If you are thinking of investing in UK commercial real estate, there are a number of legal and practical issues involved. Below are some frequently asked questions (FAQs) relating to the purchase of commercial/business premises in England and Wales.
As each property investor has different needs and every property is unique, these FAQs can only give a general overview. If you are considering a property transaction, it is recommended that you obtain specialist legal advice.
The type of ownership and the legal rights over a property can significantly affect its value. Property will usually be either freehold or leasehold property.
A freehold interest is an interest in land that is not limited by time. The owner of a freehold generally controls and owns all the property: the land itself, any buildings/structures on it, the subsoil below and the airspace above it. However, ownership may be restricted by the rights of others (for example a third party may have a right of access over the property).
With leasehold property, the interest is contractually time limited to the length of the lease. Generally, flats and much of central London property are held on a leasehold basis.
The lease is the principal document which sets out the details of the contractual relationship between the owner of a property (the Landlord) and the occupier (the Tenant). The content of the lease will vary depending on the property type and the relationship between the landlord and the tenant.
Lease lengths (known as the ”term” of the lease) for business leases have been gradually reducing with the average lease length now being just under eight years. However, some commercial property tenants may have a statutory (legal) right to extend the contractual term of the lease.
Depending upon the nature of the property and the transaction, long leasehold interests (with a lease length of up to 999 years) may also be available. Such leases are normally granted on payment of a premium with only low or nominal rents payable.
There are two ways of acquiring leasehold property:
Yes. These include:
Most property in England and Wales is registered on a public register at the Land Registry. It is referred to as Registered Land. Registration provides conclusive evidence as to the identity of the owner and the owner's title to the property. The register also provides details of the extent of the land and the rights benefiting and affecting it.
If property is registered, there is a state guarantee of title that guarantees the accuracy of the public register. If a defect or error is found in a registered title, compensation is payable by the Land Registry in certain circumstances.
Yes. In addition to having legal advisors to assist you with your property transaction, other property consultants may include a property agent, surveyor and a valuer.
Owners wishing to sell or let their property typically employ a property agent to market their property. They advertise the property in a variety of online and offline publications and media and contact parties who have registered with them. Buyers can register with these agents and ask for details of available properties. Alternatively, a buyer can appoint their own agent to find a suitable property investment (a finder’s fee is usually payable and is often linked to the rental value or purchase price for the property).
Agents also negotiate the key terms of the transaction. Once these terms are settled between the parties, they are documented in “Heads of Terms” which are then used by the parties’ legal advisors to draw up the legal documentation for the transaction.
A surveyor is usually appointed before you buy/rent commercial property. Their job is to report on the condition and structure of the property in which you are interested. There are two main reasons for appointing a surveyor:
A survey will help you to identify physical defects in the property so that you can properly understand the extent of the liability you may be taking on when buying/renting the property.
A professional valuer will often be involved in the sale/letting of commercial property, either for the seller/landlord to set the sale price/rental level for the property or for finance providers to satisfy themselves that there is adequate security for their loan.
Given the uniqueness of many commercial properties and the fact that individual properties are not transacted frequently enough to establish a clear market price at any given moment, a valuer is needed to estimate the price a property will fetch if it is sold/let. The valuation will be based upon expert knowledge of the market, market evidence and relevant previous transactions.
You may also want to obtain valuation advice to understand the state of the market and guide you on the value of property so that you are well informed when it comes to negotiating the price and other commercial terms of the transaction.
The key stages in a typical property transaction are as follows:
Note that some of the stages overlap. For example, due diligence and negotiation of the transaction documents will take place at the same time.
You will need to consider the most suitable structure for your property investment. UK property can be held in a number of ways (either directly or indirectly) including via a limited liability company, a traditional partnership, a limited liability partnership and unit trusts.
It is important to consider the tax implications when deciding what structure is most appropriate. The tax consequences will depend upon a number of factors including your tax residence and domicile and the investment vehicle you choose. We always advise that you seek tax advice based on your particular circumstances.
If you intend to borrow monies to finance your property transaction, the funding arrangements will need to be in place before the property contracts are exchanged. As your legal advisors, we will need to liaise with your lenders to ensure that:
Yes. The party providing finance for the transaction and your legal advisors will need to comply with UK Money Laundering Regulations and will require documentary evidence of identity. If you are an individual, this is likely to be your passport or driving licence and a utility bill. For a company it will be the company’s constitutional documents.
It depends on the type of transaction. Typically, when acquiring freehold property, you will need to pay a deposit of between 5-10% of the purchase price on exchange of contracts. As your legal advisors, we will need evidence that you have funds to pay this. The remainder of the purchase price is then paid on completion of the transaction.
A deposit is not normally paid on the exchange of contracts for the grant of a new lease (known as an agreement for lease) and sometimes there is no need for an agreement for lease, with the parties proceeding direct to completion of the lease after the due diligence stage.
In addition to the purchase price, there are a number of other costs associated with the acquisition of property. As a general rule you should budget for:
You should also budget for the cost of any works that may be required to the property, either for your own occupation or (if you propose to let to a third party) to ensure the property is in a lettable condition.
If you are acquiring a leasehold interest, the landlord (or the tenant if you are acquiring an existing lease) will need to be satisfied about your financial strength (sometimes referred to as covenant strength) i.e. your financial ability to meet the tenant’s obligations in the lease.
You will have to provide:
If satisfactory references/accounts cannot be supplied, it is common for some form of security to be required. This could be in the form of a guarantee (from a parent company or the company directors) or a cash deposit (known as a rent deposit).
No. There is no duty on the seller/landlord to disclose physical defects or many of the other matters that may affect the property. It is essential, therefore, that proper checks are undertaken on your behalf to ensure you are satisfied that the property you propose to acquire is suitable for your purpose.
In addition to a physical survey undertaken by your surveyor, as your legal advisors, we will carry out legal due diligence to make sure the seller/landlord has the right to sell/let the property and identify whether there are any restrictions which may affect your use and enjoyment of the property. There are three strands to this due diligence:
Yes. Environment laws in England and Wales can operate to make you liable for contamination that is already present at the property when you acquire it. It is advisable to carry out a desk top environmental survey to assess any potential environmental risk. If considered necessary (depending on the outcome of initial investigations or the nature of the property), you may need to engage an environmental consultant to carry out a full environmental survey.
We also advise that steps are taken to identify potential environmental problems early in the transaction so that such matters can be factored into negotiations on price and other contractual terms.
There is no typical time period for completing a property transaction. This can vary enormously depending on the structure and complexity of the deal and the nature of the property. The seller/landlord will normally impose a timescale for carrying out due diligence, exchanging contracts and completing (or closing) the transaction. As your legal advisors, we will need instructions as to the deadline and timescale that you wish to work towards.
Exchange of contracts is the stage when the contract becomes legally binding. The parties will not be bound to go ahead with the transaction until each party signs, dates and delivers their part of the contract to the other party. Until exchange of contracts takes place, neither party has any recourse if the other decides not to proceed with the transaction. Once exchange takes place, neither party can withdraw without incurring liability.
If the transaction is the grant of a new lease, there may not be an exchange of contracts (the contract is known as an agreement for lease) and the parties will not be bound by the transaction until the lease is completed.
An exclusivity agreement (sometimes referred to as a lock-out agreement) is an agreement used to give the buyer a specified period of time to carry out its due diligence with reassurance from the seller that they will not negotiate with other parties within that period. However, the benefit of such agreements is limited. They can be difficult and time-consuming to negotiate and the buyer’s remedies for breach are limited to recovering wasted costs.
Completion takes place when the formal documents transferring/granting the property interest are signed, dated and delivered. The balance of the purchase price is handed over at this stage. In the case of a grant of a new lease, sums under the lease may be payable.
If contracts were exchanged prior to completion:
Yes. For some property transactions to be legally effective, they must be registered at the Land Registry within a specified period after completion takes place. Transactions requiring registration include the:
Bear in mind that members of the public can view Land Registry records and see details of the property. However, it is possible to limit access to ‘commercially sensitive’ information. You should consider whether there are any commercially sensitive provisions in the documents that need to be submitted for registration. We can discuss this with you and make the necessary application to remove that information at the same time as dealing with registration of the transaction.
Stamp duty land tax may also need to be paid.
Yes, we always advise you to seek tax advice based on your particular circumstances. Stamp duty land tax, Value Added Tax (VAT) and other taxes such as capital gains tax, capital allowances and tax on rental income may be relevant.
Stamp duty land tax (SDLT) is the main tax on property acquisitions. It must be paid by the buyer within 30 days of completion of the acquisition. Failure to pay on time results in significant penalties and interest. SDLT must also be paid before the Land Registry will process the registration of the transaction.
See SDLT FAQs for details of the current levels of SDLT applicable for property purchases and the premium (if any) paid for a new lease or the assignment of an existing lease.
Possibly. The VAT treatment of dealings in property and land is complex and subject to change. Different rules apply depending on the nature of the transaction and whether the property is residential or commercial.
Generally, on the sale or purchase of property in England and Wales, VAT is not chargeable. However, an owner of commercial property can ‘opt to tax’ the property. If the option is made, any sale is subject to VAT (currently at 20%). In practice, most owners of commercial property in the UK opt to tax.
On the sale of a commercial property which is let to tenants, the sale can be treated as being outside the scope of VAT as a transfer of a letting business as a going concern (TOGC) provided certain criteria are met.
Occupiers of business properties, whether freehold or leasehold, are required to pay a municipal tax known as business rates. The gross annual bill payable is calculated by multiplying the rateable value of the property (which is usually less than the amount actually paid for the property) by a rate set annually by the UK Government.
Further details of rates can be found on the Valuation Office Agency website.
You will need to factor in enough time to obtain the consents necessary to carry out these works (often referred to as fit out works). This may involve planning and building regulation consents and, where the property is leasehold, consent from the landlord. Fitting out plans should be prepared and submitted for consent as early as possible in the transaction so that their approval does not delay exchange/completion of the transaction.
There are other issues to consider in relation to fit out works to a leasehold property on which we can advise you including:
Planning permission is required:
The term ‘development’ is widely defined. Planning permission is generally not required for works affecting only the inside of a building (unless the works increase the floor area). In some cases, development is permitted by statute (and an express grant of planning permission is not required).
We always advise that you seek planning advice before carrying out works to a property or making a change to its use.
Yes, depending on the nature of the works and the nature and location of the property, other consents may also be needed before certain works can be carried out:
The works may also need building regulation approval to confirm that construction has taken place in accordance with applicable building regulations. Buildings must comply with fire regulations. Depending upon the location of the property and its use, other permits may be required (eg environmental and environmental health permits).