Buying commercial real estate in England and Wales - FAQs

If you are thinking of investing in UK commercial property (or real estate), there are a number of legal and practical issues involved.  Below are a range of queries 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 adviceHow is property held in England and Wales? 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.

What is meant by freehold?

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).

What is meant by leasehold?

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.

How is leasehold property acquired?

There are two ways of acquiring leasehold property:

  • you may be granted a new lease of the property, either by the property owner or by an existing tenant (where granted by a tenant it is known as a sub-lease or underlease); or 2. you may acquire an existing lease from the tenant (leases often allow tenants to transfer (or assign) their interest in the lease to a third party).

Do other property interests exist in England and Wales?

Yes.  These include:

  • Licences - these are purely contractual arrangements and do not give the licence holder an exclusive right to the property.
  • Options and pre-emptions - these are rights to buy or rights of first refusal.
  • Easements - these are rights over another person’s property such as a right of way or rights to use pipes and cables.

How is ownership evidenced?

Most property in England and Wales is registered on a public register at the Land Registry [link].  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.

As well as employing legal advisors, will I need advice from other consultants when investing in commercial property?

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.

What is the role of a property agent?

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.

What is the role of a surveyor?

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:

1. the general rule in relation to property transactions in England and Wales is ‘buyer beware’.  The seller/landlord has no legal obligation to tell you about physical defects affecting the property.  The onus is on you as buyer/tenant to carry out physical, structural and environmental surveys of the property. Usually there will be no guarantees/warranties available in relation to the physical condition of the property

2. typically, landlords want to pass on as many of the costs associated with the property as they can to the tenant so that the income from and capital value of the property can be maintained.  To achieve this, leases are commonly granted on a full repairing and insurance basis, where the tenant has to pay the costs of repairing, maintaining and insuring the property (referred to as an FRI lease).

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. 

What is the role of a valuer?

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.

What are the stages of a typical property transaction?

The key stages in a typical property transaction are as follows:

• identify a suitable property investment (you might use an agent to help you) • arrange finance, if required • make an offer (usually made through the property agents) and negotiate commercial terms (again you can use an agent to help you.  You might also use a valuer to ensure that you offer the right price) • agents prepare heads of terms and give these to the parties’ legal advisors.  At this stage, proposed time scales will be agreed and the agent will probably want to know how the acquisition is to be funded (and will require proof of finance) • appoint legal advisors • due diligence (both legal due diligence and physical surveys and inspection by a surveyor) • legal advisors prepare and negotiate the following transaction documents: o finance documents (if applicable) o for a freehold purchase - the sale contract and transfer document o for the purchase of an existing lease - the sale contract, the transfer document and any necessary landlord’s consents and any lease security documents o for the grant of a new lease – the lease, any landlord’s consents and any lease security documents.  There may also be a contract known as an agreement for lease, depending upon the circumstances • legal advisors report to you on the transaction • legal documentation is signed and contracts are exchanged (a deposit is normally paid in relation to a freehold transaction) • completion (or closing) of the transaction either by: o signing and dating the transfer of the property interest (where the freehold or an existing lease is being acquired) and paying the balance of the price or o signing and dating the lease (where a new lease is being granted) and making any necessary payments under the lease • payment of Stamp Duty Land Tax and registration at the Land Registry [link].

Note that some of the stages overlap.  For example, due diligence and negotiation of the transaction documents will take place at the same time. 

How should I structure my property investment?

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. 

What about financing the investment?

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:

• their requirements for drawdown (obtaining the monies) can be met • they are happy with the title to the property • any security they require over the property being acquired is properly documented and registered.

Do UK Money Laundering Regulations need to be complied with?

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.

 Will I need to pay a deposit?

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.

What costs do I need to budget for?

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:

• agent’s fees - can be 1-2% of purchase price plus value added tax (VAT is currently charged at a rate of 20%) • valuation/survey fees - 1-2% of purchase price plus VAT • legal fees - normally a percentage of the purchase price/rental value plus VAT.  Such costs vary depending upon the nature of the transaction • search fees – these vary depending upon the nature of the transaction and what searches are necessary • registration fees – up to a maximum of £920 • stamp duty land tax – there are differing rates depending upon the nature of the transaction [link to SDLT FAQs] • finance costs – you will normally have to pay an arrangement fee and the fees of your bank’s lawyers and valuers • other professional costs – where the buyer is a non-UK company, these costs are typically those relating to the provision of an opinion letter from a lawyer in the appropriate jurisdiction confirming that the overseas entity has capacity to enter into the property transaction.

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 I am acquiring a leasehold property, what will the landlord need from me in the way of references and security?

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:

• references (usually from your bank, accountants or trading suppliers or customers) • audited accounts (usually for three years).

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). 

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Penningtons Manches Cooper LLP

Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority under number 419867.

Penningtons Manches Cooper LLP