Preparation, preparation, preparation: The 5 key steps to a stress-free commercial property purchase

Whether you are buying a commercial property for the first time, or a new premises for your flourishing business or investment portfolio, preparation is the key to a smoother transaction and fewer nasty surprises and last-minute hitches.

1. 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 property 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  percentage on top of the purchase price.

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.

Depending on the price of the property, you will also have to pay Stamp Duty Land Tax (SDLT) on the purchase price inclusive of any VAT, if applicable. It is important to note, that 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.

 2. Surveys, inspections and testing

Although your solicitor will be responsible for the legal investigations relating to the property, you should always ensure that you visit the property yourself and inspect the condition of it, ascertain whether there have been any alterations to the property, and check to see if anyone is occupying the property – 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, equipment, environment and asbestos. As you will need advice on how best to manage any risks that may be identified by the searches, such as risk of contamination.

If there have been obvious alterations made to the property (such as the construction of a mezzanine floor), for example, you should inform 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 completed are revealed by their conveyancing searches and due diligence.

Make sure that you are not likely to be taking on a property with “unwanted guests”. It is important to know whether there is someone occupying the property and in what capacity. Occupiers of business premises can quite easily gain rights to stay in premises as protected business tenants. Your solicitor can advise on how to deal with any occupiers.

3. Funding

If any part of the purchase price is being provided by a lender, the lender will have various sets of instructions which your solicitor will need to follow.

Your solicitor will have to report to the lender on the property and disclose any unresolved problems which may have come to light, which can be quite time consuming.

As a borrower,  it is important to appreciate the full  extent of security paperwork which a lender will require before agreeing to release the funds for the purchase and factor this into the timescale of the transaction

As a company purchasing property, you will need to find out whether the  lender will simply want 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, you will need to consider whether the bank (as they usually do) will want to see a lease in place between you as the landlord of the property and your business as the tenant.

If all of these requirements are not identified early in a transaction, this will result in causing a major delay and result in not only immense frustration but also increased costs owed to the additional work required to meet the lenders standards.

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.”

It is important to note that 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.  You will be required to produce your bank statements to show the location of the funds and 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.

4. Planning and overage

If the purchase is conditional on planning, you may want to consider the following:

• A pre application 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 such as 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.

5. Keep lines of communication open with your solicitor

Inform your solicitor of your future plans for the building – be as full and as early with the information as possible. For example, consider whether you are planning to lease the property, or to use it to trade from; will you be planning to alter or extend the property to suit your trading needs.

All of this information will help your solicitor to consider the legal paperwork in your required context and to alert you to any obstacles as to the proposed use.

You should also seek advice from your accountant on whether or not you can claim “Capital Allowances” for anything in the building. Capital allowances are a type of tax relief available to business that allow you to deduct value from an item, such as business equipment or machinery, from your profit before you pay tax. These must be identified quickly and there are processes to follow in order to be able to claim those allowances. If you do not follow these processes before completion, then you will lose the right to claim the relief.

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 later down the line.

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.