Buying your first commercial property? Top 10 issues to considerNavigating the purchase of a commercial property brings with it many points that need to be considered. Here are 10 of the most important things that a buyer should be thinking about to achieve the best possible position for the investment:
1) Type of Investment: freehold or leasehold ownership
It is important to consider which type of ownership would be more suitable for you or your business needs., For example, you may wish to consider if a short term lease of commercial property would be a better option in the first instance, particularly if your business is a new start-up.
On purchasing the freehold of a property you will own that Property outright in perpetuity. If the transaction is leasehold then the parties will enter into a contract (a lease) which gives you the right to use a property for a set amount of time and which also sets out the legal rights and responsibilities of either side.
Having decided that purchasing a property is the most suitable route for you, you may want to consider instructing a Buyer’s Agent.
2) Buyer’s Agent
The Seller will usually instruct a selling agent to act on their behalf in marketing the property and advising the Seller on important commercial terms for the sale including the sale price, any key contract terms and timescales. Buyers do not always appreciate that they can also instruct an independent agent to act on their behalf to represent their best interests.
Engaging with a commercial property agent at an early stage can be beneficial to a buyer in the following ways: -
- hearing about prospective properties before they are advertised in the open market and ‘off- market’ transactions;
- negotiating key commercial terms having viewed a Property and submitting offers;
- keeping distance between themselves and the Seller allowing breathing room to consider proposed key commercial terms;
- and other advice on the suitability of the property for your needs.
The adage of ‘Location, Location, Location’ remains true for commercial property not only in respect of whether a property is suitable for you or your prospective tenant but also in respect of external factors such as whether the property or the vicinity is prone to flooding, or is subject to planning and conservation designations or other restraints which may affect your intended use. Most of these factors will be picked up in the property searches, however, you may wish to carry out some of your own due diligence at an early stage before making an offer. A buyer’s agent or surveyor can also help you bottom these points out.
Just as an individual may undertake a survey for residential property before they move house, it is always advisable for a prospective purchaser to commission a survey before proceeding with the purchase of a commercial property. Depending on the type and level of survey which a surveyor is instructed to carry out, this should identify any defects in the Property and other items which may require unexpected expenditure. The cost of a survey can seem daunting, but it's findings may enable renegotiation of the purchase price.
5) Purchasing Entity
Having found the right property, you will want to consider how the property is to be owned. Buying a commercial property as an individual or partnership is commonplace but there may be reasons why buying a property as a limited company, limited liability partnership or through a SIPP may be preferable: speaking to your accountant or tax advisor is advisable before committing to buy the property.
6) Option to Tax and VAT Position
As with most commercial deals, tax plays an important consideration… The default position for the sale of land and buildings is that they are exempt from VAT meaning that no VAT is payable by the buyer in addition to the purchase price. However, a Seller may have opted to tax the land or property. Once someone has opted to tax land or buildings then all supplies (including a freehold sale or leasing the property) would usually be subject to VAT on a standard rated basis. This is not usually a problem if the purchaser is themselves VAT registered.
There are circumstances where VAT will not be payable in addition to the purchase price where there is a valid option to tax and your accountant or tax advisor should be able to provide advice on whether these exceptions apply.
You may wish to check the VAT position in respect of the property before proceeding with any purchase.
It is also important to remember that SDLT is calculated and payable on both the purchase price and any applicable VAT on the purchase price. Unfortunately, tax is payable on tax in this circumstance!
Searches are carried out prior to exchanging contracts and aim to provide the buyer with as much information about the property as possible before committing to buy.
Property searches can usually be put in place at the buyer’s discretion (unless there is bank involvement in which case the requirement of searches is usually mandatory).
A prudent buyer may wish to carry out a full suite of searches and these would include a Local Search, Drainage & Water, Highways, Environmental and Flood Risk. Other searches can be carried out which are specific to the Property such as Mining.
In addition to the VAT implications of a purchase, Stamp Duty Land Tax (SDLT) is payable on non-residential property where the purchase price (also referred to as ‘consideration’) paid is £150,000 or more. You may wish to do a quick calculation to give an idea of additional purchase costs or, we can carry out a simple calculation on your behalf.
9) Service Charge
It is a common misconception that when buying a freehold property that there will never be a service charge payable as it is often misunderstood to be applicable to leasehold property only. There are circumstances where a freehold property, such as those on an estate, may be liable to pay an estate or other service charge for maintenance of the common parts. It is worth checking with the agent when negotiating the purchase to see if there are any estate or other service charges payable. If the agent is not sure of this information then your solicitor should check the Property title when carrying out pre contract due diligence in respect of the property.
10) Business Rates
Business rates represent one of the largest overheads for businesses and may impact on the viability of operating your business from a particular property. The Property particulars drawn up by the selling agent will sometimes give an indication of the rateable value of the Property but, it is worth making enquiries of the agent or reviewing the Valuation Office Agency website if you are struggling to find this information.
Please get in touch if you feel that we can assist you in purchasing your first commercial property or, if you are thinking of adding another property to a portfolio. We are usually able to offer a fixed fee to give you certainty on legal costs.
These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.