The acquisition of commercial property in England and Wales is a structured legal process. Each stage of the transaction carries its own procedural requirements, and each is a stage at which a buyer’s position can be materially strengthened or exposed. This piece is the first in a four-part series following the commercial property lifecycle, from acquisition through occupation and management to eventual disposal. It sets out the legal framework of a commercial purchase and identifies the points at which the buyer’s interests most often need to be actively protected.
Heads of terms
Most commercial transactions begin with heads of terms recording the agreed commercial position: the parties, the price, the property (including any parts of a larger title being retained), the transaction structure, any conditions to which the sale is subject, and the timetable to exchange and completion. Heads of terms are ordinarily expressed to be subject to contract and are not intended to create legal relations at that stage. Their function is to record the commercial agreement in sufficient detail to allow the lawyers to draft on a common basis. Ambiguity or omissions in the heads of terms are the most common cause of friction once the lawyers are instructed, and time invested in making them precise generally saves considerably more in the drafting phase.
The contract and the Standard Commercial Property Conditions
A contract for the sale of land in England and Wales must, under section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, be made in writing, incorporate all the expressly agreed terms, and be signed by or on behalf of each party. A contract which does not satisfy the section 2 formalities is void. Commercial property contracts are almost invariably drawn on the current edition of the Standard Commercial Property Conditions, published by the Law Society and adapted by special conditions to reflect the specific transaction. The Standard Conditions govern matters including the deposit, insurance, apportionments, remedies for non-completion and the passing of risk, and provide a common framework on which the parties can negotiate the transaction-specific special conditions.
Pre-contract enquiries and searches
A buyer of commercial property takes the property on the principle of caveat emptor, and is expected to investigate the property rather than to rely on the seller to disclose problems. Investigation is carried out through pre-contract enquiries, which in commercial transactions are typically raised on the Commercial Property Standard Enquiries (CPSE) forms. The CPSE forms address matters ranging from title and occupational interests through to VAT treatment, environmental issues and disputes. The buyer’s solicitor will raise supplementary enquiries where the replies are unsatisfactory or incomplete, and the replies form part of the contractual record for the purposes of any subsequent misrepresentation claim.
The buyer will also conduct searches. A local authority search reveals planning permissions, building regulation approvals and other matters held by the local planning authority. Environmental and drainage searches address contamination risk and connection to mains services. Depending on the location and nature of the property, additional searches may be required, including chancel repair, mining and highway searches. A more detailed treatment of pre-contract due diligence is set out in our earlier piece on investigations and considerations when acquiring commercial property.
Title investigation and third-party interests
Title to registered land is investigated by reference to the register and title plan held by HM Land Registry under the Land Registration Act 2002. The investigation identifies the registered proprietor, the class of title, and any restrictions, notices, charges or entries affecting the property. Restrictive covenants, easements, rights of way and other third-party interests are considered in detail, and the buyer’s solicitor will assess whether any adverse entry can be released, modified, indemnified against or insured. Unregistered title requires review of the title deeds and the deduction of title for at least fifteen years, with first registration at HM Land Registry following on completion.
Exchange and completion
On exchange of contracts the parties become legally bound and the buyer typically pays a deposit of ten per cent of the purchase price, held by the seller’s solicitor as stakeholder or agent for the seller. Once contracts are exchanged, neither party can withdraw without incurring the remedies set out in the contract. The interval between exchange and completion is fixed by the contract and is used to arrange the transfer of funds, the release of any lender’s facility, and the preparation of the transfer deed. On completion, the balance of the purchase price is paid and the property is transferred by execution of the transfer deed.
Value Added Tax
VAT can arise on a commercial property transaction where the seller has exercised the option to tax under Schedule 10 of the Value Added Tax Act 1994. Where the option has been exercised, VAT at the standard rate is payable on the consideration in addition to the price. Where the transaction qualifies as a transfer of a going concern under regulation 5 of the Value Added Tax (Special Provisions) Order 1995, VAT is not chargeable, but the conditions for that treatment must be satisfied and clearly evidenced in the contract. The VAT position materially affects the buyer’s cash requirement on completion and needs to be established early in the transaction.
Post-completion matters
Two post-completion matters carry statutory deadlines and are material to the buyer’s title. Stamp Duty Land Tax is payable to HMRC under the Finance Act 2003 within fourteen days of the effective date of the transaction, and the transfer must be registered at HM Land Registry within the statutory priority period to protect the buyer’s priority against subsequent dealings. Late attention to either matter can create problems, including additional tax liabilities and loss of registration priority, which are entirely avoidable through proper post-completion project management.
Key authorities
Legislation
Law of Property (Miscellaneous Provisions) Act 1989, s.2
Land Registration Act 2002
Value Added Tax Act 1994, Schedule 10 (option to tax)
Value Added Tax (Special Provisions) Order 1995, regulation 5 (transfer of a going concern)
Finance Act 2003 (Stamp Duty Land Tax)
Standard documents
Standard Commercial Property Conditions (current edition), Law Society
Commercial Property Standard Enquiries (CPSE) forms
Speak to Ai Law
Ai Law’s Commercial Property team acts for buyers and sellers of commercial property, on transactions from heads of terms through to registration. We advise on transaction structure, the contract, the due diligence appropriate to the property, and the tax and post-completion position.
To discuss a commercial property acquisition or disposal, please contact a member of our team. You may be interested in reading our other Commercial Property blogs, including Investigations and Considerations When Acquiring Commercial Property.
This does not constitute legal advice and cannot be relied upon. If you need advice please contact us and we will be happy to help.