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The Process of Buying a Commercial Freehold Property

Commercial Freehold Guidance by Saracens

The Process of Buying a Commercial Freehold Property

If you have decided that the time is right to purchase a freehold commercial property, either as an investment for yourself, or to give you greater control and flexibility over your existing business premises, then this article is written especially for you. It is important for business owners and investors to understand the procedures and processes for buying a commercial freehold property, either through the standard sale and purchase method, or through auction, as well as the key differences when buying commercial leasehold property.

The Difference Between Freehold and Leasehold Commercial Property

If you purchase a freehold commercial property, then you will own it outright. If you want to paint it fluorescent green and stick feathers all over the walls…..well, there is no one to stop you. You will benefit from the rise in market value, suffer if the property market falls and you can sell the property to anyone you wish.

A leasehold transaction involves purchasing a lease on the property for a period of time (new long term commercial leases are often granted for 999 years). The owner of a lease may sell the lease and make some changes to the property, but they will need to do so under the terms of the leasehold contract, which will often require obtaining the landlord’s permission first.

The Process for Purchasing Your Own Freehold Property

So, you have found the perfect premises for your business or investment, organised finance and all that remains to be done is for your solicitor to sort out the legalities of the purchase.

The following steps set out how the process works under the normal sale and purchase procedure and what is required under auction.

Step One – The Heads of Terms Document and Sales Pack

Standard Sale and Purchase

The Heads of Terms (HOTs) is usually prepared by your solicitor and will contain details of the following:

  • The names of the seller and buyer
  • Details of the property being purchased
  • The rights granted over the property
  • Buyers and sellers covenants (obligations)
  • The purchase price
  • The conditions of sale (for example, the surveys that will be required)
  • Proposed dates for exchange of contracts and completion

HOTs are rarely legally binding. That is the job of the sales contract. Rather, it is a set of intentions, agreed by the parties, of how the purchase process will proceed and what details should be included in the sale and purchase agreement. Good HOTs can save you a great deal of time and money in the long run as they act as clear instructions for your solicitor and eliminate most of the confusion that can arise from a badly managed property purchase.

Auctions

There are generally no HOTs when purchasing a property at auction. Rather, the seller’s solicitor will prepare a legal pack before the auction which will include, among other details;

  • Details of special conditions
  • The searches performed
  • An Energy Performance Certificate
  • Replies to enquiries
  • A Memorandum of Sale

Step Two – Sale and Purchase Agreements and Auction Contracts

Standard Sale and Purchase Agreements

In practice, it is the seller’s solicitor who will draft the sale and purchase agreement; the purchaser can make revisions and eventually approve the document. A sale and purchase agreement will have many terms including:

  • The deposit requirements
  • An assurance of vacancy of possession on the completion date
  • VAT provisions
  • Details of the covenants surrounding the contract
  • Any details of planning permission obtained by the seller

There is usually some movement back and forth between both parties’ solicitors as this is the time when details of the sale are negotiated and finalised.

Auction Contracts

The sales contract available prior to the auction proceeding will contain details of:

  • The general conditions of the sale
  • Special conditions of the sale
  • An addendum which will correct any mistakes contained in the sale contract, legal pack or auction brochure.

The auction catalogue will contain a guide price which indicates what the vendor expects the property to sell for. A reserve price is the lowest price the seller will accept, and all bids must be at or above this price to be considered.

If you are successful in bidding for the property in question, you will be legally bound to complete the contract. Therefore, it is important to have your solicitor thoroughly review the sales contract and the auction catalogue prior to the auction taking place.

Commercial FreeholdStep Three – Due Diligence

Standard Sale and Purchase

Due diligence is the process of checking out the facts and details of the property being sold to ensure that everything is as it seems and there are no issues or defects which may cause financial loss (whether in money or time to make repairs or both) to the purchaser after the property has been sold

In a standard sale and purchase agreement, a solicitor should conduct due diligence in two stages. The first concerns smooth management of the sale and purchase transaction which involves your solicitor being aware of:

  • Your reasons for acquiring the property
  • The finance acquired for purchase

They should also check that the HOTs are comprehensive and clear and contact the buyers other advisors such as their agent and accountant to ensure everyone has the same information. .

The second stage of due diligence is related to the actual property itself and includes duties such as:

  • Reviewing search results
  • Investigating the property’s title
  • Identifying and talking through potential liabilities with you
  • Reviewing the valuation and survey thoroughly

Auction

If there is only one point you take away from this article let it be this;

Please ask your solicitor to perform diligent / thorough checks well in advance of the action date. The day before bidding begins is too late.

A standard sale and purchase procedure can take between six to ten weeks to complete. Much of this time is spent conducting proper due diligence.

To complete due diligence on an auction property, the first step is ensuring that you view the property and its immediate surroundings. If you already run your business from the property you are looking to purchase then you may already have a more thorough knowledge of the property’s particulars which you should discuss with your solicitor.

Arrange for your solicitor to check the legal pack as soon as it is available (they are often viewable online). This will give them time to check the searches, valuations and surveys and discuss any potential issues with you before your turn up at the lot. Always ensure that you check the addendum on the day of the auction in case any amendments to the sales contract or legal pack has been made in the interim.

Step Four – Exchange of Contracts and Completion

Standard Sale and Purchase Agreements

After all the checks have been made, questions answered and the agreement has been approved, the contracts will be exchanged and a completion date set. There is no going back at this point; you are legally bound to complete the contract after exchange has taken place.

You will be required to pay the deposit due on the property at the time of exchange.

The average time between exchange of contracts and completion in a standard sale and purchase arrangement is seven to twenty eight days but can be longer depending on what is agreed.

Auction

Unlike the standard sale and purchase process which can take up to six to ten weeks to move from pre-exchange to completion, at an auction, the contract between the vendor and purchaser is legally binding as soon as the hammer falls and the buyer will be required to pay a 10% deposit immediately.

Ensure your finances are secure before you bid!

Completion usually occurs within 20-28 days after the auction takes place.

In Summary

Purchasing a freehold commercial property is both an exciting and risky venture. With a great deal of money at stake, whether you are buying at auction or through the standard sale and purchase process, you need to ensure that you understand the procedures of the purchase and that all necessary due diligence has been carried out. This will allow you to complete your purchase knowing that you have dotted all your i’s and crossed all your t’s and there will be no nasty surprises waiting for you when you finally collect your keys.

If you would like to find out more about purchasing a commercial property then please click here .

Do you have any comments? We would be delighted to hear them. Please put your thoughts in the comments section below.



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