Buying Commercial Property

Buying a Commercial Property

For any business, buying or leasing any piece of commercial real estate is a significant step. It’s not just a financial commitment, it is a strategic growth move.

What is a commercial property?

There are five main types of commercial property:

• Industrial – industrial units, factories and warehouses. These can be anything from a few hundred square feet to logistics spaces that take up more than 1000,000 sq ft. 
• Offices – from the small suburban office to large corporate spaces in the heart of a city centre.
• Retail – small convenience parades, small neighbourhood shops, shopping centres and supermarkets.
• Healthcare – nursing homes, clinics, hospitals.
• Leisure – anything in the food and beverage space such as a café, takeaway and restaurant, to pubs, hotels and sports facilities.

Own or lease?

There are pros and cons to owning and leasing, so whether you decide to go for a mortgage or a lease is down to your strategic business aims and plans.

If you decide to go down the route of buying – or selling – your own commercial real estate, you will need specialist legal advice because these transactions are highly complex.

This is a short guide that covers the key legal points when buying or selling commercial property.

Permissions

Once you have found a site that will work for you and your business, it is a good idea to check that the building can be used for your business type. 

Does it have the required permissions for the use you have in mind?

Speak to your local planning department to establish if it could change its permitted usage and if so, how long it could take. 

This is a risk, of course, because until your application for change of use goes in, you are still at risk of your application being turned down, leaving you with an expensive burden.

Survey

Instruct a surveyor to carry out a detailed search of the building. It is important to find out if there are any problems that may affect the value or to highlight any potential issues with the building.

A structural issue could put you, your business and your employees at risk – or worse, you could find yourself operating outside of the law.

A surveyor will usually value the property, giving you a good indication as to whether or not your offer should be negotiated further. If the surveyor believes the building is worth less than you have offered, it will give you more confidence to go back to the property agent.

Understand the seller

It is worth taking the time to understand the seller’s position as this can also be a bargaining tool.

If the seller is under pressure to sell quickly or if it has been on the market for a long time, it could be advantageous to you.

However, if there are several parties interested in the property, this could change your negotiating position.

Surveyors, solicitors and property agents can help you with this stage and your solicitor will ensure your offer is subject to the legal checks and survey reports. You will also be required to conduct an asbestos survey.

Your offer is accepted

Congratulations! Your offer is accepted but that is not the end of the process. It is important to note that the seller is not be legally obliged to sell you the property and there is little you can do if the seller decides to accept another offer.

The only way to stop that is by having your solicitor exchange on an exclusivity agreement. This means you have to exchange contracts by an agreed deadline so make sure you, your solicitor and the seller’s 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.

Searches

Your solicitor will undertake a series of searches to ensure there are no nasty shocks down the line. These searches include (but are not limited to): 

• Local search
• Drainage search
• Environmental search
• Chancel search
• Mining search 
• 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.

Other searches will enable your solicitor to establish if there are any plans for local development, drainage, links to mains, notices that may be held against the property, current applications for change of use, environmental or contamination 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.

There may be other searches, depending on factors such as postcode, mortgage lender requirements and type of business use. From these, your solicitor will highlight potential issues and their repercussions and liaise with the other party’s solicitor.

All these searches will enable you, as the buyer, to fully understand what you are taking on and any problems highlighted by the searches can be dealt with before exchange. 

Have you heard of the phrase “buyer beware”? It means it is up to you to find out potential issues with the property rather than for the seller to bring them to your attention.

How to buy

Buying commercial real estate is likely to be one of the largest single cost expenditures for your business.

This means it is imperative that you receive the correct advice on structuring the transaction. This should be dealt with by a tax accountant in conjunction with your solicitor drawing up the legal documentation. 

You can purchase commercial property in several ways, including:

• Through a pension fund
• Cash 
• Buying the business that owns the property.

Your deal is unique, so any advice you have will be tailored specifically to your business.

 You, your business type and size, your lender and the property itself will be factors that may contribute to the structure of the deal.

You also need to take into consideration stamp duty thresholds and VAT legislation relating to your purchase. Your accountant will structure the deal in a tax efficient way, which can save you significant sums, and will make provision against any future tax bills, which could be devastating to your business.

While your solicitor cannot provide specific tax advice, s/he can normally recommend accountants, if you do not already have one.

Exchange and completion

Once 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.

Contracts are legally binding upon exchange and it would be costly to pull out at this stage. It could also have legal implications. 

It is important you know the date of the exchange so 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.

Cost considerations

While there are different factors to consider, depending on your specific deal, here is a breakdown of the likely costs of buying a commercial property:

• 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 increased costs if interest rates rise. 
• Legal costs – Your solicitor is obliged to give you a cost estimate of their legal charges. 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 – As your solicitor will require third parties to carry out work and provide information, they will provide an estimate of these costs. 
• 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 different costs. 
• Lenders fees and broker’s fees – If you are using a broker to find you the best commercial mortgage, you will be charged a fee. Sometimes the lender will charge you fees for setting up mortgages. Your solicitor will also include an ‘acting for lender’ fee, which should be in their estimate, for representing the lender in the transaction.
• Insurance – You will need different types of insurance, including building and employer, depending on your business type and size. These costs must be built into your financial model.
• Changes to the building – These come with the obvious contractor, architect, planning fees. 
• Equipment – Does your business need specialist equipment? 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 do not expect any such items to be left for you if they are not agreed to by the solicitor.
• Maintenance – The cost of general upkeep and repairs of commercial buildings may surprise you.
• Business rates – These must be factored into your annual costs.
• Leasing – If you are to lease the property or part of the property. These come with several related costs. You should research local and property type yields to make sure this is a wise investment. Your lender may also stipulate if you can or cannot lease the property, so make sure this is qualified and built into your business plan.

Commercial property transactions are highly complex areas of law, so it is essential you get the right legal and financial advice. Always choose a specialist lawyer who really understands the sector and can spot pitfalls to minimise your risk.

A specialist commercial property lawyer will help you through the process and make sure your investment is legally sound and that you can be confident your business can face the future with minimal liabilities.

ORJ commercial property solicitors are among the best in the legal sector. Our specialist team offers efficient, expert legal advice at every stage, whether you are buying or selling commercial property or land. You can rely on our team’s breadth of knowledge to help navigate you through the complexities of every stage of the process.