You’re not alone if you’re interested in buying commercial real estate in the U.K. Widely seen as a secure investment due to a robust regulatory and legal system, a well-established tax and planning environment, relative economic stability, and good potential for capital and rental growth, the U.K. is a popular location for domestic and foreign investment alike. Just like any property purchase, buying business property in the U.K. is not without its legal processes and requirements. This article walks you through key legal aspects and stages of buying a commercial property in England and Wales, outlining crucial considerations and factors to keep in mind ahead of your purchase.
It’s important to note that the United Kingdom comprises three separate legal jurisdictions. As stated above, this article focuses on the legal requirements in England and Wales.
Types of tenure for business property
Before we look at the actual legal process of purchasing a business property, it’s important to understand the different types of tenure that exist.
There are two types of estate (ways you can hold ownership of property): freehold and leasehold estates.
Freehold estate is essentially equivalent to outright ownership of a business property. This means there is nobody with superior ownership to you. The buyer will take on full responsibility for any property repairs, maintenance and insurance.
If you purchase leasehold, you essentially take on ownership of the property for a fixed period of time dictated by the lease but you never own the land. There will be a ‘superior owner’ – the freeholder. If you are purchasing leasehold, it’s crucial to look at how long the lease term lasts, whether there is any ground rent or service charges payable to the freeholder and how much these are. It’s also worth looking into how often the ground rent is reviewed and what the service charge pays for.
Is Freehold or Leasehold better for commercial property?
- Leasehold is generally associated with fewer upfront costs whereas Freehold requires substantial initial capital investment.
- Leasehold only lasts for the lease term, meaning it can be a more flexible option. If you purchase a freehold, you’re tied to the property until you’re able to find a buyer (or tenant).
- Lease provisions may restrict what you can do with the property and you will have to pay ground rent and/or service charge.
- Freehold comes with total responsibility for maintenance, repair and insurance for the property.
- Freehold gives you exclusive ownership over the property whereas leasehold does not. This gives added security to your business.
- Freehold is likely a good long-term investment as increase in the property value is likely.
- Freehold gives you the ability to adapt and alter the property as you wish (subject to planning permission).
How to buy a commercial property in the U.K.
Sale of commercial property in the U.K. starts with preliminary negotiations. These begin when a party expresses interest in buying the property. At this point in the process, the seller may still be in conversations with more than one interested party.
When a ‘preferred buyer’ is selected, negotiations will continue until the heads of terms are agreed by both parties (or on their behalf by their agents and/or solicitors).
The heads of terms essentially outline the terms of the commercial transaction as agreed in theory by both parties.
Following the agreement of the heads of terms, negotiations will begin regarding the final contract. In the meantime, the buyer will also carry out necessary due diligence ahead of the property purchase.
Things to consider when buying a commercial property in the U.K.
When looking to buy commercial real estate in the U.K., it’s critical that you not only seek expert legal advice, but that you carry out all the necessary due diligence with regards to your potential property purchase. This should include (but is not limited to):
- Property boundaries. Ensure you are fully aware of how far the boundaries reach, and what your purchase agreement includes and does not.
- Seller’s title to the property. Important to investigate the seller’s title to the property and review all relevant documents.
- Searches of public registers. Your legal representation should carry out searches of public registers and enquiries with public authorities and utility providers about the property, however there is also the alternative of using no-search insurance which is becoming more popular.
- Surveys. Carrying out an environmental and structural survey of the property.
- Further works. Enquire as to whether the seller intends to carry out further works on the property before the sale.
- Planning permission. If you intend to change the use of the property or carry out changes, you should ensure that the property has the relevant planning consent for your proposed plans. In addition, you should audit any potential development limitations imposed by existing rights to light or other third party rights.
Whilst the seller of a commercial property is not under any legal obligation of disclosure; it cannot deliberately mislead or conceal any material issues with the property. The standard “commercial property enquiries” will ask the seller a number of set questions, replies to which the buyer is entitled to rely on. The burden lies with the buyer to undertake their own due diligence.
Exchange of Contracts and Completion
When both parties are happy with the drafted contract and sign it, they become legally bound by the sale agreement. This is called ‘exchange of contracts’. The buyer will have to pay a deposit on the exchange of the sale contract which is usually 10% of the purchase price
Completion after the exchange of contracts is a date agreed between the parties and entered into the contract at exchange and it can vary depending on what the parties agree. Generally the contracting parties will agree the length of time between exchange and completion in the heads of terms.
On completion, the balance of the purchase price is paid to the seller, and the legal title to the property is transferred to the buyer by the transfer deed. The buyer then submits the transfer deed to the Land Registry for registration.
Stamp Duty on Commercial Properties
Stamp Duty Land Tax applies to commercial properties too. It is a tax that is imposed on property transactions and is paid to Inland Revenue. It does not matter whether you are purchasing the freehold or a new or existing leasehold property. Commercial Stamp Duty is payable to HMRC within 10 days of completion.
As it stands, the current rates apply:
- Up to GBP 150,000 – 0%
- Between GBP 150,001 and 250,000 – 2%
- More than 250,000 – 5%
Note that unless the property is new, the sale of business property is exempt from VAT. Although you can ‘opt to tax’ in order to be able to recover the VAT on associated costs. You should seek legal advice before opting to tax.
Buying commercial property in the UK
Although in an ideal world purchasing a business property would be easy. Unfortunately, buying a commercial property involves some fairly complex legal processes. You should ensure to budget for expert legal advice for your property purchase. Legal expertise ensures all the necessary due diligence is carried out thoroughly and comprehensively, and to make sure you are able to negotiate a robust purchase contract. Our first-class property team has years of industry expertise, meaning they’re able to guide you through the entire purchase property and offer you specialist advice all for a fixed and transparent price.
Get in touch to find out more about our property law services.
FAQs about buying business property in the U.K.
What is the difference between leasehold and freehold?
As we touched on earlier in this article, the key difference is the length and type of ownership you have over the property. Whereas in a leasehold estate your ownership only lasts the duration of the lease term, in a freehold estate you own the property for an unlimited term. In addition, leasehold ownership means you own the property, but not the land that it sits on, whereas freehold ownership means you own both the property and the land it is on.
Can foreigners buy commercial property in the U.K.?
Yes, they can. Although you should consider the specific requirements and implications. If you are a foreign resident looking to buy commercial property in the U.K., it’s advisable to seek specialist advice.
How much is commercial property worth in the U.K.?
According to Statista, in 2018 the capital value of commercial property was GBP 582 billion.
Can I buy a property as a business expense?
Although you may see it is as a business expense, it is not possible to deduct the purchase of your commercial property as an expense.