Permitted Use of Business Premises – never assume approvals have been obtained

When buying a business, a Buyer should always conduct a town planning/zoning search of the premises from which the business is being conducted.  Such a search should preferably be undertaken before the contract is entered into or, if not, the contract should be subject to a satisfactory town planning search being obtained.

A Buyer should never assume that a Seller (or a Franchisor, if the business is a franchise) has done anything to obtain the necessary licences or approvals for the business to operate out of its premises or, indeed, has secured appropriate premises at all.

Even if the Seller has entered into a formal lease of the premises, it does not mean that the permitted use under the lease has approval under the applicable town plan.  It could even be that the permitted use under the lease is different to the description of the business in the contract of business sale.  For example, a lease could provide that the permitted use is storage and distribution whereas the contract of business sale could describe the business as a retail business. 

Should a Buyer rely on a warranty in the Contract of Business Sale?

As seemingly reassuring as warranties are, a Buyer should not be tempted to simply rely on any warranty in the contract of sale that the Seller has obtained all necessary approvals etc., as any such warranty may be excluded in certain circumstances or only apply if the matters being warranted were within the Seller’s knowledge.  For example, if the parties use the REIQ Contract of Business Sale (3rd edition) for their transaction, Standard Condition 8.1(b) contains a warranty from the Seller as follows:

The Seller states and assures the Buyer that except as otherwise disclosed in the Contract:

    1. to the best of the Seller’s knowledge and belief the Seller has applied for or obtained all licences, permits, patents, certificates, consents or other approvals from any competent authority necessary for the proper carrying on of the Business and that there is not, and at the date of Completion there will not be, any subsisting contravention of any licence, permit, patent, certificate, consent or other approval obtained by the Seller In relation to the premises for the carrying on of the Business.

In the case of Spoilt Pty Ltd v Ticking Pty Ltd & Ors [2010] QDC 259, the Court found that the warranty in clause 8.1(b) could be avoided by a Seller where evidence showed that there was nothing to alert the Seller to the fact the use of the premises was unlawful.  In that case, the Court was not satisfied that the Seller’s failure to make proper enquiry meant that their warranty at clause 8.1(b) was breached or that the lack of proper approval meant that their warranty was breached.

What is the effect of the exclusion of warranty as to permissible use in the REIQ Contract?

Interestingly, there is also another standard condition (clause 32.1) in the REIQ Contract (3rd edition) that provides:

    The Seller does not give any warranty that the type of Business stated in Item J(a) is a permissible use under any town planning scheme and no compensation is payable if the particulars in Item J(a) are not correct.

On an initial reading of clause 32.1, one would expect that it would mean that town planning approvals are not covered by the warranty in Standard Condition 8.1(b) in any event.  However, the Judge in Spoilt took a different view, when he said:

    It seems to me that clause 8.1(b)  can operate consistently with clause 32.1.  The former clause is concerned with knowledge and belief and the latter clause with permissible uses, irrespective of knowledge and belief.  If reliance on a warranty at clause 8.1(b) falsely given by a Seller causes the Buyer to fail to search for approvals or to fail to engage a solicitor which causes losses as a consequence of a failure to discover that a use being unlawful, it seems to me the Buyer could claim as damages under clause 8.1 an amount equivalent to the damages which would have flowed from a breach of warranty that the Business use was permissible. Such a claim would not be inconsistent with the operation of clause 32.1 and the absence of a warranty on present use.

This is something that Sellers should be mindful of.

What does this mean for a Buyer?

If you are a Buyer, always conduct a town planning search. You can call the relevant local government authority as a first step. We would always recommend that you also engage a professional town planner.

The question then becomes what level of investigation a Buyer should undertake. For example, in Brisbane City, there are three levels of search which can be undertaken. It goes without saying that the most desirable search is the most expensive one (which costs over $3000) and the one that takes the longest to obtain. Whilst we would recommend that the search be undertaken, we need to be mindful of the time constraints and the cost of doing so.

What happens if the premises do not have town planning approval for the Business use?

If the premises do not have relevant approval, a Buyer may not want to go through with the purchase as the cost of applying for approval may be prohibitive.

Alternatively, a Buyer may wish to negotiate a special condition to be included in the contract requiring the Seller to apply at its cost for the required development approval and, if such approval is not obtained with a specified period of time after the contract is entered into, then the Buyer may elect to terminate the contract.  Of course, it would be prudent to ascertain from the relevant local authority how long the approval process may take as it may not be commercial to undertake the approval process and it may be better to walk away from the deal before the contract is entered into.

Either way, better to know up front that the correct town planning approvals have been granted.


Disclaimer:
Reliance on content the material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.