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  • Overview

    If you are selling a business that uses commercial premises then the property aspects of the sale will be very important to a prospective buyer. Therefore, it pays to be organised early on as there is a good deal of work required by the seller, often on tight timescales!

    Carrying out a property review:

    It is important that prospective sellers undertake their own property review at the earliest opportunity to collate all relevant information ready for due diligence and disclosure. This will avoid a mad dash later on when the buyer raises enquiries about missing information!

    The property information disclosed typically includes registered title information from the Land Registry, deeds, leases (and supporting documents) and relevant property information such as planning and environmental matters. Sellers will also typically be required to provide replies to standard property enquiries. Once collated, documents should then be provided to the buyer to review, who will raise enquiries about the documents disclosed.

    What issues will the buyer be looking out for?

    Some of the typical property issues that may be revealed by the due diligence exercise include:

    1. Planning: If the planning information discloses personal or temporary planning permissions or if there are unusual or onerous conditions, this could inhibit the buyer’s business plans. In addition, if planning permission for the current use or building regulations consent has not been obtained, the buyer will be concerned about the risk of enforcement action.
    2. Defects on the title: If there is a significant defect in the title, the seller may need to obtain title insurance if it is not already in place.
    3. Restrictive covenants: If there is a restrictive covenant that prevents the property being used for the use required by the buyer, the seller may need to obtain title indemnity insurance.
    4. Legal Charges: In an asset sale, the buyer will want to ensure that any legal charges are discharged upon completion.
    5. Unregularised occupation: There may be issues if there are properties (or parts) that are occupied by third parties without any documentation in place regularising the position. The buyer will want to ensure third parties do not have any occupation rights.
    6. Environmental: If there is any contamination risk at the Property the buyer will want to limit its liability or seek an indemnity.
    7. Leasehold: The buyer will want to ensure there are no material breaches of the lease terms, that there are no arrears and that Landlord’s consent has been obtained for matters where it is required.

    Leasehold interests and obtaining Landlord’s consent

    The lease terms should be reviewed early on to establish whether Landlord’s consent is required to assign (transfer) the lease to the buyer. In a share sale this does not cause as much concern because the leases often remain with the target company and do not need to be transferred. However, in asset sales the leases will be transferred to the buyer so obtaining consent to the assignment will always be an important consideration. Each lease will need to be carefully considered, particularly with regards to the following:

    1. Pre-conditions: The lease may include pre-conditions that need to be complied with for the Landlord to provide its consent.
    2. Absolute prohibition: If the lease contains an absolute prohibition against assigning the Landlord will have absolute discretion in deciding whether and on what terms to grant the consent.
    3. Covenant strength: The Landlord will want reassurance that the buyer can perform the tenant obligations under the lease and pay the rent. The seller and buyer may need to agree early whether any further security needs to be provided by the buyer such as a guarantor or rent deposit.
    4. AGA: The lease may require the tenant/seller to enter into an authorised guarantee agreement where the seller guarantees the performance of the obligations in the lease and payment of rent by the buyer.

    Timing

    The buyer may try to insist that consent to the assignment is obtained before completion of the business sale. However, in the majority of transactions, and particularly where there are several properties, this is not always possible either for confidentiality reasons or because obtaining Landlord’s consent for multiple leasehold transfers can take a considerable amount of time and organisation.

    If Landlord’s consent cannot be granted before completion, your solicitor will need to check the lease occupation provisions to see whether the buyer can go into the property under a licence to occupy until such time as Landlord’s consent is given and the transfer of the lease to the buyer has been completed.

    Warranties

    In both asset and share sales, the buyer will want to know what the property liabilities will be - such as environmental liabilities. A seller will want these property liabilities to pass to the buyer wherever possible, but this will depend upon the negotiating strength of the parties.

    As discussed earlier in the series (https://www.linkedin.com/pulse/how-sell-business-part-4-connor-iontton/), the agreement governing the sale will include warranties and a number of these relate specifically to any properties involved the transaction. These need to be given careful attention because a buyer may have a right to bring a claim against you for breach of contract if the warranty is not correct. As well as giving buyers a remedy, property warranties are used to elicit disclosure of relevant property information so the buyer can analyse any potential risks and decide whether these risks require further action e.g. by way of an indemnity, some other form of protection or, if material, a reduction in the purchase price.

    The earlier you instruct your solicitor to review the properties involved in the transaction, the earlier issues can be identified. This will provide your solicitor with an opportunity to try to resolve the issue in advance of the sale, or if not, to be prepared with the relevant disclosure against the property warranties - saving a lot of negotiating time.

  • Related Services

    Commercial Property & Development

    Our Commercial Property & Development team give commercially orientated advice and ensure a speedily concluded transaction whether you are purchasing, selling or leasing commercial property.

    Corporate

    Our award winning team of corporate lawyers provide highly practical advice to help businesses of all sizes develop and grow.    

Get In Touch

By submitting an enquiry through 'get in touch' your data will only be used to contact you regarding your enquiry. If you would like to receive newsletters from Thomson Snell & Passmore please use the separate form below.

Newsletter Sign Up

General Private Client UpdatesGeneral Commercial UpdatesConstruction UpdatesCourt of Protection UpdatesAgriculture & Rural Affairs UpdatesCommercial Property UpdatesEmployment UpdatesDispute Resolution UpdatesCorporate & Commercial UpdatesCharities & Not for Profit UpdatesFood & Drink UpdatesEducation UpdatesTransport & Logistics UpdatesFamily Business & Owner Managed Businesses Updates

I agree to be ‘opted in’ to receive Thomson Snell & Passmore newsletters, event invitations and other publications that are related to the subject matter of this event or my industry sector. I understand that this means they will send me these communications by email

I agree

If you want to update what types of information you want to receive from us, or if you wish to stop receiving these communications, you can do so ay any time using the following link: or emailing us at .

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Jargon Buster