Key Takeaways
- Pre-contract preparation matters more for commercial property than residential: finance clauses, valuation risk, GST, zoning, leases, and settlement timing all need to be addressed before signing rather than after.
- Standard residential finance clause periods (14 to 21 days) are usually too short for commercial transactions, which typically need 21 to 35 days minimum.
- GST on commercial property can add 10% to the purchase price unless the sale qualifies as a GST-free going concern, which depends on the contract wording and tenancy arrangements.
- Lease quality, zoning compliance, and realistic settlement periods (8 to 12 weeks) are the most common sources of contract surprises that affect financing.
Why Pre-Contract Preparation Matters so Much
Buying commercial property with a loan involves more moving parts than a residential purchase. The lender’s approval pathway is longer, the valuation more nuanced, the tax position more complex, and the lease structure can materially change the deal economics. Borrowers who treat the contract as the starting point often find themselves managing problems that better preparation would have prevented entirely.
The other reason pre-contract preparation matters is timing. Once a contract is signed, the cooling-off rights that apply to some residential contracts generally do not apply to commercial deals, and finance clause periods are often the only protection a buyer has if the loan falls through. Hence, borrowers who understand which clauses to negotiate, which checks to complete before exchange, and which surprises to anticipate generally avoid the most expensive mistakes in commercial property buying.
This guide covers what borrowers should know before signing a contract on commercial property in Australia: the key clauses, the valuation and tax risks, the due diligence steps, and the realistic timing involved. If you want to walk through your specific deal with our team at Loanworx for commercial property finance before signing a contract, we can map the financing risks against the contract terms.
Finance Clauses: Get the Terms Right
The finance clause is the single most important contract provision for a buyer relying on a loan. It defines what happens if the lender’s approval does not come through in time, and it sets the timeline for the entire pre-settlement process.
Why Residential Finance Clauses Are Too Short for Commercial
Standard residential finance clauses run 14 to 21 days from contract date. Commercial loans typically take 2 to 4 weeks for straightforward deals and 6 to 12 weeks for complex ones. A 14-day finance clause on a commercial purchase almost guarantees the buyer is asking for an extension within days of signing, which weakens their negotiating position with the vendor.
Realistic Commercial Finance Clause Periods
A commercial finance clause of 21 to 35 days is realistic for most standard deals. For specialised property, larger transactions, or borrowers without pre-existing relationships with the lender, 35 to 60 days is sometimes needed. The clause should specify the lender, the loan amount, and the conditions that must be satisfied for finance to be considered approved.
What the Clause Should Cover
A well-drafted finance clause covers the lender, the loan amount, the maximum interest rate, the loan to value ratio (LVR), and the key conditions (such as satisfactory valuation). It should clearly set out what happens if finance is not approved by the deadline, including the buyer’s right to terminate the contract and recover the deposit. Generic wording often leaves the buyer with less protection than they assume.
Common Mistakes to Avoid
The most common finance clause mistakes are accepting too short a period, agreeing to vague conditions, naming a specific lender that may not approve the deal, and overlooking the need for the clause to cover specific approval conditions such as valuation. Each of these can leave the buyer exposed if the financing process does not run smoothly.
Valuation Risk Before Signing
Valuation is the single biggest source of pre-settlement surprises in commercial property. A valuation that comes in below the contract price changes the lender’s LVR calculation and can leave the buyer with a funding gap.
Why Commercial Valuations Often Surprise
Commercial valuations rely on a combination of comparable sales, capitalisation rates applied to net rental income, and detailed assessment of lease quality, tenant covenant, and property condition. A property with an above-market lease, or a contract priced ahead of recent comparable sales, can attract a valuation noticeably below the contract figure. The lender’s panel valuer is independent and conservative by design.
Pre-Signing Valuation Checks
Before signing, buyers should review recent comparable commercial sales in the area, check whether the asking rent matches market rent for the property type, and assess any obvious factors that could affect valuation (older buildings needing capital expenditure, short remaining lease terms, environmental issues). For larger purchases, an indicative valuation from a panel valuer can be commissioned, although it does not bind the lender’s eventual valuation.
Handling Valuation Shortfalls
If the lender’s valuation comes in below the contract price during the finance clause period, the buyer has several options: renegotiate the purchase price with the vendor, increase the deposit, offer additional security (such as a residential property), or terminate under the finance clause. Each option has trade-offs, and the buyer’s negotiating position depends partly on how the contract was drafted.
Building a Valuation Buffer
Buyers who plan only for the best-case valuation outcome can find themselves under pressure if results fall short. Having additional deposit available, or additional security on standby, gives the buyer options if the valuation comes in 5% to 10% below the contract price. This is particularly important in changing markets where valuations may lag the most recent transaction prices.
GST on Commercial Property: A Significant Cash Flow Issue
GST treatment is one of the most misunderstood aspects of commercial property buying. The wrong assumption can add 10% to the purchase price or trigger an unexpected cash flow event at settlement.
When GST Applies
Goods and services tax (GST) generally applies to the sale of commercial property if the seller is registered for GST. A $1.1 million commercial property contract that includes GST has $100,000 of GST embedded in the price. The buyer can usually claim this back as a GST credit, but only if they are registered for GST themselves and the property is used for taxable purposes.
The Going Concern Exemption
A commercial property sold as a ‘going concern’ can be GST-free, subject to specific requirements: the sale is for payment, the buyer is registered for GST, and both parties agree in writing that the sale is of a going concern. For tenanted commercial property, this is the most common GST-free structure, but the contract wording must be drafted correctly to qualify.
The Margin Scheme
Where GST applies and the property has been held by the seller for an extended period, the margin scheme may allow GST to be calculated on the difference between the sale price and the original purchase price (the ‘margin’) rather than on the full sale price. This can significantly reduce the GST liability, but it requires specific contract provisions.
Cash Flow Implications
Even when GST is fully claimable, the cash flow timing matters. The buyer typically pays the GST at settlement (as part of the purchase price) and claims it back in their next Business Activity Statement (BAS), which may be weeks or months later. On a $1.1 million purchase, that is $100,000 of working capital tied up in the interim. Planning the cash flow position around this gap is essential.
Getting Professional Advice
GST on commercial property is complex enough that nearly all buyers benefit from professional advice from an accountant or specialist commercial solicitor before signing. Decisions about going concern treatment, margin scheme application, and GST registration all need to be made before contract exchange, not after settlement.
Zoning and Planning Compliance
Zoning determines what the property can legally be used for, which affects both the buyer’s plans for the property and the lender’s view of the security.
Understanding Zoning Categories
Australian commercial zoning categories vary by state and council, but typically include retail, commercial business, industrial, mixed use, and special use zones. Each zone has specific permitted uses and restrictions. A property in a retail zone cannot generally be used for industrial purposes without a planning application, and vice versa.
Permitted Use Verification
Before signing, buyers should verify that the intended use of the property matches the zoning. For owner-occupier purchases, this means confirming the buyer’s business activity is permitted on the site. For investment purchases, it means confirming the existing tenant’s use is compliant and that any future tenants would also be permitted.
Planning Permits and Approvals
Some uses are ‘permitted’ (no planning permit required), others are ‘permissible’ (planning permit needed but generally available), and some are ‘prohibited’ (not allowed regardless of permit). Older properties may also have grandfathered uses that do not match current zoning, which can complicate future tenant changes or redevelopment.
Section 32 and Vendor’s Statement Reviews
In Victoria, the section 32 statement (the vendor’s statement) sets out zoning information, planning overlays, and any relevant council notices. Equivalent documents apply in other states (such as a section 149 certificate in NSW). Reviewing these documents carefully before signing is essential, since they can reveal zoning issues, heritage overlays, or planning restrictions that the marketing material did not mention.
Council Searches and Building Compliance
Beyond zoning, buyers should consider whether the building’s structures and modifications have proper council approval. Unapproved extensions or non-compliant fit-outs can create liability for the new owner and may affect insurance, lender valuation, and future tenant arrangements.
Lease Checks for Tenanted Property
For tenanted commercial property, the lease is one of the most important documents in the file. It affects the rental income, the property’s value, and the lender’s view of the deal.
Reviewing the Existing Lease
Buyers should review the full lease, not just the headline rent and expiry. Key terms include the rent review mechanism (CPI, fixed percentage, market review), the responsibility for outgoings (net versus gross), options to renew, permitted use, assignment provisions, and any tenant rights to terminate. A 5-year lease at $100,000 with annual fixed increases of 4% is materially different from the same headline rent with CPI reviews.
Tenant Covenant and Performance History
The financial strength of the tenant directly affects the income reliability. For larger purchases, requesting the tenant’s financial history, payment performance, and any history of arrears is reasonable due diligence. Long-standing tenants with strong payment histories support stronger lender views than newer or smaller operators.
Make-Good and End-of-Lease Provisions
Make-good provisions and end-of-lease obligations are often overlooked but can shift significant costs between landlord and tenant. Reviewing existing lease obligations around make-good wording, capital expenditure responsibilities, and renewal options before signing can prevent surprises about future costs that affect the property’s net returns.
Recent Rent Reviews and Market Position
Where the current rent is above market, the lender’s valuer will usually adjust to market rent when calculating value, which can reduce the LVR available. Where the rent is below market, the lender will value at the contracted rent, which may understate the property’s potential. Understanding the current rent relative to market helps the buyer anticipate the valuation outcome.
Vacant Properties and Lease-Up Planning
For vacant commercial property, the lender treats the deal as having no current rental income. Borrowers usually need to demonstrate their wider position can support the loan during the lease-up period, or have signed leases ready to commence at settlement. Vacant property typically also attracts tighter LVRs and slightly higher pricing.
Other Due Diligence Steps
Beyond finance, valuation, GST, zoning, and leases, several other due diligence steps are worth completing before signing. None is universally critical, but each can reveal issues that materially affect the deal.
Building and Pest Inspections
Building inspections for commercial property are typically more involved than residential ones, covering structural integrity, building services (lifts, air conditioning, electrical, plumbing), fire safety compliance, and any obvious capital expenditure requirements. For older buildings or specialised property, a building report can highlight major upcoming costs that affect the deal economics.
Environmental Assessments
Industrial property, service stations, dry cleaners, and certain manufacturing sites may have contamination issues that require remediation. Environmental assessments range from a basic desktop review to detailed site investigations. Lenders sometimes require environmental clearance before approving loans on industrial property, and any clean-up costs can be substantial.
Strata and Owners Corporation Reviews
For strata-titled commercial property (such as office suites in a larger building), the owners corporation’s financial position, special levies, and pending capital works can all materially affect the buyer. A search of owners corporation records before signing is standard practice for strata commercial purchases.
Easements and Encumbrances
Property titles can carry easements (rights-of-way, utility access) and other encumbrances that limit the use of the property. The title search and the vendor’s statement should disclose these, but reviewing them with a solicitor familiar with commercial property is useful before signing.
Insurance Considerations
Commercial property insurance differs from residential, particularly for industrial property, mixed-use buildings, or properties with environmental considerations. Getting indicative insurance quotes before signing helps confirm the property is insurable on reasonable terms, and that any required liability cover is available.
Realistic Settlement Timing
Settlement timing is one of the most common sources of friction in commercial property purchases. Residential-style settlement periods are usually too tight for the commercial process.
Why Commercial Settlements Take Longer
Commercial settlements involve more parties than residential ones: the buyer’s solicitor, the seller’s solicitor, the lender’s solicitor, the valuer, often a property manager (for tenanted property), and sometimes specialist advisers for GST or environmental issues. Each adds their own timeline, and coordination across all parties takes time.
Realistic Settlement Periods
A standard commercial property settlement typically needs 8 to 12 weeks from contract to settlement. Larger or more complex deals (multi-tenanted property, specialised assets, SMSF purchases, deals requiring environmental clearance) can need 12 to 16 weeks. Settlement periods of 30 days or less, common in residential, are usually too short for commercial.
Coordinating with Finance Approval
The settlement date should sit comfortably after the finance clause deadline plus an additional buffer for valuation, document preparation, and any final conditions. Common pattern: 35-day finance clause, 60 to 90-day settlement. This gives time for the financing process to run and for any post-finance-approval steps (valuation, legal review, document execution) to complete.
Vendor Expectations
Vendors selling commercial property usually understand longer settlement periods are needed, but inexperienced vendors may push for residential-style timing. Setting realistic expectations during negotiation, and reflecting them in the contract, prevents friction later. Buyers willing to commit to a firm long settlement are often viewed favourably by experienced commercial vendors.
Contingencies for Delays
Even well-planned commercial settlements can be delayed: valuations come back later than expected, leases need updated tenant verification, environmental reports take longer to commission, lender conditions take time to clear. Building a buffer between key dates (finance clause, settlement) absorbs minor delays without triggering contract problems.
Where to Read About GST on Commercial Property
GST treatment is one of the highest-impact issues to resolve before signing a commercial property contract. The combination of going concern treatment, the margin scheme, GST registration requirements, and cash flow timing means professional advice usually pays for itself many times over.
The Australian Taxation Office’s guidance on GST and commercial property at ato.gov.au covers the main scenarios buyers and sellers encounter: GST on the sale price, going concern treatment, the margin scheme, and what GST credits are available on commercial property transactions.
Frequently Asked Questions (FAQs)
1. What finance clause period should I use for a commercial property contract?
A finance clause of 21 to 35 days is realistic for most standard commercial property purchases. For specialised property, larger transactions, or borrowers without pre-existing lender relationships, 35 to 60 days may be needed. The finance clause should also specify the lender, the loan amount, and the conditions (such as satisfactory valuation) for finance to be considered approved.
2. Will I have to pay GST on commercial property?
Generally yes, where the seller is registered for GST. The standard rate is 10% added to the purchase price. Two main exceptions apply: the going concern exemption (for tenanted property sold as an ongoing business) and the margin scheme (which can reduce the GST calculation). Both require specific contract provisions and both parties being GST-registered. If you are GST-registered yourself, you can usually claim the GST back through your BAS, but the cash flow timing matters.
3. What happens if the valuation comes in below the contract price?
If the lender’s valuation falls below the contract price, the LVR is recalculated on the lower number, which usually means a smaller loan or a larger deposit required from the buyer. Options at that point include renegotiating the purchase price with the vendor, increasing the deposit, offering additional security (such as residential property), or terminating under the finance clause (if the loan amount cannot be approved at the contract price). The buyer’s negotiating position depends partly on how the finance clause was drafted.
4. Do I need a building inspection on commercial property?
It is highly recommended, especially for older buildings, industrial property, or properties with specialised fit-outs. Commercial building inspections cover structural integrity, building services (lifts, air conditioning, electrical, plumbing), fire safety compliance, and obvious capital expenditure requirements. The cost is usually modest relative to the transaction size, and the report can reveal issues that materially affect the deal economics or support price negotiation.
5. How long should I allow for settlement on commercial property?
A standard commercial property settlement typically needs 8 to 12 weeks from contract to settlement. Larger or more complex deals (multi-tenanted property, specialised assets, SMSF purchases, deals requiring environmental clearance) can need 12 to 16 weeks. Settlement periods of 30 days or less, common in residential transactions, are usually too short for the commercial process and create unnecessary pressure on financing and due diligence.
6. Can I sign a contract before getting loan approval?
Yes, but only with a properly drafted finance clause that protects you if the loan does not come through. The clause should specify the lender, loan amount, maximum interest rate, LVR, and conditions for finance to be considered approved. Without a finance clause (or with a poorly drafted one), the buyer is fully committed regardless of whether finance is available, which is one of the most significant risks in commercial property purchasing.
7. What should I check in an existing lease before buying a tenanted commercial property?
Key items include the remaining lease term, the rent review mechanism, who pays outgoings (net versus gross), permitted use, assignment provisions, options to renew, tenant termination rights, make-good obligations, and any rent that is above or below market. The tenant’s financial strength and payment history are also worth confirming. For multi-tenanted property, review each lease, not just a summary.
The Bottom Line
Buying commercial property with a loan involves more pre-contract preparation than residential, and the consequences of skipping steps are usually more expensive. Finance clauses need to be realistic, valuation risk needs to be planned for, GST treatment needs to be settled before signing, zoning compliance needs to be verified, lease quality needs proper review, and settlement timing needs to accommodate the commercial process.
For most buyers, the smartest approach is to complete as much due diligence as possible before signing the contract rather than after. A solicitor experienced in commercial property, an accountant familiar with GST and going concern issues, and a specialist commercial broker who can map the financing risks against the contract terms together provide a strong combination. The cost of professional advice upfront is usually a small fraction of the cost of a poorly drafted contract or an unexpected funding gap at settlement.
