June 12, 2020
A 4-Step Guide to Buying a Commercial Property
A 4-Step Guide to Buying a Commercial Property
Step 1 – Seek Professional Advice
During the initial stages of trying to purchase the property or business, you will need to instruct the right professionals and make important decisions on how you want to progress.
It is worth considering the following:
• Instruct a qualified agent experienced in the type of property/business you are purchasing. A good quality agent will handle purchase price negotiations on your behalf to avoid emotions overrunning. An agent will also give you advice on values and keep the negotiations professional and on track;
• Accountants know their tax and at this stage it is worth getting an accountant on board to give you guidance on any tax advantages and the likely cost implications of taxation including VAT and Stamp Duty Land Tax. An accountant will also look at the potential for capital allowances and the best apportionment of the purchase price to sit alongside the vehicle (e.g. company, society or individuals) used to purchase the property/business;
• It is worth getting a solicitor briefed on the project during the early stages. You should always look for a solicitor with specific experience in the sector you are purchasing. When the final terms are agreed the solicitor can start work and start progressing the transaction; and
• It is important to look at getting the property fully surveyed so you are aware of any defects which may need potentially immediate and costly action upon completion of the purchase.
Step 2 – Heads of Terms
When terms are agreed between the seller and buyer the respective agents will put together a document called agreed “heads of terms” or it is sometimes known as “agent’s particulars” or “particulars of sale”.
The heads of terms will record the parties to the transaction including all professionals instructed to assist the parties. It is therefore important that you have made contact and instructed your chosen professionals before you get to the stage of terms being finalised and recorded. The terms will be circulated to all parties, including your solicitors. The solicitors will make initial contact with each other and it will be the responsibility of the seller’s solicitor to put together the contract and due diligence pack for the buyer’s solicitor to review.
Some of the early points to consider when starting a transaction of this type are:
• Your solicitor will have to carry out anti money laundering checks, client care documentation and initial file administration. It is therefore important that you are able to provide details of the purchase vehicle (e.g. company, secretary or individuals) used to purchase the property/business and the funding arrangements;
• You are likely to need deposit funds which generally equate to 10% of the purchase price. The deposit is a sum of money pre-agreed between the parties which is held in place as a bond or surety for satisfactory completion of the transaction and is usually offset against the purchase price on completion. You should make sure the deposit funds are in place and quickly accessible should they be required to exchange contracts quickly;
• Have you considered whether Value Added Tax is payable on top of the purchase price? Some sellers have completed a process which is known as “opting to tax” and this would mean that potentially VAT would be payable on top of the purchase price;
• If this is a purchase of the existing business, what happens with employees? You should investigate the position regarding any employees employed at the property. In most circumstances the employee will transfer to you on their existing terms of employment. You need to fully investigate each and every employee and the terms under which they are employed so you are aware of your liabilities going forward; and
• You should also speak to your solicitor about whether or not stamp duty land tax is payable. This guide won’t go into specifics but the duty is calculated by reference to the purchase price plus (if applicable) any VAT payable.
Step 3 – Cover All Bases
The Importance of Surveys
As mentioned above it is important to instruct a surveyor but also consider your own physical inspections. Generally, your solicitor won’t know the property and therefore legally it’s a help if the client can inspect the property and check it against the boundary plans the solicitor provides.
Please keep in mind the following when conducting inspections:
• Do the boundaries appear correct?
• Is there any land missing?
• Is there any land used by the property but not within the red edging on the plans?
• Is there any unauthorised occupation of the land and/or buildings or any tenants which you were not aware of?
• Have you checked/looked for neighbours with gates/openings into the land?
• Does there appear to be anyone using the land as access or parking with or without consent?
• Are the public using the land for recreation purposes (i.e. dog walking etc.)?
• Is there any evidence of septic tanks and/or watercourse?
• Is there any inaccessible land from a highway or land which is accessed via a bridge or under buildings?
• Are there any telegraph poles, bus shelters or overhead cables within the boundaries?
The best course of action is to report everything to solicitor, they can decide if further action is needed and advise you dependent on your circumstances.
You should also consider getting the gas and electrical installations checked by a qualified engineer (i.e. boiler, air conditioning units, kitchen equipment and electrical wiring etc.), so you can gain some idea of the lifespan of such items and whether any immediate repairs are required (ask to see service records if possible to make sure the item has been properly maintained). The same can be said for any fixtures and fittings to be purchased. Check the items to make sure they are fit for purpose otherwise you will need to replace when you complete on the purchase. Please be careful to make sure you ask the seller for copies of the current, clear and valid statutory certification for both the trading areas of the property and any residential accommodation (if there is any). These certificates can include the electrical, gas (or LPG – if applicable), portable appliance testing, asbestos, lift hoist (if applicable), fire alarm, emergency lighting, fire doors, health and safety file and fire risk assessment. It is a legal requirement to make sure that the property is safe and therefore you should check to make sure that the property benefits from all certification and, if not, how much it will cost to obtain the outstanding certificate(s) (and if applicable the costs of remediation works). This may mean that you instruct your own engineer to inspect the property to value any potential works before they can provide the certificate.
Property Specific – Sale of Alcoholic Products
One of the most important checks for a property which is dependent on the sale of alcoholic products is to check that the property benefits from a premises licence.
This is the licence which allows the sale of alcohol from designated areas of the property within strict guidelines and conditions. You should ask for a copy of the licence and check this with the local authority to make sure it has not lapsed (or been surrendered or revoked).
You will need a full copy of the licence as this will include any conditions and the plans for the trade areas. It’s possible that the conditions will be restrictive and therefore you should check these against your intended business model to make sure there are no conditions which cause concern or excessive financial burden. To hold a premises licence a designated premises supervisor is to be nominated and such individual must hold adequate training and a personal licence. You should decide this early as the designated premises supervisor is the person the authorities contact if there is an issue with the licence.
Step 4 – Understanding the Legal Process
The legal process can be quite tricky to follow, but we set out below the relevant steps to help you understand what is required:
Taking instructions and initial file administration
This was touched on previously but in brief, the buyer’s solicitor, while waiting on the initial contract and due diligence documentation from the seller’s solicitor, will take instructions on the transaction and undertake all client care and anti-money laundering checks. It is generally the task of the seller’s solicitor to produce the contract pack but please note that this can take a good week or so to produce.
This should include the contract, replies to commercial property enquiries, title documentation and any further business documentation/information necessary for the purchaser’s due diligence investigation.
The seller will be asked to supply a pack of information and documentation as well as responses to enquiries designed to elicit any information from the seller which is not evident from inspections, surveys and searches. It’s important that you and your solicitor work through these enquiries and pick out any missing or worrying information.
Searches and title investigation
Your solicitor should ask you if you wish to obtain commercial searches. These are vitally important but if your purchase is not being funded by bank loans you do have the option of not purchasing the searches. The searches look at various areas including potentially adverse entries at the local authority, water and drainage connections, environmental issues (other searches can be obtained depending on the location and issues with the property and locality).
It is always advisable to obtain the search results as they could potentially reveal something which hasn’t already been discovered and which could ultimately mean it’s going to be costly to rectify or unviable.
The seller’s title to the property is either registered at the Land Registry or not. Either way the solicitor will be tasked with reviewing and reporting on the title and the title plan. The title will include words like restrictive covenants, charges, restrictions, and easements. The solicitor will report on anything which will dictate your use and enjoyment of the property after you have purchased but they will also work with the seller’s solicitor to remove anything immediate and financial before the purchase completes.
The solicitor should report to you all rights and reservations which benefit and burden the property. It is possible that the property will be burdened by restrictions on use or alternatively rights which benefit neighbours etc. The property could potentially have rights which are needed or, importantly, the property may need rights but such rights are not evident from the title. From your inspections you can assist the solicitor with making sure the title is satisfactory and accurate.
Contract and negotiations
The contract is produced mainly by the seller’s solicitor and it includes the basic terms of how the sale and purchase is to take place, i.e. it records the consideration, the date of completion and what happens in between. A business sale agreement is used when there is a business element to the transaction and this also includes provisions relating to stock, suppliers and assets etc. The contract generally comes in a format which is seller friendly and therefore it’s the job of the buyer’s solicitor to review the contract to make sure it is correct and it doesn’t place any excessive burden on the buyer.
Negotiations on the contract can sometimes be lengthy but it is an important process to make sure the contract records the terms and helps with any issues which could occur before or after completion. When the parties have agreed the contract it can be circulated for signature in readiness of the next step.
Exchange and completion
Exchange of contracts is when the seller and buyer enter into a legally binding contract, the deposit is handed over and the physical contract is exchanged between the buyer’s solicitor and the seller’s solicitor. The parties fix a completion date within the contract and there would be severe financial penalty if either party breached the terms of the contract.
Most (but not all) contracts will require the buyer to insure the property from exchange of contracts. There are instances when insurable events happen between exchange and completion and therefore it’s important that you speak to your solicitor about insurance risk and make sure you have insurance in place and “on risk” when required. Ideally you should arrange to inspect the property again before exchange of contracts to check the property hasn’t been damaged etc., and for safety’s sake also arrange a second inspection on the morning of completion.
Completion is the date when the funds are transferred from the buyer’s solicitor to the seller’s solicitor and therefore it is important that you do not allow yourself to be committed to the contract if you are not 100% comfortable that you can forward the purchase funds on the designated date.
When the funds arrive with the seller’s solicitor, they usually then notify the selling agent to release keys and the buyer may take occupation. It may be prudent to consider changing the locks if you are concerned about lost keys or previous holders of the keys. The seller’s solicitor will also forward to the buyer’s solicitor all transfer documents (including a consent to transfer if there is a premises licence) when they receive the completion funds.
Registration and Stamp Duty
As soon as the buyer’s solicitor receives the transfer documentation (and any other related Land Registry documents i.e. release of charges/mortgages etc.) the solicitor will apply to the Land Registry to register you as the proprietor of the property. This takes a few weeks and sometimes months to come back from the Land Registry, but once this is finalised the solicitor’s work is largely finished, and you will probably receive a notification that the file is being closed.
While the solicitor is waiting for the Land Registry to process the transfer application, the buyer’s solicitor will be notifying the HM Revenue and Customs of the transaction and if applicable pay any stamp duty on your behalf (provided you have placed your solicitor in funds beforehand). Not all transactions are notifiable depending on the amount of the purchase price/land valuation and as indicated above there are brackets for the amount of stamp duty payable (if any) depending on the amount of the purchase price (and any VAT if applicable also potentially the land value if there is a sale at an undervalue).
Please note there are deadlines for submission of the notification (and payment of duty if applicable) from completion of the transaction. If the notification is submitted late there is an immediate fine with additional financial penalties if the application is delayed further.
We understand that this isn’t the most simple process to understand. But we hope that by breaking it down, we can help you to understand what you can expect from the process of buying a commercial property.
If you wish to get a better understanding of this and seek further advice. Please don’t hesitate to contact us.
This blog post includes general legal information provided by Ancora Law and is provided for example purposes only. This information may not be suitable to your circumstances and should not be considered as a substitute for the advice of a solicitor or other appropriately qualified professionals. Ancora Law is not responsible for any loss, damage or cost resulting from any decisions that are made in reliance on the information above, including legal, compliance and/or risk management decisions.