Hidden Trust Risk in a Commercial Property Acquisition — Legal Due Diligence Clears the Way

In commercial real estate investment, transactions often appear structurally straightforward and financially attractive, yet may conceal complex legal risks beneath the surface.

In this matter, our client proposed to invest in a commercial property located in the core of the Sydney CBD. According to information provided by the vendor, the property was held through a unit trust structure. Rather than acquiring the property directly, the client intended to acquire all Class A units in the trust, thereby obtaining control of the trust and, indirectly, the underlying property and its rental income stream.

The property had been leased to a commercial tenant on a long-term basis, generating stable and predictable rental returns. From a commercial perspective, the investment appeared highly attractive.

However, in structured transactions of this nature, the purchaser does not acquire the asset itself, but rather an interest in the legal vehicle that holds the asset. As such, potential risks are often embedded in the trust structure, trust deed, asset ownership arrangements, and pre-existing legal relationships.

Prior to completion, our client engaged us to conduct a comprehensive legal due diligence investigation to assess whether the proposed investment structure gave rise to any material legal risks.

At the outset, based on the vendor’s information, the transaction appeared to involve a trust holding a well-performing commercial property with stable tenancy and reliable income. However, given that the purchaser was acquiring units rather than the property itself, the central issue was not merely the quality of the asset, but whether the trust structure ensured effective control over the asset. Upon detailed review of the trust documentation, we identified ambiguity in the allocation of rights between the trustee and the unit holders.

Under a typical unit trust structure, unit holders do not have direct ownership of trust assets. Instead, they hold economic interests in the trust fund, while the trustee holds legal title to the assets.

However, in this case, the trust deed did not clearly exclude the possibility that a unit holder could assert rights in respect of specific trust assets. In the absence of clear restrictions, this raised the possibility that:

Accordingly, this uncertainty gave rise to a material risk: if unit holders were capable of asserting rights to specific assets, the purchaser, despite acquiring all units, might not obtain full control over those assets. This could result in restrictions on disposal, disputes over asset ownership, and an inability to realise the commercial objectives of the investment.

Further investigation revealed that the trust had historically engaged in an arrangement involving non-cash distribution or asset-related treatment, and the documentation surrounding that arrangement was ambiguous in its legal characterisation. This raised concerns as to whether the trust had, in practice, permitted asset-based distributions or failed to clearly restrict such arrangements.

We undertook a detailed legal analysis of the above arrangement, focusing on a critical distinction: whether the historical arrangement reflected a legal entitlement arising under the trust deed, or merely a fact-specific implementation by the trustee in particular circumstances.

This distinction was determinative. If the arrangement were based on a legal entitlement, it could potentially form the basis of ongoing or future claims by unit holders. If not, it would not give rise to any enforceable rights.

We conducted a comprehensive review of the trust deed and considered the factual context in which the arrangement arose. In parallel, we issued targeted requisitions to the vendor requiring clarification as to the legal basis and nature of the historical transaction.

Through continued communication and follow-up, we obtained clear responses from the vendor on each of these points.

The vendor confirmed that the arrangement was implemented in specific circumstances to facilitate a unit holder exit or adjustment of interests, and constituted a distribution in specie. Importantly, it was not based on any express or implied entitlement of a unit holder to specific trust assets. The vendor further confirmed that the arrangement did not derive from the trust deed and did not establish any ongoing or generalised mechanism capable of being relied upon by other unit holders.

Having considered the trust deed as a whole, we concluded that the trust structure remained consistent with orthodox unit trust principles. Legal ownership of the trust assets remained with the trustee, and unit holders’ rights were limited to distributions of income and capital, rather than any direct claim to specific assets.

Accordingly, while the historical record involved asset-related treatment in form, its legal character was that of a one-off arrangement in a specific context, and it did not affect the fundamental allocation of rights within the trust. Once clarified, the issue did not present a material risk to the purchaser’s ability to obtain effective control over the trust assets.

Based on our legal analysis and risk assessment, we enabled the client to proceed with the transaction with a clear understanding of the legal structure and associated risks.