Commercial Property Acquisitions

Key Legal Considerations for First-Time Buyers

Commercial property acquisition can be a financially rewarding and an exciting opportunity with long-term investment potential, rental income and the ability to shape or grow a business by way of owning a physical asset. However, buying a commercial property can also come with considerable legal, financial and regulatory issues.

As always, the success of your acquisition lies in ensuring you have a clear vison of what you want to achieve, a full understanding of what is involved and a considered and strategic approach. From understanding different types of ownership or land uses and classes, to navigating planning rules and carrying out effective due diligence, this is our guide to commercial property acquisition for first time buyers.

Understand what you are buying

Commercial property acquisitions come in many different shapes and sizes, and the legal implications vary according to what you buy. 

Tenure: freehold vs. leasehold

Freehold means outright ownership of the property. Subject to any relevant planning laws or any other conditions, this means you have control over the property including  occupation, redevelopment or investment. Freeholds tend to cost more but are often easier to finance.

Leasehold means you are taking an interest in the property for a set term, under a lease granted by the freeholder. Lease length, repairing obligations, break rights, service charges and landlord consents can all affect value and usability. A long lease (say 99 years) is more attractive whereas a short lease (under 20 years) may limit funding and resale options but may be a more affordable option.

With vacant possession or investment?

As the name suggests, vacant possession means the property is empty and free from occupiers at completion. This is what you want if you plan to run a business from the building yourself. Always confirm whether there are any occupiers, licences or informal arrangements currently in place and check when the seller will be able to achieve vacant possession.

Investment property means the building is occupied by tenants. You are essentially buying an income stream and inheriting the landlord’s obligations. Reviewing the lease terms, rent review provisions, tenant covenants and any arrears will be important.  

Asset type and use class

Commercial property is categorised by asset type (office, retail, industrial, mixed-use, hospitality, etc.). Every property will also be categorised with a use class or multiple use classes. The use class system was overhauled in September 2020. Examples of different classes include C1 (hotels), C2 (care), B2 (industrial), B8 (storage/distribution) and E (retail, restaurants, offices, gyms and medical centres).

Certain changes of use will require planning permission but change of use within Class E (to another Class E use) is allowed without planning permission in certain circumstances. This is not the case with all use classes. Always check the existing lawful use and any restrictions in title or lease.

Trading business vs. property only

In some cases, you may not only buy the property but also a  business that is carried on there, for example, a café, care home or hotel. This introduces additional considerations including transfer of staff (TUPE), licences, intellectual property and stock.

Instructing your professional team  

You are likely to need a number of different professionals to help you including a commercial conveyancing solicitor, an agent, a property surveyor and/or an accountant and it’s sensible to brief and instruct your professional team as early as possible. You should also have any finance arrangement provisionally in place before you make an offer or start negotiations.

Finance

For most first-time commercial property buyers, arranging finance is one of the most important stages of the process. A cash purchase is normally the most straightforward, but it does tie up capital. Bank loans or commercial mortgages can be more complex and you may have to negotiate the loan-to-value ratio (LTV: a higher valuation supports a larger loan), interest terms and a repayment schedule. The lender’s offer will often come with conditions attached.

Lenders will normally insist on an independent valuation by a chartered surveyor. Lenders will also want a legal charge over the property (similar to a residential mortgage). For corporate buyers, they may also require a debenture (covering company assets) and / or personal or corporate guarantees from directors or group companies.

Before drawing down the loan, you’ll also need to satisfy the lender’s conditions precedent. These often include:

• Satisfactory due diligence: title checks, searches, enquiries.
• Reports: building survey, environmental report, fire risk or asbestos assessments.
• Insurance: evidence of buildings insurance on acceptable terms, with the lender’s interest noted.
• Step-in rights: if third-party consents are needed (e.g. superior landlord consent on a leasehold property), the lender may require rights to “step in” if you default, to protect their position.

If the property is bought as an investment, lenders will often test the income profile. Rental income often needs to comfortably cover loan repayments. Empty properties or short leases can make borrowing harder or more expensive.

Insurance

Both you and your lender will want to know that the property is properly protected with insurance. Although normally the seller continues to insure the property until completion, you may be required to reimburse them if there’s a long gap between exchange and completion. Once the purchase is complete, the buyer is responsible for insurance unless it’s a leasehold property where the landlord insures and recharges tenants.

Heads of Terms

Before matters proceed any further, you or your legal team will need to agree Heads of Terms. These represent a summary of what is provisionally agreed between a buyer and a seller and will help inform the more detailed contracts to be drafted in due course. Although not normally legally binding (except when it comes to issues like confidentiality or exclusivity), Heads of Terms record the price, deposit, timing, conditions (e.g. subject to survey or finance) and whether vacant possession will be given. This provides clarity and should highlight any major issues early on. They can also include a timetable to ensure the purchase proceeds smoothly.

Due Diligence

Carrying out proper due diligence can be time consuming and complex but is essential and the key to the success of any property acquisition. The areas that should be covered by the due diligence process include:

Title and property rights

Official copies, plan, class of title, restrictions and notices. Your solicitor should check the Land Registry records to confirm ownership, boundaries and whether the title is absolute or has limitations.

Easements and rights. These cover legal rights of way, rights to use services (such as drains or electricity) or parking spaces.

Covenants and overage. Covenants can restrict use, while an overage is a clawback provision that may entitle a previous owner to an extra payment in certain circumstances.

Indemnity insurance. Where there are issues, such as a missing right of way, insurance may be available.

Searches and enquiries

Standard searches provide critical information about a variety of things that include: 

• Local authority: planning permissions, enforcement notices, highways proposals. If you plan to alter or repurpose the property, your advisers should assess whether planning consent is achievable including past refusals, protected views or local plan policies.
• Drainage and water: mains supply, drainage responsibilities.
• Environmental: contamination risks, landfill, flood risk.
• Highways: whether roads are adopted by the council.

Commercial Property Standard Enquiries (CPSEs) are a set of questions the buyer’s solicitor sends to the seller. Replies cover things like disputes, outgoings, occupiers, and service contracts.

Surveys and safety

Your due diligence should inevitably include a commercial building survey in respect of the building and any defects, repair costs or boundary discrepancies as well as mechanical and electrical systems. You may in some cases need an environmental survey.

For fire safety, and health and safety you may need asbestos surveys or fire risk assessments. Your due diligence should also check energy efficiency (properties below a certain rating (currently “E”) may not be lawfully let).

Lease agreement

When you are buying a leasehold property, the lease terms will be critical to the success of the purchase. You will find more information about commercial leases here:

A Guide to Commercial Leases. Part 1: Overview – RSW Law

Tax and cost planning

Tax and other costs can make a big difference to the affordability and value of a commercial property. Getting specialist advice early can help you avoid surprises and structure the deal in a more tax-efficient way. Key areas to consider include:

• SDLT (commercial rates) and timing of returns.
• VAT: Option to tax, TOGC treatment (when buying a let property), capital goods scheme.
• Capital allowances on fixtures & integral features: s198 CAA election, pooling requirements.
• Apportionments at completion: Rent, service charge, insurance.
• Ongoing costs: Business rates, insurance, compliance upgrades.

Negotiations and contracts

As the sale progresses, your advisors will start the process of negotiating the final terms of the acquisition. Sellers often sell on an “as is” basis, meaning you take the property in its current condition, subject to the title information disclosed. Sometimes limited warranties may be given e.g. confirming there are no undisclosed rights or disputes or sellers will disclose known issues. This protects them from future claims. Liability caps and strict time limits within which to bring a claim are common if warranties are provided.

Some contracts are conditional, for example, on the buyer securing funding, planning consent or the seller obtaining vacant possession. In these circumstances, you may wish to include a long-stop date by which if the condition isn’t met, neither party is bound by the contract.

In development projects, the seller may want a proportion of future value if planning permission is obtained or if the site is resold at a higher price. Known as overage, these provisions need very careful planning and consideration.

In addition to the main contract or lease, there may be a number of additional agreements that may be necessary such as rent concessions and collateral warranties.

Exchange to completion

Once contracts are agreed and exchanged, the contract is legally binding, but ownership doesn’t transfer until completion. The period between exchange and completion can be a matter of days or weeks, depending on funding and conditions. The contract normally sets a fixed completion date and if the contract is conditional, this is the period in which the conditions need to be met.

During this period the buyer’s solicitors will also be ensuring undertakings from the seller’s solicitor are in place (e.g. to discharge existing mortgages) and carrying out final checks and reconciliations.

On completion day there will be final gas, electricity and water readings taken and the buyer will receive the keys and any property manuals, compliance certificates (fire, asbestos, EPC), insurance details.

Several important administrative steps still need to be carried out after completion. A Stamp Duty Land Tax (SDLT) return must be filed, and the tax paid. The buyer’s solicitor will also make an application to HM Land Registry to register the transfer, any new lease and any legal charge in favour of the lender. If the buyer is a company and has granted a charge, that charge must also be registered at Companies House within 21 days.

In the case of an investment purchase, tenants must be formally notified of the change of landlord and given clear instructions on where to pay rent. At the same time, there should be a proper transfer of service charge accounts, maintenance contracts and managing agent instructions, so that ongoing property management continues seamlessly.

The buyer should note important events for the future including:  

• Rent review dates (if buying an investment).
• Tenant break options.
• Insurance renewals.
• Statutory inspections (fire safety, gas, electrical, lift maintenance, asbestos).  

If you’re a first time buyer of a commercial property and would like to discuss any of the issues raised above, please get in touch.

The legal content provided by RSW Law Limited is for information purposes only and should not be relied on in any specific case without legal or other professional advice.

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