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Issues to consider when buying commercial property in England

and why engaging a good lawyer is important!


Author: Richard Howes

Lawyers are often the last people to be instructed on a property deal but good property lawyers do add significant value to their investor, developer and other clients and save them money in the long run. Here’s how we do it:

Preliminaries: Heads of terms, confidentiality, exclusivity 合同主要条款

The ‘Heads of Terms’ or ‘Memorandum of Agreement’ should note the parties, price, timings, any special conditions, whether VAT is payable, exclusivity period, etc.

Get the lawyers involved early on, so that we can help properly structure the deal from a documentation point of view.

Consider: What’s the intended use of the Property? Investment? Development – for what? Is planning permission required?

Investigating the property – Due Diligence 尽职调查

Investigating the property involves finding out about the physical property and about its legal title, its tax status and third party rights affecting the property.

How much due diligence and what we do depends on the location, history and intended use of the property.

If available, we will also review the survey and valuation from a RICS specialist.

The due diligence process will involve the following:

土地所有权凭证 - Checking the title: is it freehold or leasehold? Is it registered (about 90% of properties in England are registered)? If so, we obtain the Official Copies, title plan and attendant documents from the Land Registry HMLR. If it is unregistered, the seller has to provide an epitome of title, showing a good root of title going back at least 15 years, which is generally a conveyance or mortgage document.

各种许可 – Are any consents required? If it is leasehold, are landlord consents required? If it is charged, are mortgagee consents required? What restrictions are there on title – is any deed of covenant required, for example, to comply with overage or other restrictions?

We obtain any documents and other information from the seller that we cannot obtain from any other source, such as overriding interests, unregistered leases etc.

If the property is tenanted, we will conduct a review of the occupational leases, looking particularly at the term length, break rights, service charge provisions and shortfalls, the type of rent review, and environmental, social and governance (ESG) clauses.

We will carry out all appropriate searches, most commonly the following: Local Authority, Drainage and Water, Environmental, Chancel Repair, SIM, Highways, utilities – these can take several weeks to come back.

If the property is being built for development, then we will usually conduct many more searches, such as gas, electricity, telecoms, infrastructure, and location dependent searches, such as: Cheshire Brine, Coal (for example, if the property is located in Nottingham, Durham, Wales or another traditional mining area), Gavellers (Forest of Dean area, historically coal and iron ore, but now stone mining), tin mining in Cornwall, Civil Aviation Authority (for properties near flight zones, masts and runways), London Underground, Post Office underground line, HS2, and Crossrail. All these things can affect what can be built and where.

We will raise pre-contract enquiries for the seller to answer. These are the so-called CPSEs or commercial property standard enquiries and they cover virtually everything that initially needs to be known about the property. For example, we generally use CPSE1 for freeholds and CPSE2 if the building is also tenanted.

Finance

抵押/资金

The buyer's solicitor will need to check that the financing of the purchase is in order and available by the completion date. It will be for the buyer to arrange this.

If a loan is being taken from a bank, the bank will need to be satisfied as to the adequacy of the security it will be taking in terms of value and title. The bank will want its lawyers to do their own due diligence. Reporting is usually in the form of a Certificate of Title for a bank.

Report on Title 产权报告

The Report on Title represents the sum total of the Buyer’s solicitor’s due diligence. It should provide an executive summary of the main headline points and then go into more detail about the contractual terms, the title, replies to enquiries and searches, and the amount of SDLT to be paid. If bank finance is involved in the purchase, to save duplication of effort and time, it is better to use a Certificate of Title, instead of a Report on Title.

Documentation

Preparing the contract合同

The seller's solicitor or conveyancer usually drafts the contract for negotiation with the buyer's solicitor. The buyer’s solicitor usually drafts the Transfer (转让物业所有权契约).

Once the contract is in agreed form, contracts can be exchanged (合同交换) and then both parties become legally bound to buy and sell the property.

Pre-completion

This is the time between exchange and completion.

The buyer's solicitor carries out pre-completion searches (最后的查询) and confirms the practical arrangements for completion with the seller's solicitors in the form of SCRs - solicitors’ completion requirements, which deals with discharge of mortgages, undertakings, collection of keys etc.

Completion 完成交易

On completion, the buyer's solicitor or conveyancer will need to arrange for completion monies to be transferred to the seller, to receive the executed transfer and all the necessary title documents, and to ensure that any charges affecting the property, which should have been discharged on completion, have indeed been discharged (SCRs and DS1 undertakings).

Insurance: (i) solicitors can arrange title insurance to cover any defects in title apparent from the due diligence; (ii) the buyer will need to arrange buildings insurance, on exchange or completion, depending on what was agreed in the contract.

Post-completion

Stamp duty land tax (SDLT 纳印花税) and registration at HMLR 土地登记处

The buyer must file a Land Transaction Return (using Form SDLT 1 and any applicable supplemental forms) to notify HM Revenue & Customs (HMRC) within 14 days of the transaction (fines are payable if late).

On receipt of the SDLT return, HMRC will issue a certificate (SDLT 5), which must be sent to the Land Registry with any application for registration of the property into the Buyer’s name.

Different rates of SDLT apply depending on whether the property is commercial or residential and its value.

If the commercial property has been opted for VAT, then SDLT is payable on the VAT inclusive amount of the purchase price or rent.

The current percentage rates of SDLT for commercial (non-residential) property are as follows:

Band: market price £ Non-residential

0-150,000 0%

150,001 - 250,000 2%

Over 250,000 5%


Conclusion

Much is underpinned by insurance in the UK. Engaging a good solicitor is an additional level of insurance and peace of mind for those embarking on property acquisitions, investment and development.


For further information, please contact:

Richard Howes

Partner Zhong Lun Law Firm, London

Email: info@zhonglun.co.uk

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