Looking to buy a commercial property is exciting but also daunting as there are lots of important things to consider before committing to buying a property. This can include determining the size and location of the property you’re looking for, completing searches and conducting due diligence.
In this article, we’ll explore the process of buying a commercial property to ensure you’re fully prepared for your purchase.
The pre-purchase stage
Before deciding to buy a commercial property, businesses will go through the pre-purchase stage where they will identify that they need to buy a property. This could be due to their current location no longer working for them, they need more or less space or the business is making changes that require a new property or location.
During this stage, the buyer should determine what they want from the new property and what their overall business goals are. This will enable them to properly identify a commercial property that meets their needs.
Market research should also be done to discover what is in the area. For example, is the building they’re looking at near a range of shops, restaurants and transport links. When looking at multiple buildings, a comparison should be made to see which one would work best.
Once a property is chosen the buyer will talk to various professionals such as surveyors, finance brokers and lawyers where they will help them to agree fair terms and find the best finance options. Discussions should also be had with the buyer's accountant or tax specialist regarding the best finance option from a tax investment perspective.
The negotiation stage
Negotiations will take place regarding the purchase price as well as the terms of purchase. This will involve the buyer, seller and selling agents. This will produce a memorandum of
sale where all the legal terms agreed will be recorded. This will then be used by commercial property solicitors to check and draft all legal documents. It is always worthwhile to get your solicitor involved at this stage to check that the terms agreed can be dealt with in the manner and within the timeframes agreed between the parties
The due diligence phase
It’s always advised to undertake property due diligence. While it’s often the most time consuming part of buying a property, it ensures that any issues with the property are identified before the purchase takes place.
What to ask when buying a commercial property
There are a number of questions you can ask during due diligence such as:
- What’s the condition of the property like?
- Would we be able to expand the property?
- Who is adjacent to the property?
- What is the historical performance of the site?
Once the property is paid for any structural issues or expensive maintenance items left on the property will be the buyer’s responsibility to pay for and fix.
An environmental search is also recommended as any cleaning up required from previous environmental problems will also be the buyer's responsibility once the property is purchased.
Conducting searches
A search is a third party report providing information on the property and its locality.
The buyer's commercial property solicitor will carry out a range of searches, such as:
- A local Authority Search.
- A planning search.
- A desktop environmental search.
- A drainage and water search.
Solicitors will advise buyers if any other searches are required, such as coal or tin mining searches. Lenders may also require specific searches to be carried out.
Checking titles
Copies of the property’s title will be given to the buyer's solicitor by the seller's solicitor. The buyer's solicitor will check that the property has all the rights it needs to function and will ensure that no rights are granted to third parties that would prevent the buyer using the property for their intended purposes.
The title will also reveal any third party consents are required, any charges are registered against the title or if any deeds of covenant need to be entered into.
CPSEs
During a commercial property transaction the CPSEs (Standard Commercial Property Enquiries) must be given answers by the seller or landlord. Depending on what’s happening within the property, different forms of enquiries will be made.
When giving answers to CPSEs the documents and reports mentioned in the answers should also be supplied.
A period of time between the buyers and the sellers solicitors to converse can be expected once the buyers solicitor goes through the searches, the title and the replies to CPSEs. This process is used to find out as much as possible about the property.
Financing and legal decisions
During this part of the buying process a formal mortgage offer has hopefully been made. The buyer's solicitor will also use all the information gathered during due diligence to give to the bank if necessary. The solicitor will also read through the mortgage offer and prepare any necessary paperwork needed to secure lending from the bank.
When buying a commercial property through a limited company the bank will likely want personal guarantees from all directors. If that is the case the directors will need to seek independent legal advice to ensure they understand the obligations contained in the guarantees.
This part of the process will also involve both the sellers and the buyer's solicitors negotiating the terms of the contract and transfer.
The exchange of contracts
The contracts will be signed once due diligence has been completed and the buyer is satisfied that all their questions have been answered. The transfer and mortgage deed (if applicable) will also be signed. These contracts will then be exchanged once both parties have signed them.
The buyer will also need to put their solicitor in funds for 10% of the purchase price and agree a completion date with the seller. This 10% is usually held by the buyer's solicitor on behalf of the seller. Once agreed, the date is fixed and both the seller and buyer have contractually agreed to following through with the transaction.
The post exchange stage
This stage requires the seller to prepare the property for the buyer's move in date and the buyer should prepare to move in. The completion date (move in date)can be straight away i.e. a simultaneous exchange and completion or the completion date can be a date in the future which is agreed between the parties.
During this stage the buyer's solicitor will also submit the certificate of title to the buyer's bank so that the drawdown of funds can be completed. Money will also be transferred for the purchase price, Stamp Duty Land Tax and Land Registry fees.
The completion and post-purchase stage
On the day of completion the purchase monies will be sent over by the buyers solicitors. The solicitors will then speak to each other and date the transfer, meaning the buyer is the new owner of the property.
Post completion formalities will be dealt with by the buyers solicitors and typically include:
- If the buyer is a limited company they will need to apply to register the legal charge at Companies House and must be done within 21 days of the completed charge.
- Drafting and submitting the Stamp Duty Land Tax return and any payable Stamp Duty. This must be completed within the 14 day period.
- The buyer's ownership at the Land Registry must be applied for. This should be completed after the two points above have been.
The buyer must confirm the move to their suppliers and authorities such as business rates and their water and electricity suppliers.
FAQs
1. Can you buy a commercial property with existing tenants?
Yes, you can buy a commercial property with existing tenants. The property will be purchased subject to the leases that have already been granted and upon completion of buying the commercial property, you will become the landlord of the tenants.
There will be additional steps to take if the property is being purchased subject to tenancies such as rent apportionments, assignment of arrears and assignment of rent deposits.
The tenants will also need to be notified as to who their new landlord is and where rent payments should be made going forward.
2. Can I buy a commercial property for personal use?
Yes a commercial property can be bought for personal use, however, there are a few things you will want to consider before doing so:
- Planning permission may need to be obtained.
- Properties used for personal use are subject to different taxes.
3. Can a first time buyer buy a commercial property?