There are a number of key stages in a typical property transaction – they include the following:
- Identify a suitable property investment (you might use an agent to help you)
- Arrange finance, if required
- Make an offer (usually made through the property agents) and negotiate commercial terms (again you can use an agent to help you. You might also use a valuer to ensure that you offer the right price)
- Agents prepare heads of terms and give these to the parties’ legal advisors. At this stage, proposed time scales will be agreed and the agent will probably want to know how the acquisition is to be funded (and will require proof of finance)
- Appoint legal advisors
- Due diligence (both legal due diligence and physical surveys and inspection by a surveyor)
- Legal advisors prepare and negotiate the following transaction documents:
- finance documents (if applicable)
- for a freehold purchase – the sale contract and transfer document
- for the purchase of an existing lease – the sale contract, the transfer document and any necessary landlord’s consents and any lease security documents
- for the grant of a new lease – the lease, any landlord’s consents and any lease security documents. There may also be a contract known as an agreement for lease, depending upon the circumstances
- Legal advisors report to you on the transaction
- Legal documentation is signed and contracts are exchanged (a deposit is normally paid in relation to a freehold transaction)
- Completion (or closing) of the transaction either by:
- signing and dating the transfer of the property interest (where the freehold or an existing lease is being acquired) and paying the balance of the price or
- signing and dating the lease (where a new lease is being granted) and making any necessary payments under the lease
- Payment of Stamp Duty Land Tax and registration at the Land Registry.
Note that some of the stages overlap. For example, due diligence and negotiation of the transaction documents will take place at the same time.
Caveat Emptor (Buyer beware)
There is no duty on the seller/landlord to disclose physical or legal defects or many of the other matters that may affect the property. It is essential, therefore, that proper checks are undertaken on your behalf to ensure you are satisfied that the property you propose to acquire is suitable for your purpose.
In addition to a physical survey undertaken by your surveyor, your legal advisors will carry out legal due diligence to make sure the seller/landlord has the right to sell/let the property and identify whether there are any restrictions which may affect your use, enjoyment and value of the property. There are three strands to this due diligence:
- investigate title – your lawyer will look at the Land Registry entries for the property and review other available title documents. If you are acquiring a leasehold property, or taking a new lease they will also review the terms of the lease
- searches – your lawyer will undertake various searches with the appropriate municipal (local) authorities, utility companies and other bodies to identify matters affecting the property. For example, planning (zoning) restrictions, the availability of sewers and services at the property, whether access roads are publicly maintained and whether there are any proposals that might affect the property. Generally these searches only disclose matters affecting the property itself and not any adjoining property or the surrounding area.
- enquiries – your lawyer will ask questions (known as preliminary enquiries) of the seller/landlord’s lawyers, covering both title matters and more practical matters affecting the property such as the physical state of the property and whether there have been any disputes.
Environmental investigations
Environment laws in England and Wales can operate to make you liable for contamination that is already present at the property when you acquire it. It is advisable to carry out a desk top environmental survey to assess any potential environmental risk. If considered necessary (depending on the outcome of initial investigations or the nature of the property), you may need to engage an environmental consultant to carry out a full environmental survey.
Such investigations should be taken to identify potential environmental problems early in the transaction so that such matters can be factored into negotiations on price and other contractual terms.
Exchange of contracts
Exchange of contracts is the stage when the contract becomes legally binding. The parties will not be bound to go ahead with the transaction until each party signs, dates and delivers their part of the contract to the other party. Until exchange of contracts takes place, neither party has any recourse if the other decides not to proceed with the transaction. Once exchange takes place, neither party can withdraw without incurring liability.
If the transaction is the grant of a new lease, there may not be an exchange of contracts (the contract is known as an agreement for lease) and the parties will not be bound by the transaction until the lease is completed.
Exclusivity agreement
An exclusivity agreement (sometimes referred to as a lock-out agreement) is an agreement used to give the buyer a specified period of time to carry out its due diligence with reassurance from the seller that they will not negotiate with other parties within that period. However, the benefit of such agreements is limited. They can be difficult and time-consuming to negotiate and the buyer’s remedies for breach are limited to recovering wasted costs.
Completion
Completion takes place when the formal documents transferring/granting the property interest are signed, dated and delivered. The balance of the purchase price is handed over at this stage. In the case of a grant of a new lease, sums under the lease may be payable.
If contracts were exchanged prior to completion:
- a completion date will have been specified in the contract (there is usually a short period between exchange and completion, although it is possible for completion to take place on the same day as exchange)
- there are usually severe penalties if the parties do not complete on the specified completion date. Daily interest is likely to be payable (around 3-4% above UK bank base lending rates) on the outstanding completion monies. If the buyer is in default, the seller can also often charge for loss of income, pursue a claim for damages, take steps to terminate the contract and retain the deposit.
Post Completion
For some property transactions to be legally effective, they must be registered at the Land Registry within a specified period after completion takes place. Transactions requiring registration include the:
- transfer of freehold property
- transfer of leasehold property where the lease still has more than seven years remaining
- grant of a lease for a term of more than seven years.
Bear in mind that members of the public can view Land Registry records and see details of the property. However, it is possible to limit access to ‘commercially sensitive’ information. You should consider whether there are any commercially sensitive provisions in the documents that need to be submitted for registration. We can discuss this with you and make the necessary application to remove that information at the same time as dealing with registration of the transaction.
Stamp duty land tax (SDLT)
Stamp duty land tax (SDLT) is the main tax on property acquisitions. It must be paid by the buyer within 30 days of completion of the acquisition. Failure to pay on time results in significant penalties and interest. SDLT must also be paid before the Land Registry will process the registration of the transaction.
Value Added Tax (VAT)
The VAT treatment of dealings in property and land is complex and subject to change. Different rules apply depending on the nature of the transaction and whether the property is residential or commercial.
Generally, on the sale or purchase of property in England and Wales, VAT is not chargeable. However, an owner of commercial property can ‘opt to tax’ the property. If the option is made, any sale is subject to VAT (currently at 20%). In practice, most owners of commercial property in the UK opt to tax.
On the sale of a commercial property which is let to tenants, the sale can be treated as being outside the scope of VAT as a transfer of a letting business as a going concern (TOGC) provided certain criteria are met.
Business Rates
Occupiers of business properties, whether freehold or leasehold, are required to pay a municipal tax known as business rates. The gross annual bill payable is calculated by multiplying the rateable value of the property (which is usually less than the amount actually paid for the property) by a rate set annually by the UK Government. Levels of Business rates vary between local council to local council.
