Property Entrepreneurs

FAQs - Buying commercial real estate in England and Wales

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.

How 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
  • 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.  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:

  • 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
  • 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:
    • finance documents (if applicable)
    • for a freehold purchase - the sale contract and transfer document
    • for the purchase of an existing lease - the sale contract, the transfer document and any necessary landlord’s consents and any lease security documents
    • 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:
    • 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
    • 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.

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
  • 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).

Is the seller (vendor) obliged to tell me about defects in the property?

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:

  • investigate title – we look at the Land Registry entries for the property and review other available title documents.  If you are acquiring a leasehold property, or taking a new lease we also review the terms of the lease
  • searches – we undertake various searches with the appropriate municipal (local) authorities, utility companies and other bodies to identify matters affecting the property. For example, planning (zoning) restrictions, the availability of sewers and services at the property, whether access roads are publicly maintained and whether there are any proposals that might affect the property.  Generally these searches only disclose matters affecting the property itself and not any adjoining property or the surrounding area.
  • enquiries – we ask questions (known as preliminary enquiries) of the seller/landlord’s lawyers, covering both title matters and more practical matters affecting the property such as the physical state of the property and whether there have been any disputes.

Do I need to undertake any environmental investigations?

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.

How long does a typical property transaction take?

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.

What is exchange of contracts?

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.

What is an exclusivity agreement?

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.

When does completion (or closing) take place?

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:

  • a completion date will have been specified in the contract (there is usually a short period between exchange and completion, although it is possible for completion to take place on the same day as exchange)
  • there are usually severe penalties if the parties do not complete on the specified completion date.  Daily interest is likely to be payable (around 3-4% above UK bank base lending rates) on the outstanding completion monies.  If the buyer is in default, the seller can also often charge for loss of income, pursue a claim for damages, take steps to terminate the contract and retain the deposit.

Are there any steps that need to be taken after a transaction has been completed?

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:

  • transfer of freehold property
  • transfer of leasehold property where the lease still has more than seven years remaining
  • grant of a lease for a term of more than seven years.

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.

Do I need to get tax advice on my property transaction?

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.

What is Stamp duty land tax (SDLT)?

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.

Will I have to pay Value Added Tax (VAT)?

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.

What are business rates?

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.

I am acquiring a property for my own occupation and will need to carry out works so that the property meets my needs.  What should I consider?

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:

  • the terms of any consent needed from the landlord (known as a licence to alter)
  • how the works are to be dealt with in the lease (for example whether they will need to be removed by you at the end of the lease and whether they should be taken into account on rent review).

When is planning permission needed?

Planning permission is required:

  • to ‘develop’ property
  • for some changes to the use of the property. 

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.

Are other consents required before works to a property can be undertaken?

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:

  • where a property is historically or architecturally important, listed building consent will be required
  • if the property is located in a conservation area, a conservation area consent will be needed.

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).

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.

Penningtons Manches Cooper LLP