Buying or selling a commercial property (as opposed to leasing) is a significant process that involves several contracts and legal steps. Whether you’re purchasing an office building for your own use, buying a warehouse as an investment, or selling your current premises, here are the key contracts and documents you’ll encounter:
- Heads of Terms (Letter of Intent): At the outset of a sale/purchase, the buyer and seller often agree on heads of terms, which outline the main points: purchase price, property details, any conditions (like subject to survey or planning), proposed timelines, etc. This is usually not legally binding (except possibly confidentiality or exclusivity clauses), but it guides the solicitors in preparing the formal contracts. It’s basically a roadmap of the deal.
- Sale Contract (Agreement for Sale/Purchase): The primary contract is the sale and purchase agreement (often just called “the contract”). In UK property transactions, there is an exchange of contracts phase – where both parties sign identical contracts and exchange them, at which point the deal becomes legally binding. The contract for a commercial property will include:
- Parties: Buyer and seller names.
- Property: A description of the property, often referring to a title number or attached plan.
- Price: The purchase price and any deposit to be paid on exchange (typically 5-10%).
- Conditions: If any (for example, conditional on obtaining planning permission, or subject to the buyer obtaining finance by a certain date, though finance conditions are less common in UK practice – usually buyers arrange that beforehand or risk losing deposit).
- Title and Standard Conditions: The contract will incorporate standard conditions of sale (there are standard commercial property conditions, similar to residential ones but tailored). It will outline any title issues (e.g., “subject to all matters in the title registers except those which will be cleared at/ before completion”).
- Apportionments: If there are rents, service charges, or property taxes (business rates, etc.) that need apportioning between buyer and seller on completion, the contract might cover how those will be adjusted.
- Fixtures and Fittings: What’s included in the sale – e.g., does it include certain fixtures, or is it just the building and land? Usually, all fixtures (items attached to property) are included, but sometimes things like air conditioning units or trade equipment might be excluded if the seller intends to remove them.
- VAT: It should state whether VAT is applicable on the sale (commercial property can be VAT-free or VAT may be added if the seller opted to tax the property). If VAT is to be charged, the contract covers that the buyer will pay VAT in addition to the price.
- Completion Date: When the purchase will complete (transfer) – often 2-4 weeks after exchange of contracts, but can be any agreed date. Sometimes simultaneous exchange and completion happen (especially if no time needed in between).
Upon exchange of contracts, the buyer usually pays a deposit (commonly 10%). Both parties are then legally committed. If the buyer backs out after exchange, they forfeit the deposit and could be liable for further damages. If seller backs out, buyer can sue for breach or sometimes seek specific performance to force the sale.
- Transfer Deed: On completion, a Transfer Deed (often form TR1 for land registry in straightforward cases) is executed by the seller to convey the property to the buyer. This is a deed of transfer that gets registered at HM Land Registry in the buyer’s name. The contract leads to completion, and the transfer deed is the instrument that actually transfers title. The transfer might also contain certain agreed covenants (for instance, the buyer might covenant to do or not do something post-sale, or it might incorporate covenants from older deeds that need to be repeated).
- Due Diligence Documents: Before exchange, the buyer’s solicitor will have examined a lot of documents: the title register and title plan (to check ownership and any easements, covenants, mortgages to be cleared, etc.), search results (local authority search for planning issues, environmental search for contamination, flood search, etc.), and property information (the seller often provides replies to Commercial Property Standard Enquiries (CPSE) – a set of detailed questions about the property, like whether there are disputes, what leases if any, compliance with building regs, utility info, asbestos reports, etc.). The contract might incorporate that these replies form part of the agreement, meaning if the seller’s answers were false, the buyer has recourse.
- Disclosure and Warranties: Unlike buying a company (where share purchase agreements have lots of warranties), in property sales the principle is usually “caveat emptor” – buyer beware. The seller doesn’t typically warrant the property’s condition (hence buyers get surveys) or legality of past use beyond giving information. However, if the property sale is of a business (like sale of an ongoing concern including property), there might be additional terms. Generally for straight real estate, the contract doesn’t have extensive warranties; it’s more about title guarantee. Sellers often sell with “full title guarantee” (a legal phrase meaning they promise they have right to sell and will do what’s needed to transfer, etc.). If a seller is aware of something like a title defect, they must disclose it or risk misrepresentation.
- Rent and Lease Assignments: If the property is being sold with tenants in place (like you’re buying an office building that’s partially let out), then along with the property transfer, the seller will assign the benefit of those leases to the buyer (so the buyer becomes the new landlord). That doesn’t require tenants’ consent (the freehold reversion can be sold and tenants just get notified of new landlord and where to pay rent). But the contract would include schedules listing the existing leases, and completion requires handing over those lease documents, and apportioning any rents (so buyer gets rent for after completion date). Also, any rent deposits held by seller should be transferred or accounted for.
- Completion Statement: Ahead of completion, the lawyers provide a completion statement showing the balance due. For buyer: purchase price + any VAT + apportionments (like reimbursing seller for prepaid insurance or rent) – deposit already paid = amount to send on completion. For seller: they might need to discharge a mortgage on completion from proceeds, which is handled by undertakings between solicitors.
- Post-Completion: After completion, buyer’s solicitor takes care of Stamp Duty Land Tax (SDLT) payment (if any – definitely if price is above thresholds) within 14 days, and registration at Land Registry within the priority period of the pre-completion search (usually 30 working days).
- If using a Loan: If the buyer is taking a mortgage/loan, there will be a loan agreement and often a legal charge (mortgage deed) on the property that the buyer signs at completion in favor of the lender. The lender’s solicitor (or the buyer’s solicitor if also acting for lender) will ensure that the charge is registered at Land Registry after completion, giving the lender security. The sale contract may not deal with this aside from possibly listing that the purchase is financed, but it’s an additional contract to be aware of as buyer.
- If selling a property with a business (like pub or hotel): Then the sale might include business assets, stock, staff, etc. That can complicate things – the contract might then be an asset purchase agreement covering property and business. But if it’s pure property, then mostly what we’ve outlined stands.
- Auction Sales: If buying at auction, the auction conditions and the signed auction sale memorandum act as the binding contract at the fall of the hammer. Auction packs include a draft contract and special conditions which become the contract upon winning bid.
- Using a Solicitor: It’s highly advisable to use a solicitor for commercial property transactions. They will draft or review all these documents, raise enquiries, and ensure the contract protects you (for example, including any necessary conditional clauses or agreed points). For sellers, they make sure to limit liability appropriately and handle title issues properly. For example, if a property is opted for tax, the contract must address that so VAT is properly dealt with.
In summary, the main contracts are the sale contract (legally binding once exchanged) and the transfer deed at completion. Surrounding that are various ancillary documents like replies to enquiries (which form part of what you rely on), possibly a side agreement if something is being left in the property or some post-completion obligation (sometimes sellers agree to fix something after sale under a separate agreement, but that’s not too common). If the property is leasehold (like you’re selling/buying a leasehold interest rather than freehold), then landlord’s consent might be needed and you have a lease assignment document instead of a property transfer – but that’s more akin to business leases which is another scenario.
Buying or selling property is a complex legal process but routine for solicitors. The key for business owners is to engage good legal counsel and do proper due diligence. British Contracts can review relevant documents for competitve fixed fees under our Bronze and Silver packages and can provide conveyancing services through partner law firms..
One more thing: commercial property deals often involve “capital allowances” or other tax considerations (beyond scope here), which might be addressed via an election or clause in the contract about how to apportion values. If relevant, your solicitor and accountant coordinate on that.