Commercial Property

When a seller instructs us to act for them in relation to the sale of their commercial property, they are sometimes unaware of the legal procedure involved in a sale, and also the documentation that will be required from them in order to satisfy a buyer.

We have therefore produced this summary as a brief guide to the documentation required from a seller, and as an overview of the sale process once a seller instructs a solicitor.

What is the Sale Process?

1. At the start of the transaction, we will send out a draft contract to the buyer’s solicitor, together with copies of the Land Registry title documents for the property and copies of the various documents listed below in the “What documents should I provide to my solicitor?” section.
2. If you have a mortgage secured against the property, we will liaise with your lender to obtain a redemption statement to check that the sale proceeds from the property will be sufficient to redeem the mortgage.
3. The buyer’s solicitor will review the draft contract and supporting paperwork provided by us, undertake searches on the property, and raise enquiries with us on the documentation. If the buyer is getting a mortgage to fund the purchase, the buyer’s solicitor will also need to satisfy any requirements of the buyer’s lender.
4. We will reply to the buyer’s solicitor’s enquiries on your behalf (after taking your instructions) and once the buyer is satisfied with our responses (and any requirements imposed by the buyer’s lender have been met), the parties can then proceed to exchange of contracts.
5. On exchange of contracts, the buyer will pay a deposit to us and the completion date will be fixed.
6. On completion, the buyer will pay the balance of the purchase price to us. With these funds, we will pay any sum required to redeem your mortgage to your lender and then send the balance of the sale proceeds to you (less any costs such as your agent’s fees, which we can arrange to pay on your behalf).
7. Once the sale has completed, the buyer’s solicitor will submit an application to the Land Registry to register the buyer as the owner of the property.

There are a number of documents that you will need to provide when selling your commercial property, including the following:

1. Replies to Commercial Property Standard Enquiries (CPSEs). CPSEs are a set of standard questions, which sellers are asked to provide answers to when they sell their commercial property. It is important that the CPSEs are answered accurately, as a buyer is entitled to rely on the responses, and if there is an incorrect reply, the buyer could sue the seller for misrepresentation.
2. Planning and Building Regulations Documentation. If you have copies of any planning permissions or certificates of lawful use relating to the property, these should be provided to the buyer. In addition, any building regulations certificates should also be included.
3. Asbestos Survey. If the property is of a certain age, you are legally required to check for the presence of asbestos, and to produce an ongoing management plan. This should be provided to the buyer.
4. Fire Risk Assessment. If you are responsible for a commercial property, you should undertake a fire risk assessment and this should be provided to the buyer.
5. Energy Performance Certificate. Usually the agent will provide an EPC to the buyer as part of the marketing process. However, it is useful to supply us with a copy of the EPC, which we can pass on to the buyer’s solicitor.
6. Any other documentation relevant to the property, for example:
   • Air conditioning maintenance records
   • Health and safety file
   • Electrical and/or gas test certificates
   • Details of business rates and any other costs the buyer would be liable for as owner of the property

To avoid delays in the sale transaction, it is important that this documentation is provided to the buyer as soon as possible. Whilst the above list sets out common items required by a buyer, there may also be other documentation required, which is relevant to a particular property transaction.

Searches enable buyers to learn as much as they can about a property before committing to the purchase. Anything unexpected which is revealed can be raised with the seller pre-exchange, with a view to resolving or renegotiating the purchase price or other terms of the transaction. Therefore, sellers need to be equally aware of the importance of searches when selling commercial property.

If you are taking out a mortgage to purchase the property, your lender will likely require at least a Local Search, Drainage & Water Search and an Environmental Search. Frequently they also still require a search concerning Chancel Repair Liability. Even if you are a cash purchaser, the below searches should always be considered.

The title of a property will usually be investigated when the property is either being sold or leased out. The buyer or prospective tenant under a lease will want to establish whether the seller is legally able to transfer the title to the property that the seller has contracted to sell and that there are no defects in that title that would adversely affect the buyer’s interests.

A seller or landlord needs to establish whether there are any title defects which need to be resolved or disclosed to the buyer.

A lender taking security over the property needs to establish that there are no defects in title that might adversely affect the value of the property or the ability of the lender to sell the property to realise its security.

Putting a title policy in place
Where a title indemnity policy is required it is not uncommon for the insurer to require replies from the property owner to a number of enquiries relating to the defect that has been identified and for certain documents to be provided as evidence to assist in assessing the risk posed by the defect. For example, the seller may be required to provide planning documents, a statutory declaration confirming the use of the property or land over which rights are exercised, and copies of the titles affected by the defect.

A title indemnity policy will not remedy the title defect – instead it provides financial compensation in the event of the defect causing actual loss, subject to the limit of indemnity stated on the policy. This amount is usually the value of the property in question, the amount of the mortgage being obtained, or the gross development value of a site that is to be developed.

The default position is that commercial properties are exempt from VAT. This means that the purchase or leasing of the property would not attract VAT on the purchase price or rent.

However, it is not as simple as that and an owner of commercial property can elect to waive this exemption from VAT and choose to charge VAT on a property. This is known as the “option to tax”. The “option to tax” is a long term commitment as once made it cannot be revoked for 20 years (although there are circumstances where it may be revisited within six months of it being taken). Before making such a commitment it is important to consider the implications. To assist with this some points to consider are:

• Input VAT cannot be recovered on an exempt property. As such exercising the option to tax can make commercial sense if VAT has or will be paid on construction costs, repairs or other works.
• If an option of tax has been exercised over the property then VAT must be charged on any sale or letting (there are few exemptions). Some businesses cannot recover VAT and as such an elected building may be harder to market.
• Stamp Duty is payable on the VAT inclusive rent or purchase price and therefore if VAT is payable on the purchase price it increases the amount of Stamp Duty payable. Again, this may make the property harder to market or lead to concessions on the sale price or rent.
• If potential tenants and purchasers can recover VAT then VAT is less likely to be an issue. The tenant or purchaser may recover the VAT paid as input VAT and the requirement to pay VAT will be a matter of cash flow only.
• An option to tax is personal and does not automatically pass with the building. A buyer of an opted property must also exercise their own option to tax if it wishes to recover the VAT on expenses relating to the property. Again, once the option is made that buyer would need to charge VAT on the rent and on future sale proceeds.

When considering buying or taking a lease of property it is important to find out the VAT status at an early stage. If VAT is payable there could be serious financial implications that you may not have factored into your budget and may test the financial viability of the planned acquisition.