legal considerations when buying commercial property

Legal Considerations When Buying Commercial Property

Linkilaw Commercial Property

5 Legal Considerations When Buying Commercial Property

Whatever spin the pre-election politicians (and associated think tanks) put on recent economic news, it’s clear that what really matters (confidence) is returning to the market.

An obvious knock on effect with greater market activity, particularly in buying commercial property.

If buying commercial property is part of the next steps for your business – either for trading use and/or investment, then here are 5 key legal considerations when buying commercial property.

1. Finding Opportunities

Unlike the residential sector, you won’t find a glut of commercial agents on your high street and many commercial investments are sold through private treaty however, auctions are a useful source of good value, particularly if you are just starting out.

Goes without saying that care is required at any auction – we’re not talking bargain hunt here – because if successful, you will need to hand over 10% on the day and complete within a month. 

Instructing a good commercial agent to help beat the market, and getting advice from a chartered surveyor/commercial lawyer (as opposed to a conveyancing solicitor), specifically with investment expertise, is key.

2. Freehold Or Leasehold?

Freehold owners generally control and own all of the property: the land itself, any structures on it, the subsoil below etc. If inexperienced in this world, be aware that part of the ownership may be restricted by a third party, e.g. there may be a right of access over the property.

With leaseholds, the owner contractually holds the interest for set period limited to the length of the lease. The content of the lease will depend on the property and the relationship between the landlord and the tenant. 

[tweet_dis_img]You must decide whether it's more beneficial to buy or lease commercial real estate.[/tweet_dis_img]

Business lease terms have gradually reduced over the years and the average lease length is now <8 years. Some commercial property tenants have a legal right to extend the contractual term of their lease. There is also the potential to hold a long leasehold interest (up to 999 years) and these are usually granted by paying a premium and then a low or peppercorn rent.

You will probably spend more in buying a freehold but you will probably achieve a greater return.

With both, check if there are any restrictions on use, whether (in leaseholds) you need consent for alterations, whether the building is listed and/or in a conservation area.

3. Cash Buyer Or Loan?

Cash is often king and commercial property is no different. Great deals are available if you can move super quick.

If you are using a loan provider then keep them updated every step of the way it should go without saying that commercial property lenders are more interested in lending against the income generated by well-let properties rather than empty ones.

[tweet_dis_img]Debt against UK commercial property has been falling since the 2009 financial crisis.[/tweet_dis_img]

Lenders are continuing to reduce their loan books as a result of the 2009 financial crisis, with debt held against UK commercial property falling over the last 6 months to £171b as at May 2014 from £180.3b (2014 De Montfort Commercial Lending report).

4. Costs

Costs for Buying commercial property include:

  • The initial purchase price or lease premium
  • Stamp duty and land registry fees
  • Surveyor, estate agent and solicitor charges
  • Initial alterations and/or decoration
  • Prepayment of initial rent (for leaseholds) and insurance
  • Possibly VAT

Additional costs for drafting the lease can be expensive as there is no standard format for buying commercial property. Obtain due diligence advice (including the usual property searches but also environmental searches and registered charges).

You also need to factor cost of empty business rates into any price valuation, a building survey & an environmental report; particularly if there is future redevelopment potential.

Self Promotion Alert:

Obviously, you need to get your lawyer competing on price so I’d recommend using a comparison service like Linkilaw to find the right lawyer, at the fairest price. 

5. Tenants

As above, lenders are much happier lending against well let properties so unless you want to immediately use the property for your own purposes, it’s clearly beneficial to buy a property which has a tenant in situ. 

Good tenants are worth their weight in gold so it’s clearly a great advantage to inherit an immediate rent roll which allows you to accurately budget your costs going forward: the rent is fixed, you are paid in advance and rent reviews generally increase – but make sure you get pre-completion advice on the terms and rights you’re inheriting.

Article written by Rachel Furniss.

Final Words On Legal Considerations When Buying Commercial Property

Buying a commercial property can be a great decision for your business or even just yourself as an investment. However, you must always consider the legal considerations when buying commercial property as outlined in this blog post.

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