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A GUIDE TO PURCHASING AND INVESTING IN COMMERCIAL PROPERTY England and Wales
A GUIDE TO PURCHASING
AND INVESTING IN COMMERCIAL
PROPERTYEngland and Wales
PURCHASING AND INVESTING IN PROPERTYThere has never been a better time to invest in property in England and Wales. The commercial property market is dynamic and flexible, with overseas purchasers in particular seeing investment opportunities in England and Wales.
This brief guide aims to provide a legal background for new investors or overseas investors considering purchasing commercial property.
There are two main ways in which a company or an individual can acquire an interest in land: freehold interests and leasehold interests.
FreeholdFreehold land is an outright, indefinite interest in land. Other than for investment purposes it is relatively uncommon for companies to own freehold land as the tax treatment of rent paid for leasehold occupation is more favourable for companies.
LeaseholdLeasehold land is an interest in land which provides the holder with rights of possession and use of the land for a specified period of time. The landlord retains the freehold interest and grants a lease (or ‘tenancy’) to the holder of the estate, who is referred to as the tenant. A leasehold interest lasts for a limited amount of time, although this can be granted for up to 999 years.
Other interestsIn some cases a useful alternative to acquiring a freehold or leasehold interest is an occupational licence. An example would be serviced offices which can be a convenient, flexible and easy to use office space solution. They normally offer ready-made offices often fully equipped with furniture, telephone lines, internet access, reception and kitchen facilities. The occupier takes a licence or serviced offices agreement rather than a lease.
TYPICAL TERMS OF A UK LEASE OF COMMERCIAL PREMISESLength of lease term UK lease terms are usually between five and 15 years which allow the tenant to occupy the property during this term. However it is common to see mutual landlord and tenant break options which allow either party to end the lease before the expiry of the term.
Rent Basic rent is normally expressed as a rental figure ‘per annum’ but is normally paid by equal payments quarterly in advance, the traditional ‘quarter days’ being 25 March, 24 June, 29 September and 25 December.
Turnover rentAn additional turnover rent is sometimes payable on retail or restaurant leases. It is usually calculated by reference to the turnover generated at the premises. Turnover rent usually forms only part of the total rent payable.
REVIEWMost UK business leases with a term of five years or more will include provisions for a review of the annual rent every five years. This is usually an upwards only review to the current open market rental value of the property.
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The review will be based on a number of specified hypothetical assumptions and disregards but normally taking into account the market rents being achieved in the locality for similar properties. Rent reviews sometimes link the annual rent increases to an inflation index such as the Retail Prices Index (RPI).
Service chargeIn buildings with multiple occupiers the usual position is that the landlord retains ownership of the structure of the building and the liability to repair. The cost of providing that service and any other facilities such as heating, lighting or security is normally recharged to the tenants as service charge on a particular proportional basis.
This can mean the tenant may be faced with large bills where a great deal of capital expenditure is made. For tenants taking on relatively short term leases it is usual to see fixed or capped service charge payments where possible.
Disposal of a leaseA standard commercial lease will permit the transfer, assignment, subletting and charging of the whole of the premises with the landlord’s prior written consent.
An assignment is effectively a sale of the lease and transfers the interest to a third party. A subletting is the grant of an underlease (ie a new lease granted out of – and at a term for less than – the main lease) to a third party. Assignment and subletting of part only of the premises is likely to be prohibited. Conditions are also likely to be attached to any landlord’s consent to an assignment or subletting of whole of the premises.
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InsuranceThe landlord will normally insure the building against certain risks such as flood, fire, lightning and terrorism. The landlord will recover the cost of the insurance from the tenant as insurance rent. In the event of damage or destruction by an insured risk, the landlord is obliged to rebuild or reinstate the premises.
Rights to terminate the lease• Subject to statutory restrictions, the landlord typically
has the right to terminate a business lease if:• the rent remains unpaid for a specified period of time;• the tenant breaches its lease obligations; or • the tenant becomes insolvent, bankrupt or an
administrator/receiver is appointed.
The landlord’s right to terminate or ‘forfeit’ the lease is limited by statute. Certain notices must be served and the tenant has a right to apply to a court to avoid forfeiture. The court can refuse or grant relief, having regard to the conduct of the parties and proceedings.
The tenant can only terminate the lease before its expiry date if the lease contains a break clause. It is important from the tenant’s perspective for the break not to be conditional in any way (save possibly for the payment of the basic rent).
Security of tenureOn the expiry of a ‘business’ lease and subject to serving a formal notice for the prescribed strict time limits, the tenant has an automatic right to renew the lease on substantially the same terms as the original lease at the then current market rent.
However, it is common for the parties to agree to exclude this right and this is known as ‘contracting out’.
If the lease is contracted-out, the tenant must vacate the premises when the lease expires.
Rent deposits and guaranteesA landlord may request a rent deposit on the grant of a business lease and this is very common in the case of overseas tenants. A rent deposit is a sum of money provided by the tenant as security for payment of the rent and performance of the covenants in the lease. The rent deposit deed will detail the circumstances in which the landlord can draw against this money and also the time for repayment of the deposit to the tenant.
An alternative to a rent deposit is a guarantee, typically a parent company guarantee. The parent company will guarantee the performance of the tenant’s covenants and payment of rent throughout the term.
TAX IMPLICATIONS OF ACQUIRING AN INTEREST IN PROPERTYStamp duty land tax (SDLT)SDLT is a compulsory tax payable on the purchase of a property. It is paid at the point of completion of a transfer land, on completion of a lease or on substantial performance of a property contract eg, taking possession of land. SDLT is not payable on completion of a licence arrangement. Current SDLT rates can be found on the HMRC website. (Note: SDLT rates are subject to frequent changes). Some transactions may be exempt for SDLT but we can provide you with detailed SDLT advice on request.
Capital Gains Tax (CGT)On the sale of a property, the seller is liable to pay capital gains tax. CGT is chargeable on the gain element of the sale proceeds. Liability to pay CGT depends on the type of property being sold and whether any reliefs apply.
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Capital allowancesCapital allowances provide tax relief for the expenditure of certain capital items. A business may be able to deduct capital allowances from its taxable profits and reduce its liability to tax. The most common types of capital allowance are available for expenditure on plant and machinery and integral property features eg lifts, air-conditioning, and kitchen equipment.
Value added tax (VAT)The acquisition of commercial property is exempt from VAT unless:• the building is new or unfinished; and• the seller has ‘opted to tax’ the property.
On certain transactions it may be possible to purchase a property without a VAT cost if the transfer constitutes the transfer of a going concern (TOGC) for VAT purposes.
Tax adviceDetailed advice on the tax implications of any of the above is beyond the scope of this note. BDB can provide you with detailed tax advice for your transaction on request.
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