Whether you are buying a commercial property for the first time, or a new kind of premises for your flourishing business or investment portfolio, preparation is the key to a smoother transaction and fewer nasty surprises and last-minute hitches.
Costs
You’ve found the right set of premises for your business, or the right investment for your portfolio – but do you know exactly how much you are going to need to fund the process of the purchase as well as the cost of the building itself?
As well as the purchase price, you will need to consider Value Added Tax (VAT).
Depending on the age and VAT status of the property, you may need to fund an extra 20 per cent on top of the purchase price. Not a small “extra” to fund– especially if you cannot recover it.
There are processes and rules to follow in order to assess whether you have to pay VAT and to be able to recover it if at all possible.
You need to prepare properly to ensure that you know whether or not VAT will be payable on the price for the property, what amount you will have to fund on the completion date, and how you are going to fund it.
Depending on the price of the property, you will also have to pay Stamp Duty Land Tax (SDLT). If VAT is payable on the purchase price, you have to pay SDLT on the VAT too.
No part of SDLT is recoverable – not even the part paid on the VAT element.
Finally, you also need to take into account the costs of hiring the professionals you need to complete your purchase, including an accountant, surveyor – and, of course, a solicitor.
Surveys, inspections and testing
Your solicitor will look after the legal investigations relating to the property for you – but you still have an important role to play.
You should always visit the property yourself and inspect the condition of it, test the service media and any equipment, ascertain whether there have been any alterations to the property, and check to see who might be occupying it – all in a similar way to that in which you would inspect a potential new home.
You should instruct a surveyor to carry out a suitable survey of the property and engage other specialists to carry out all necessary testing of service media, appliances and equipment.
If there have been obvious alterations made to the property (such as the construction of a mezzanine floor), you should tell your surveyor and your solicitor. The surveyor will consider the work which has been done, while your solicitor will advise on whether any consents for the works done are revealed by their conveyancing searches.
Make sure that you are not likely to be taking on a property with “unwanted guests”. Occupiers of business premises can quite easily gain rights to stay in premises as protected business tenants. It is important to know who is occupying the premises and in what capacity. Your solicitor can then advise on whether you can be rid of them (if indeed you wish to be) – and how.
Funding
If any part of the purchase price is being provided by borrowing from a bank, the bank will have various sets of instructions which your solicitor will need to follow.
Your solicitor will have to report to the bank on the property and disclose those unresolved problems which have come to light.
It has been known for borrowers not to appreciate the full gamut of security paperwork which the bank will require before agreeing to release the funds for the purchase. If “you” are a company purchasing property, do you know whether the bank simply wants a mortgage over the property – or will it also want a debenture over the company, and/or guarantees or other security over other land?
If you are an individual buying a set of premises for your own business, will the bank (as they usually do) want to see a lease in place between you as landlord and the business as tenant?
All of these things have been known to come to light at the last minute, delaying a transaction and causing immense frustration. They also cause increased costs because of the additional work which is necessitated and the intensity of that work.
Therefore, you should make sure that you and your relationship manager have a mutual understanding as to what exactly the bank requires. As matters progress it is important to keep in touch with them to understand how close you are to the magic “release of funds.”
Any part of the purchase price which is being paid for out of your own funds will be subject to anti-money laundering (AML) checks.
At a very early stage, you should be able to produce your bank statements showing the location of the funds. You will also need to provide evidence as to how the funds have accrued – whether through legitimate business activity, savings, gifts, inheritances and so on.
Your solicitor will be able to provide more detail as to any further checks which they are required, by law, to make.
Planning and overage
If the purchase is conditional on planning, you may want to consider the following:
- A pre app meeting with the Local Authority is often useful in providing insight to matters that may need to be tweaked before the final application is submitted.
- Who is submitting the application and at whose cost.
- Timelines, especially if you are moving out of existing premises.
- Matters which will not amount to a satisfactory planning permission that you will need to build into the contract.
- What Long Stop Date you will require to keep the contract live before you can pull out if planning is obtained.
If the purchase is subject to an overage, you may wish to consider the following:
- Take advice from your valuer as to the overage period and the formula of any payment to ensure the agreement reached is fair.
- Make sure the formula allows for you to deduct costs e.g. planning costs from any overage payment.
- Ensure that it allows you to carry out certain transactions that would not be caught by the overage known in the trade as “exempt disposal” e.g. lending.
- Speak to your accountant as you will need to make an application for SDLT deferment on any overage agreement as this will constitute consideration for the purposes of SDLT should an overage payment be made.
Palmers Solicitors can advise you on other considerations you may need to make.
Keep lines of communication open with your solicitor
Tell your solicitor what your future plans are for the building – be as full and as early with the information as possible.
For example – are you going to rent it out? If not, and you are going to trade from it, what is your business? Are you planning on altering or extending the premises?
All of this information will help your solicitor to look at the legal paperwork in that context and to alert you to any obstacles as to the proposed use.
You should also seek advice on whether or not you can claim “Capital Allowances” for anything in the building. These must be identified quickly and there are processes to follow in order to be able to claim those allowances – before the purchase completes. If you do not follow these processes before completion, then you lose the right to claim them.
Finally, it is wise to schedule a regular weekly or fortnightly call or meeting with your solicitor to receive general updates and share information. Email is great – but there is no substitute for uncovering potential problems than actually conversing.
Final thoughts
Buying a new commercial property can be an exciting step for your business. However, if you fail to prepare early, you could be run into problems and face higher costs and liabilities.
Our commercial property specialists can help you plan ahead and guide you through the purchase process, ensuring that the transaction is as smooth and stress-free as possible.
If you are planning a commercial property purchase, contact us today for expert advice and guidance.