Buying/selling commercial property: how it works and what you need to know
Commercial property is generally divided into four different types:
- retail (e.g. shops, shopping centres, supermarkets, etc.)
- leisure (e.g. hotels, pubs, restaurants, etc.)
- industrial (e.g. warehouses, industrial estates, etc.)
The exact conveyancing process will vary from property to property, with larger and more valuable properties demanding a longer and more complex process. Regardless of the size of the property though, the general process remains the same.
1. Find a property and make an offer
The first step is for a buyer and seller to agree an offer on a property. Once they’ve done so, it’s over to the lawyers to begin the conveyancing process. Remember though, a deal agreed at this stage is not binding on either party (see below).
2. Due diligence
The next step is to make sure everything is in order and ‘exchange contracts’ which makes the deal binding. The buyer will usually want to hire a chartered surveyor to ensure the building is structurally sound and both parties will need a lawyer to conduct the conveyancing.
The buyer’s lawyer’s first task will be to conduct due diligence on the property. During this stage, they’ll look into the finer detail of the property and search for any issues. To do this they’ll conduct a number of searches and ask the seller’s lawyer some questions to see if there are any issues. Buyers shouldn’t be afraid of asking questions if there’s anything they’re concerned about or want to know.
Once the due diligence phase is complete, the buyer’s lawyer will be able to advise them of any potential problems or future costs the seller will need to know about. The lawyers can also negotiate over any sticking points.
Whilst the buyer’s lawyer conducts due diligence the seller’s lawyer will be answering any questions and getting on with drafting the contract of sale. Once it’s ready they’ll send this over to the buyer’s lawyer to agree.
Remember, until you exchange contracts the seller is under no legal obligation to sell, so they can choose to pull the property off the market or sell it to someone else at a higher price at any time! If the buyer wants to avoid the potential for this, they may want to ask for an Exclusivity Agreement. These can be costly, take time and the seller may not be keen though, so it will need to be worth their while.
3. Exchanging contracts
Assuming all the buyer’s due diligence checks out and the terms of the contract are agreed, you’ll be ready to exchange. At exchange the buyer generally pays a deposit (usually 10% of the purchase price – although this can vary). Once exchange occurs, the buyer is legally obligated to buy the property and the vendor is legally obligated to sell it to you. Beware, buyers who aren’t able to complete on the deal can lose their deposits and sellers can no longer change their mind.
When the parties exchange contracts they’ll agree the date of completion. That’s the date at which the balance of the funds needs to be transferred. At this date, the buyer will need to have the rest of their finance (including any mortgage funds) ready to go and the seller will need to be ready to move out and had over the keys.
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Advantages/disadvantages of owning commercial property
If you’re still at the early stages of deciding whether to buy or tent, it may be worth considering some of the advantages and disadvantages of both.
So what are the advantages to buying?
- It’s yours – meaning you can (for the most part) do what you want. You don’t have to worry about things like getting consent to redesign or decorate. You can also decide to sell it whenever you want. However, you should take into account needing planning permission or change of use if you wish to modify the property.
- No rising rental costs – when renting commercial premises, rental costs tend to increase every few years.
- Potential for capital growth – your business will get the benefit of any capital growth in the value of the property (but watch out as you can also make a loss).
- Sub-letting all or some of the property – you won’t need consent to sub-let your premises and you can use any rental income to offset against interest payments on your mortgage for tax purposes.
What are the potential drawbacks or reasons why you might want to sell?
- It’s your responsibility – the premises are your responsibility and, if you have tenants, you’ll need to deal with any problems they encounter. This has a cost and can take up your time.
- Potential for capital loss – whilst you stand to gain from any potential increase in value of the property, you’re also on the hook for any potential reduction in value.
- Reduces your available capital – investing in commercial property reduces the amount of capital your business has available to invest on other things.
What our users say
Commercial property as an investment
If you’re looking to buy commercial property as an investment then your decision-making process is likely to be somewhat different to looking for premises to use. For a start, your priorities are clearly going to be different from someone looking to use the premises.
The main point you’ll want to consider is whether you want to purchase the property yourself or whether you should do so using a vehicle like an investment fund. When buying yourself, your exposure won’t be spread over a number of properties, like it generally would with a fund. In addition, you’ll need to deal with all the administration, legal process, etc. on your own unless you appoint a managing agent (who’ll want a fee). With the latter, you’ll have little control over the actual investments the fund makes.
Of course, the decision will ultimately be a financial one, so you may want to take financial advice before investing either way.
Paul specialises in all aspects of commercial real estate and property finance, with particular experience in commercial and residential development and investment. Paul works with a wide range of clients, from large corporates and financial institutions to SMEs and owner managed businesses.
Simon advises on a broad range of commercial property transactions, acting for institutional investors, large retailers, property funds and landlords and tenants of all sizes. He also advises on and assists with high end residential property matters.
Louise is a Partner in the property team. Louise’s special area of interest involves acting for developers in acquiring development land and the related plot sales.