If you have decided that property investment is a move you want to make, this article discusses how to navigate the transaction.
Some commercial property transactions are simpler than others. If you’re looking at a single-property acquisition, that can be relatively straightforward, whereas multi-let investments introduce layers of complexity that require careful planning and expert legal input.
In this part of our Commercial Property Investment series, we’ll explore what makes these transactions different, the legal pitfalls to watch out for, and the key contract terms to be aware of.
Single-property vs multi-let transactions: what’s the difference?
A single-property acquisition typically involves one building, one title, and one income stream. Multi-let assets (such as retail parks, office blocks or industrial estates) are more complex. They involve:
- Multiple occupational leases: Often, each lease has unique terms and obligations
- Service charge arrangements: Shared costs for maintenance and repairs of common areas, such as access roads, shared utilities and even the structural fabric of the building
- Tenant mix: Different businesses with varying risk profiles.
These factors impact valuation, due diligence, and ongoing management.
What are the complexities of multi-let sites?
Multi-let transactions require more detailed due diligence during the purchase process. Key issues include:
- Service charge provisions: Are all costs fully recoverable from tenants?
- Tenant arrears and disputes: Could affect future income and ability to enforce
- Break clauses and structure of rent reviews: Impact on long-term cash flow
- Title fragmentation: Multiple titles or rights of way can complicate ownership.
Failing to identify and then address these issues during the due diligence process can lead to unexpected costs and disputes post-completion.
How does due diligence protect buyers?
Due diligence isn’t just about identifying problems; it’s also about managing risk. For example:
- Uncovering hidden liabilities: Such as environmental contamination, compliance oversights or planning breaches, which could lead to enforcement action in the future
- Verifying income streams: Ensuring leases are enforceable, and tenants are solvent and good payers.
- Early action: Identifying issues early on enables you to ask the seller to remedy defects prior to completion; it also allows you to negotiate retention clauses or seek title indemnity policies, which can safeguard against future claims.
A robust due diligence process gives buyers leverage to renegotiate terms or walk away from a bad deal.
What are the legal pitfalls for buyers and sellers?
Whether you’re buying or selling a commercial property, there are many common traps that could jeopardise your transaction. You should seek legal advice as soon as you can to avoid costly mistakes and reduce delays.
Some pitfalls include:
- Defective titles: Missing documents or restrictions adversely impacting use may impact value
- Unregistered land: This comes up more frequently than you think! If all or part of the land, or the occupational leases themselves, have not been registered, it can cause delays and uncertainty.
- Planning non-compliance: Risk of enforcement action.
What are the key contract terms in sale agreements?
The sale contract is more than simply the price and completion date. Critical clauses include:
- Conditionality: Is the sale to be conditional on anything (for example, the completion of a new occupational lease)?
- Insurance: The seller usually continues to insure, as they have the contractual obligation to do so under the existing occupational lease(s)
- Apportionments: Rent and service charge are split at completion – the contract should include a mechanism for how the apportionment is calculated, and provisions for balancing service charge accounts at the relevant year-end
- Arrears: Who is to be responsible for pursuing any tenant arrears after completion?
- Tax treatment: Will the transaction qualify as a “transfer of a going concern”, and therefore be exempt from VAT?
- Capital allowances: Advice will be required from your accountant to ensure any allowances are dealt with appropriately in the contract
- Completion mechanics: Timing of funds drawdown and handover of documents.
Negotiating these terms effectively can save significant sums of money and prevent disputes.
What is the role of a solicitor in commercial property transaction negotiations?
We don’t just draft documents; we add lots of value, and our input is vital to ensuring a secure investment.
- Highlighting risks: Which can support you in agreeing on price adjustments
- Structuring deals: We advise and support with structuring the transactions, to ensure that they are done in a tax-efficient and commercial way
- Securing protections: We support with identifying issues that may impact value and future resale, to mitigate against loss and damage.
What are your next steps?
Multi-let investment transactions demand a higher level of scrutiny and expertise. Understanding the complexities and negotiating the best position is essential for protecting your future investment.
This article forms part of our series on investment transactions:
- Part 1: An introduction to commercial property investment transactions
- Part 2: Navigating complex investment transactions
- Part 3: Financing, tax, and sector-specific considerations
This information is for guidance purposes only and does not constitute legal advice. We recommend you seek legal advice before acting on any information given.
