the standard contract for the sale of land there is no cooling off period and the risk passes to the purchaser at the date of the contract. Accordingly, a purchaser may still be obliged to proceed to settlement where the property is damaged between the date of the contract and the date of settlement.

Transfer of shares may be subject to duty on acquisitions of interests in Land Rich Corporations: Ch 3, Pt 2 , Duties Act 2001 (Tas). See the State Revenue Office Land Rich Provisions Guideline.

In the ACT, in a contract for the sale of land there is no cooling-off period if the underlying property is not residential property. See Pt 2, Civil Law (Sale of Residential Property) Act 2003 (ACT).

The acquisition of a significant interest in a landholder will be a dutiable transaction. See Pt 3.2 of the Duties Act 1999 (ACT).

Between settlement and exchange:

• minimise the potential for delays in exchange and settlement because the documents are not in order at exchange or settlement;

• check contracts are correctly executed so that their validity is not challenged;

• lodge a caveat, priority notice or settlement notice immediately after exchange of contracts (whether it be arising from exercise of an option arising under a deed of call option, deed of call and put option, or a contract for sale of land) to protect the purchaser's interests — unless prohibited by the contract from doing so; and

• in those states where protection by priority notice or settlement notice is unavailable, carry out final searches as close as possible to settlement, and not, say in the morning of a settlement scheduled to take place in the afternoon

The importance of the lodgment of a caveat, priority notice or settlement notice and the timing of the final search was highlighted in the High Court case of Black v Garnock . In this case:

• A Writ for Levy of Property (issued the day prior to settlement) was lodged with the Registrar-General after the final search was carried out but prior to settlement scheduled to take place that day.

• Settlement was effected in the afternoon without the purchaser being aware that a writ had been registered on the title.

See Exchange, settlement and in between.

In Queensland, the concept of “exchange” does not apply, but rather the usual contractual principles of offer and acceptance. See Contract law.

In South Australia, the concept of "exchange" does not apply, but rather the usual contractual principles of offer and acceptance. See Contract law.