In this article, Alex Lewsley sets out his key ingredients for a successful freehold property sale.
The two principal reasons for selling commercial freehold property are (i) to relocate the business that is in owner-occupation to a property that better fits its current or anticipated needs and/or (ii) to convert the property to cash, repay debt and/or reinvest.
There are various routes through which to sell commercial freehold property, e.g. at auction, through a sale by private treaty, or by selling the company that holds it.
There are many types of commercial freehold property, e.g. leisure, retail, offices and industrial.
With a few technical caveats, “buyer beware” still applies as a general principle to any type of property sale and buying method. This means that it is for the buyer to rely on its own investigations to establish any issues with a property, rather than the seller having to signpost them to the buyer (save when selling property as part of a company asset or share sale when disclosure and due diligence will be required in addition to property warranties from the seller being given where negotiated as part of the corporate sale transaction).
Whatever the reason, whatever the route and whatever the stock type, here are our key ingredients for a successful commercial freehold property sale:
Have your documentation ready
Ensure you have documentation readily to hand in order to prove your identification, so that the necessary anti-money laundering checks against you can be completed without causing any delays. If the property is owned on trust for another, your lawyer will ask for details of your Trust Registration Service registration at HM Revenue & Customs (HMRC). If you are a foreign company, you need to be registered on the Register of Overseas Entities at Companies House.
Instruct an agent
Instruct an agent to market the property, find and assess prospective buyers, handle negotiations concerning price and draw up the Heads of Terms.
An agent will advise you:
- On value, taking into account the market and prices achieved on comparable properties in the area
- Whether a property is saleable “as is” without impacting price or whether some remedial or energy improvement works are best carried out first
- Whether your property has potential to uplift in value should planning for alternative uses or development subsequently be obtained by your buyer in the future (and, if so, whether that potential should be factored into the sale price or whether the sale price should ignore that with you instead reserving a right to a share of any such future uplift (known as “overage”)).
An experienced agent will also know how to best pitch the basic non-technical aspects of your property, e.g.
- Geographical location: i.e. proximity to customers, suppliers and workforce
- Local infrastructure: i.e. transport, parking, shops and healthcare, etc.
- Flexibility: i.e. suitability of the property for current and future business needs; feasibility of letting/sub-letting surplus space from time to time to 3rd parties; potential to extend and/or for alternative uses (subject to planning and other consents), etc.
In addition, such agents are likely to already have a list of possible buyers on their database and may circulate initial due diligence disclosures in respect of the property to interested parties for review. The agents may then set a final best offers date if there are a number of interested parties who may in turn require you, as part of their subject to contract offer, to enter into an exclusivity agreement which will prohibit you from entering into discussions or negotiations with any third party and for the heads of terms which have been agreed to be kept confidential.
Instruct an accountant
Instruct an accountant to advise you on the associated tax issues and costs relating to the sale of commercial freehold property, e.g.
- Is VAT chargeable or could the sale be structured so it is treated as a transfer of a going concern (TOGC) so that VAT is not chargeable, and are there any capital allowances available for transference to the buyer? Such benefits to buyers can benefit you in the form of a sale price being agreed that’s higher than it might otherwise have been
- What taxes will be payable on the net gain from your sale?
- Given the likely costs in the sale (e.g. agent and lawyer fees and, if you are selling by auction, auction entry and sale fees), will the net sale proceeds be sufficient to enable you to discharge any borrowing secured against the property or will you need to mobilise additional funds in order to do so? Is there an early redemption fee payable to your lender?
Locate your property deeds
You should make the effort to try to locate your property deeds in order to see what’s there. If they are not held by you, then they should still be being held by whoever acted for you on your purchase or they would have been sent to your lender (if any) following registration at HM Land Registry (HMLR) of that purchase. These may be original papers or, failing that, electronic copies.
Not locating the deeds can lead to transactional issues e.g.
- It is a common misconception that “everything” is registered at HMLR, but this is not the case. Relevant but non-registerable documents that are often kept with the deeds for safekeeping include indemnity insurance policies, plans relating to past works, your share certificate in any freeholders’ management company that may own the communal parts of the wider estate that your property is part of and which will need transferring to your buyer on completion of the sale, etc.)
- Often extracts of deeds reproduced by HMLR on a property’s registered title lacks the context which would have been provided by the other parts of those deeds which aren’t reproduced
- Often documents filed at HMLR are missing pages and the like due to scanning errors; and
- Sometimes documents marked as filed against a title have been electronically mis-filed and can’t be located by HMLR.
If these issues arise then it can translate into delay and increased costs whilst solutions have to be found. Locating your property deeds, be they original or electronic, can avoid that.
Instruct a lawyer
Instruct a lawyer to assist you with the disclosure exercise on the property and advise you on the property sale process (and pass them your deeds).
Our role is to:
- Prepare, negotiate and settle the contractual documentation for the sale
- Supply a copy of your title to the property, and all documents affecting your title, to the buyer’s lawyers
- Assist you with providing replies to pre-contract and any additional enquiries as raised by the buyer’s lawyers
- Provide solutions to issues that may arise during the process.
Preparation is the main key ingredient to a smoother, speedier and successful transaction.
It is recommend that we carry out a reverse due diligence exercise against your title to the property before you go to market, or whilst you are in the process of finding a buyer, in order to identify any title issues (a.k.a. a “warts list”) and how they might be addressed. Otherwise any title issues will only come to light during the transaction and be a surprise to everyone, de-railing or delaying the sales process and sometimes resulting in a price chip.
In any event, you should not underestimate what will be personally required of you in order to compile replies to pre-contract enquiries and the time and effort that it takes.
The industry-standard pre-contract enquiries raised by buyers are the Commercial Property Standard Enquiries (CPSEs). For a commercial freehold property sale, the relevant sets are:
- CPSE.1 (for use in all commercial property transactions): 34 pages of questions, on 32 topics
- CPSE.7 (short version of CPSE.1 introduced for use in lower value, simpler transactions): 15 pages of questions, on 20 topics
- CPSE.2 (for commercial properties subject to any tenancies for commercial use): 12 pages of questions, on 13 topics
- CPSE.6 (for commercial properties subject to any tenancies for residential use): 21 pages of questions, on 20 topics.
In order to compile answers to the relevant sets of these enquiries as may be applicable to your property, and so that your lawyer can advise you on what needs to be disclosed and what may not and what will need addressing in the contractual documentation, you will need to provide information about the following aspects:
- Boundaries and party walls
- Design and construction (including, If the property was constructed within the last 12 years, to what extent will construction warranties be available for the buyer)
- Plant and machinery and fixtures (will you be removing any fixtures? is the property’s plant and equipment owned by you?)
- Contents (are any loose items remaining at the property being sold separately (if so, they will need to be valued) or will they be included with the property?)
- Fire safety (e.g. copy fire risk assessment; did it recommend actions be taken and, if so, have they been?)
- Planning and building regulations (e.g. copy planning permissions, lawful use certificates, etc)
- Statutory agreements, requirements and infrastructure
- Physical condition and environmental issues (e.g. copy environmental reports, asbestos survey (did it recommend actions be taken and, if so, have they been and is there documentation evidencing this?), Energy Performance Certificate (EPC), etc.)
- Occupiers (e.g. copy of all leases, rent review memoranda, rent deposits, consent licences, rent payment histories, service charge information, details of any arrears and other subsisting tenant breaches, etc.)
- Employees (are any employed at the property in relation to the property itself, such that is the buyer to take them on under the Transfer of Undertaking (Protection of Employment) Regulations (TUPE)? If so, details of all their periods of employment, salaries and pension arrangements will need to be disclosed)
- Buildings insurance
- Service contracts (e.g. alarm/security contracts; whether these are to be novated to the buyer or terminated by you on completion)rates and other outgoings
- Capital allowances (with help from your accountant – are any available to the buyer?)
- VAT (with help from your accountant – copy option to tax and any HMRC’s acknowledgement or receipt of the same (n.b. HMRC replaced acknowledgements with receipts from 1 September 2022, and then stopped receipts from 1 February 2023)
- Other notices, licences, consents, etc.
- And the list goes on…
e.g. if your property is on an estate: details of any estate service charge relating to the communal part of the estate, a copy of your share certificate in any freeholders’ management company that may own those communal parts and which will need transferring to your buyer on completion of the sale.
e.g. if your property is being sold in its “corporate wrapper”: details of the company that is being sold.
It should be apparent from this list that the sooner you start getting prepared, the better!
Replying to enquiries requires careful consideration, as any misrepresentation carries the risk of you subsequently facing a claim from your buyer for damages.