Commercial Property Due Diligence: Why Contracts, Clauses & Walk-Away Power Matter

Summary: In commercial property, there’s no cooling-off. Your protection is a bulletproof due diligence (DD) clause, a tight buyer-side process, and the courage to walk when the deal doesn’t stack up. In this episode recap, InvestorKit teams up with commercial lawyer Joseph Khoury Gebrail (KCO Legal) to unpack the legal foundations every investor should know—plus two real negotiations that turned problems into leverage.

What This Episode Delivers

The key legal differences between residential and commercial contracts
Why a robust DD clause replaces cooling-off—and how to structure it
The “speed then verify” approach (lock in fast, investigate thoroughly)
What great buyer’s agent–lawyer collaboration looks like
Real-world playbooks: roof replacement leverage, and swapping to a stronger tenant in a sale & leaseback
Red flags in tenant behaviour—and why your property is only as strong as its lease

Commercial vs Residential: The Contract Reality

In most Australian commercial transactions there’s no cooling-off. That means your safety net is the DD clause—negotiated up-front, broad in scope, and crystal-clear on exit rights. Residential deals sometimes lean on fixed periods and templates; commercial deals require custom clauses that fit the asset, tenant, and risk profile.

“Subject to due diligence, 21 days” is not enough. Ambiguity invites disputes.

The Non-Negotiables of a Bulletproof DD Clause

Clear exit rights: The purchaser may withdraw for any reason, without penalty, and with full deposit refund.
Defined timeframes: 14–21 days is typical; adjust to asset complexity.
Explicit scope: Legal, financial, and physical investigations; third-party reports; lender and insurer approvals.
Zero ambiguity: Spell out what happens to the deposit and confirm no breach on withdrawal.
Variation pathway: Permission to amend/renegotiate terms if material issues arise (e.g., lease changes, works, guarantees).

Speed Play: Lock In Fast, Verify Thoroughly

A strong DD clause lets you move quickly to secure the deal (signal seriousness with a term sheet and modest deposit), then use your DD window to hunt for skeletons—lease anomalies, structural defects, misaligned incentives, or weak tenant covenants.

Vendors engage because you’re committed.
You retain control because you can walk if the facts don’t stack up.

Case Study 1: WA Medical Freehold—Turning a Roof Shock into Leverage

Asset: Scarce freehold medical clinic in Rockingham, WA (strong land value, essential-service tenant, clear value-add). DD finding: Building & pest flagged major roof works. Move: “We’re happy with the lease, but replace the roof—or we walk.”Why it worked:

You’re 21 days into DD; restarting with a new buyer risks the vendor facing the same issue later.
The clause gives you credible walk-away power—and that leverage often wins vendor-paid rectification.

Takeaway: Don’t discard a fundamentally great asset for a fixable defect. Use DD findings to negotiate outcomes, not just price chips.

Case Study 2: Sale & Leaseback—Swap to the Stronger Tenant

Scenario: Two related entities—one with ~$20m revenue, the other ~$2–2.5m—and the lease was initially with the weaker entity. DD findings:

No director’s guarantee
No triple-net lease
Covenant strength mismatch
Move: Via Deed of Variation, switch the lessee to the stronger entity post-settlement.
Result: Materially stronger covenant, reduced insolvency risk, cleaner financing story.

Takeaway: In sale & leaseback deals, lessee strength is value. DD should extend beyond the property into the tenant’s financials and guarantees.

Why Tight Terms Win Agent Respect (and Deals)

A professional term sheet with lawyer details, DD scope, finance clauses, and timelines signals capability. Agents prefer parties who know what they’re doing, ask smart questions, and don’t fall over mid-DD. Expect the market to favour represented buyers with robust processes.

Tenant Behaviour: The Hidden Valuation Driver

Your commercial asset is only as strong as its lease and tenant. Look for patterns:

Frequent arrears or breach notices
Disputes over outgoings
Operational volatility
Even with a “strong” lease, a great tenant today can be a problem tomorrow—budget for legal contingencies and maintain a responsive post-settlement strategy with your lawyer.

The Three Layers of Commercial Due Diligence

The Deal: Price, yield, land value, improvements, market scarcity.
The Business: Tenant financials, industry risk, revenue stability, guarantees.
The Integration: Lease structure (options, reviews, make-good), landlord obligations, outgoings, insurability, financeability—stress-tested by legal, accounting, and BA teams.

Your Deal Team: Why Collaboration Wins

Buyer’s Agent: Sourcing, pricing, tenant/lease pre-screen, negotiation strategy.
Commercial Lawyer: Drafts/negotiates the DD clause, dissects leases, secures variations, protects exits.
Accountant/Finance: Validates tenant financials, serviceability, tax settings, and financing conditions.

When each expert knows the others’ moves, problems are pre-empted—not litigated.

Practical Checklist: What to Vet in DD

Legal

Lessee entity strength, guarantees, options, rent review mechanics
Outgoings allocation (target NNN), maintenance obligations (roof, structure)
Make-good, assignments/subletting, default & remedies
Rights to vary lease (if needed), estoppels, disclosures

Financial

Tenant revenue/profit trends, cashflow buffers
Rent vs market comparables; WALE
Arrears history; breach notices

Physical

B&P and specialist reports (roof, services, contamination)
Capex roadmap; landlord vs tenant responsibilities
Insurance and compliance

Deal Control

DD timetable, document list, vendor cooperation
Clear walk-away and deposit mechanics

Final Word

Great commercial deals aren’t “clean”—they’re made clean by a strong clause set, a relentless DD process, and the willingness to walk away. That posture turns risks into leverage—and leverage into value.

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