Buying Commercial Property

You will have had the debate as to whether owning commercial property is the best option for your business or whether leasing commercial property would achieve your goals, and each has its merits. Please note that each commercial property purchase is bespoke and has its own technicalities, so the guide covers the key legal points to note when buying or selling commercial property.

Once you have decided to buy a commercial property and, having weighed up the local market to see what sites are a good fit for you (access, footfall, storage etc), you should check that the building has the required permissions for the use you have in mind. At the very least, speak to your local planning department to find out the likelihood of them changing its permitted usage as well as the amount of time this might take. Be warned, they may give you a good indication on timing but until the application for change of use goes in, you are still at risk of your application being turned down, leaving you with an expensive burden.

Another key task you need to carry out is to instruct a surveyor to check the building for any problems that may affect the value or to highlight any potential issues with the building. The last thing you need is a structural issue putting you, your business and your employees at risk or to find that you are operating outside of the law. Often the surveyor will value the property so that you can work out what you should be offering as well as giving you the confidence to negotiate an advantageous purchase price. As with buying any asset, taking the time to understand the seller’s position can really put you in good standing when negotiating the price. You may find that the seller is under time pressures to sell or that the property has been on the market for a long time. There may be other parties interested in the property and having this information may help you to lever your position. Surveyors, solicitors and property agents can help you with this and your solicitor will make sure that your offer is subject to the legal checks and survey reports. You will also be required to conduct an asbestos survey.

With the offer stage of the process completed, the seller will not be legally obliged to sell you the property and it is important to note that there is little you can do if the seller wants to accept other offers unless your solicitor exchanges on an exclusivity agreement. Usually you will need to exchange contracts by an agreed deadline when negotiating an exclusivity agreement and therefore it is important that you and your solicitor can work to these deadlines. At the point of exchanging contracts both parties are legally obliged to complete the property transaction and an agreed deposit will usually be paid at this point.

One of the first tasks your solicitor will take charge of will be to submit the searches so that you, as the buyer, fully understand what you are taking on and any problems can be dealt with before exchange. You may hear the terminology; “let the buyer beware” which means that it is up to you to find out potential issues with the property rather than for the seller to bring them to your attention. These searches are costs to you and are carried out by third parties and reviewed by your solicitor. The general searches that will be carried out on the property will include (but are not limited to): local search, drainage search, environmental search, chancel search, mining search and Land Registry search.

Your solicitor will receive the Land Registry details from the seller’s solicitors. These contain proof that the seller has the legal right to sell the property and will highlight any restrictive covenants there are over the property, for instance not allowing further development to the property.

From the results of the searches your solicitor will discover any plans for local development, drainage, links to mains, notices that may be held against the property, current applications for change of use, contamination of the site (environmental issues), whether the property is listed, or rights that may affect the property, if the property is in a conservation area, planning enforcement orders, maintenance of roads, rights of way and much more. Depending on other factors including postcode, mortgage lender requirements and type of business use, your solicitor will carry out further searches. From these searches your solicitor will highlight potential issues and their repercussions as well as what is called raising enquiries, whereby they will liaise with the buyer’s commercial property solicitors and they will reply to the enquiries (these are question marks or areas the solicitor needs to clarify with the buyer’s side which will help them to complete the investigations).

As buying commercial property may be one of the largest single cost expenditures for your business, the correct advice on structuring the transaction should be dealt with by a tax accountant in conjunction with your solicitor drawing up the legal documentation. Commercial property can be bought in a number of ways such as buying the property through a pension fund, buying it with cash or buying the business that owns the property and therefore the deal will be highly bespoke.   You, your business type and size, your lender and the property itself will be factors that may contribute to the structure of the deal and being informed of the stamp duty thresholds, VAT legislation relating to your purchase should all be taken into account. Your accountant will structure the deal in a tax efficient way which can save you huge amounts of money and make provision against any future  tax bills coming which could be devastating to your business. You shouldn’t expect your solicitor to give specific tax advice, but they can normally recommend accountants if you do not already have one to seek advice from.

Once the replies to enquiries have been done and all parties are satisfied with the agreements, an exchange and completion date will be set. These can be on the same day or separate days. Once exchange is done, the contracts are legally binding and it would be costly to pull out at this stage as well as having legal implications. It is important that you know the date of the exchange so that you can pre-arrange insurance for the property. The agreed deposit will usually be paid from the buyer to the seller at exchange of contracts and the rest of the balance will be paid on completion.

There is a full range of cost considerations to think about before and after buying a commercial property, so here is a breakdown of the likely costs to add to the overall equation of buying a commercial property (you need to do your own research as there will be different factors for each individual case):

  • Deposit – Depending on your lender and the terms of their business, you may require a substantial capital deposit to purchase commercial property.
  • Mortgage repayments – Paying a commercial mortgage is a long term commitment and unless you are able to fix these repayments, you may be subject to this cost increasing if interest rates increase.
  • Legal costs – Your solicitor is obliged to give you a cost estimate of their legal charges and these may be an hourly rate combined with an estimate for the amount of time they expect for them to complete or they will give an estimate for a fixed fee.
  • Disbursements – Your solicitor will require third parties to carry out work and provide information and they will let you know these costs with their estimate.
  • Surveyor’s fees – Generally a surveyor’s fees will be fixed however the scope of the survey as well as the type of survey can lead to differences in these costs.
  • Lenders fees and broker’s fees – If you are using a broker to find you the best commercial mortgage for your situation, they will charge you a fee. Sometimes the lender will charge you fees for setting up mortgages. Your solicitor will also include a fee (which should be in their estimate) for ‘acting for lender fee’ whereby they will represent the lender in the transaction.
  • Insurance – The various insurances that you require for buildings and as an employer need to be addressed and built into the financial model.
  • Changes to the building – Get a variety of quotations from contractors for any works you wish to carry out on the property to make it suitable for your business as well as fees associated with building regulations and planning permission, should they be required.
  • Equipment – Your business may well require specialist equipment and this needs to be taken into consideration. Depending on the terms of the sale, some equipment/fixtures and fittings will be included and some may not. Make sure you know what you are getting and don’t expect any such items to be left for you if they are not agreed to by the solicitor.
  • Maintenance – Your building will require general upkeep and repairs, the costs of which can be surprising. Business rates also need to be looked into.
  • Leasing – If you will be leasing the property or part of the property there will be a number of related costs. It would be advisable to research local and property type yields to make sure this is a wise investment. Your lender may also stipulate as to whether you can lease the property, so make sure this is qualified and built into your business plan.

We hope you find this guide of help and that it enables you to see the fuller picture with regards to the legalities of buying commercial property. It is a specialist area of the law and therefore the last piece of advice in this guide would be for you to seek a specialist commercial property lawyer. They can help you through the process and make sure that your investment is legally sound and that your business achieves it’s goals without putting it at risk by taking on a liability.

For more information of how we can help you with your property transactions, please contact Richard Egan or Harj Dhatt on 01785 223440 or email them on Richard.Egan@orj.co.uk or Harj.Dhatt@orj.co.uk

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