Often, a business cannot successfully operate without a premises to give that business a physical presence [generally as an office or retail unit]. This article highlights key considerations when acquiring commercial property and matters to be borne in mind by any prospective purchaser.
It should first be considered whether a Freehold or Leasehold interest is being acquired. With a Freehold interest, the purchaser will acquire ownership of the property outright including the land that the property is built on, and maintenance of that property vests wholly with the owner.
The advantages of acquiring a Freehold commercial property would often be that the long term cost of the property is lower, and the purchaser has full control as to how the property is altered and used [subject to planning consents and other local authority and environmental restrictions]. The principle disadvantage of acquiring Freehold property is the upfront cost being significantly higher than a Leasehold property, and the value of the property could decrease in the long run and negatively affect any investment in the property.
A Leasehold interest is where the purchaser acquires a property subject to an agreement with the Freeholder/Landlord [known as the lease] for the length of time agreed with the Landlord. Often when a business is acquired, the Leasehold interest will be ‘assigned’ to the new tenant under a Deed of Assignment, with all rights and responsibilities of the previous tenant under the lease being transferred to the new owner.
A Leasehold interest is often considerably less expensive that a Freehold interest as the land will transfer back to the Freeholder at the end of the lease term, however a Leasehold interest is more restrictive. In addition, an annual ground rent and monthly service charge are generally payable to the Freeholder until the lease comes to an end, to cover expenses payable by the Landlord [for example, buildings insurance].
The use of any property can be restricted by the Local Authority which can be identified within a Local Authority Search. If a business use is restricted, it is advisable to obtain specific change of use consent from the Local Authority prior to committing to the purchase. In the absence of this, any purchaser may be unable to use the property as intended or risk enforcement action from the Local Authority where any restrictions are breached.
With a Leasehold property, the ‘use’ of the property is also generally restricted by the Landlord. It is therefore important to consider whether the lease permits the use intended for the business, or alternatively, the Landlord expressly consents to the property being used as intended.
In the absence of this, the purchaser would be in breach of the lease, with the Landlord having the right to bring an action against them [in accordance with the terms of the lease].
It is important to consider whether any alterations to the commercial property are required. Whether the property is Freehold or Leasehold, planning permissions or building regulations may be required from the Local Authority. Such consents should be obtained prior to exchange and completion of the transaction to ensure that the purchaser is able to make such necessary alterations.
If the property is Leasehold, there will also be restrictions imposed by the Landlord in relation to how the property can be altered. If a new lease is being granted, this is a matter for negotiation, however if a lease is being assigned, the restrictions on alteration should be noted and any necessary Landlord consent obtained prior to exchange and completion.
As with residential property purchases, it is always advisable [but not always compulsory] for searches to be carried out on any prospective property. If the property is being purchased with a commercial lender, the following ‘standard’ searches are likely to be compulsory:
- Local Authority;
- Drainage and Water;
- Chancel Repair; and
- Coal mining [depending on location].
Where a commercial lender is not involved, searches are not compulsory, however the purchaser bears the risk of whatever may be revealed within those search results [as the onus is always on the purchaser to make their own enquiries, searches and investigations, and the seller is not obliged to bring them to the purchaser’s attention]. This principle is known as ‘let the buyer beware’.
Searches will also reveal [amongst other matters] whether any planning consents or building regulations have been granted for the property, whether the property is affected by any rights of way, enforcement notices held against the property and applications made for change of use.
In addition to the above searches, the purchaser may wish to instruct a surveyor to identify any structural issues which may cause future expense or affect the property value.
As above, any commercial lender would require searches to be completed [to ensure that their security is not subject to any risks revealed within the above searches]. Commercial lending is often arranged through a third-party ‘broker’, and the application process can be quite lengthy.
Commercial lenders are often represented by their own independent solicitors. To investigate the lender’s investment, their solicitor’s will raise enquiries of their own to satisfy themselves of ‘good and marketable title’, allowing the lender to realise their interest should the borrower default on any of the borrowing terms.
It is therefore advisable to begin this process as early to ensure that the transaction runs as smoothly as possible and is not delayed.
Commercial Property Stamp Duty Land Tax (SDLT)
Stamp Duty is payable on the ‘chargeable consideration’ [often cash consideration] paid for the commercial property or the premium payable for the lease. The percentage of Stamp Duty attracted is dependent on this consideration.
Our commercial property department has extensive experience in dealing with all aspects of commercial property, from commercial property sales and acquisitions, to assignment and surrenders of leases.
Should you be thinking of acquiring or selling commercial property, or have any queries regarding the above, please do not hesitate to get in touch on 0330 024 9643.
0330 024 9643