Key legal considerations when investing in commercial property

Freehold or Leasehold?

Is it freehold or is it leasehold? This is usually one of the first questions asked by your Lawyer when instructed. Both types of transactions come with various risks and rewards.

Proper due diligence on leasehold properties is a must – this will reveal potential issues such as any restrictions on use and obligations to the landlord such as financial contributions toward the upkeep of the property, and whether consent would be required for alterations.

Mixed Use Properties

Those that are investing in mixed use properties must be mindful that where the residential element makes up more than 50% of the property’s internal floor area, that the correct notices have been served by offering the tenants the right to purchase the freehold before it is placed on the open market. If the notices are absent or incorrect then the tenants can serve a notice on the new owner and can force the new owner to sell!

If the property is tenanted, find out about the tenants

Whether it be retail, offices or industrial, tenants are a huge factor to take into consideration when purchasing a commercial property.

Blue-chip tenants compliance with their FR&I (Fully Repairing & Insuring) lease obligations is typically higher when compared to independent tenants. It is important to familiarise yourself with the legal matters concerning your tenant, such as their rights under and leases or licences and it is important to familiarise yourself with the Landlord and Tenant Act 1954 which your Lawyer can explain to you in detail. You should also familiarise yourself with the rent review provisions, Tenant and Landlord repairing obligations, rent payment dates and break clauses (if applicable) to your purchase.

Tax: VAT and SDLT

If your property has been elected for VAT, then the seller will charge VAT on the purchase price. Provided that you are registered for VAT then you will be able to recover the VAT charged to you on the purchase price and on any costs related to the property purchase. However this has major cash flow implications.

Transfers of going concern (TOGC) are usually an attractive option for buyers as there is no VAT payable on the purchase price if the transaction complies with the TOGC requirements. In order for a transaction to qualify as a TOGC, the buyer must be registered for VAT, have submitted a notification of its option to tax to HMRC and the property must be capable of being run as a property rental business (ie sold with tenants in place) and the Buyer should intend on carrying out the same type of business. Bear in mind that if you are buying a property that is being traded or ‘flipped’, TOGC cannot be used – and a good lawyer will spot that quickly.

Purchasers should also be aware that where VAT is paid on the purchase price the Stamp Duty Land Tax (SDLT) payable will be calculated on the total consideration paid, i.e. the purchase price plus the VAT. Unfortunately that additional SDLT is non-recoverable. Another key example is the SDLT paid on commercial mixed use properties which at times can be cheaper in taxes if you qualify for multiple dwelling relief. Your legal advisor will be able to explain this to you in detail should you qualify.

Deal structure

Some of the best value deals are traded or ‘flipped’ deals or forward-funding deals where the property is not yet built but has an agreement to lease in place – these transactions are legally more complicated but not insurmountable and an experienced lawyer is a must.

Choosing the right Lawyer can be a daunting process, so it is important to choose one that you are comfortable with and has the expertise in commercial property so that they can advise you on what to be wary about and what to take a view on. No property is perfect, but more often than not they do stand the test of time.

We are very experienced and well known for commercial property. Please do get in contact if you need a specialist commercial property solicitor.

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