Commercial real estate law and rules in England and Wales

1. Parties and Ownership – Who can own real estate and what types of ownership are there?

Parties

Any legal “person” may own real estate. This will include individuals, companies, entities established by statute and certain charitable bodies.

Bodies which are not legal persons, such as unincorporated associations or partnerships cannot own real estate directly. However, legal persons acting as trustees can own real estate on behalf of such bodies; as a rule of law, a maximum of four trustees can own any particular interest in real estate at any one time.

Owners of commercial real estate include private developers, insurance companies, pension funds, banks and other financial institutions, private or public property companies, charities, trusts, the government and local authorities.

There are no restrictions preventing foreign nationals or companies from owning real estate.

Ownership

Legal ownership of property in England and Wales is classed as either freehold (including commonhold) or leasehold.

Normally title to either interest will be registered at the Land Registry which confers three different classes of title:

  • Title Absolute – this is the best quality ownership and can apply to freehold and leasehold interests
  • Good Leasehold title – this is granted where a lease is registered without the underlying freehold title being presented to the Land Registry
  • Possessory title – this occurs where there is no paper evidence of title, but the Land Registry recognise that a person by virtue of occupation for the relevant period prescribed by statute has the best claim of which they are aware

All land in the UK is ultimately owned by the Crown and passes back to the Crown if there is no owner. For example, where being a company is wound up without its land being transferred to a third party, the land will automatically pass to the Crown as “bona vacantia” (vacated property).

Land may also be held on trust by a legal owner for a beneficiary. Also, where more than one person has ownership they will hold their interests in one of two ways:

  • Tenants in common – where their respective interests are distinct without the right of survivorship enjoyed by joint tenants
  • Joint tenants – where if a person dies his interest will pass automatically to the survivors – this is known as the right of survivorship. Such trusts are generally used for domestic purposes where a dwelling is owned jointly

It is also possible to acquire rights over land (such as a right of way) by exercising the right for a relevant period, normally 20 years.

2. Interests – What types of interest in real estate are sold?

Property in England and Wales is classed as either freehold or leasehold. Freehold is the best class of title and is as near to absolute ownership as is possible at law. There are no restrictions in England and Wales on how long leases can be. Freehold or leasehold title will be acquired depending on the circumstances of the acquisition transaction.

Freehold is a real right (a right in rem). Technically, a leasehold is a personal right (right in personam) though in practice leasehold has many of the attributes of freehold. Legislation has enabled the creation of a derivative freehold estate known as commonhold, which will also create a real right, similar to the North American condominium interest. For commercial reasons it has not proved popular and is extremely rare. Title to freehold land and most leases must be registered at the Land Registry on completion of a purchase.

The most common lengths of institutionally acceptable leases tend to be 10, 15 or 25 year terms and provide for the payment of a market rent. They are called institutional leases, FRI leases or rack rent leases. Long leasehold interests tend to be for 99, 125, 150 or 999 year terms; such leases are normally granted on payment of a premium with only low or nominal rents payable.

Property interests which exist in England and Wales include:

  • Freehold interests – the best type of ownership and now expanded to incorporate commonhold
  • Leases
  • Licences – contractual arrangements not creating any estate in land
  • Options and pre-emptions – rights to buy or first refusal
  • Easements – such as rights of way or for the use of services
  • Wayleaves – contractual rights to use land for limited purposes such as to site telecommunications equipment

Unless the property is to be sold “as seen” the parties must make it clear whether the fixtures and fittings at the property are to be removed prior to the sale or are to form part of the purchase. If items are fixed to the property, the presumption is that they form part of it and belong to the freehold owner of the property.

Ownership extends to buildings on or beneath the land and the airspace above it, unless interests are described horizontally rather than vertically. Reference to “land” generally includes the buildings and structures on that land – similarly “property” includes both land and buildings unless limitations are created.

3. Employees – What employment issues affect real estate acquisitions?

Typical employment issues which may be relevant to real estate transactions include the transfer of undertakings, redundancies and changing terms and conditions of employment.

Transfer of undertakings – TUPE

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) are likely to be the most significant employment issue. TUPE applies when an undertaking or business (or part of one) is transferred from one party to another or where there is a service provision change (either an outsourcing, change of provider or in-sourcing). It may therefore apply when there is the sale or transfer of a business or lease of a property or the outsourcing of the management of a property to a third party. For example, this might occur in the sale of a shopping centre having its own management and security staff.

The broad effects of TUPE are that:

  • With effect from completion of the transfer, the buyer or new service provider assumes responsibility for employees working in the business or services transferred
  • Accrued continuity of employment is preserved
  • Dismissal for a reason connected to the transfer is automatically unfair – unless for an “economic, technical or organisational reason entailing changes in the workforce”
  • Employees transfer with their existing terms and conditions intact, except, at present, in relation to occupational pension scheme rights
  • If the buyer/ new provider changes terms and conditions by reason of the transfer, these changes generally are ineffective, even where the employee’s agreement is obtained
  • Employees’ elected representatives must be informed and, where appropriate, consulted about the transfer
  • If the seller recognises a trade union, the buyer will be bound to recognise that union until detailed de-recognition procedures are completed
  • Any attempt to circumvent the effect of TUPE is void

Although the legal effects of TUPE cannot be avoided, it is possible to apportion TUPE liabilities by agreement between the seller and the buyer (or outgoing and incoming service provider). Normally the seller (or outgoing service provider) will agree to be responsible for all claims and liabilities relating to employees up to the date of transfer, and the buyer (or incoming service provider) will take on all post-transfer employment liabilities.

Redundancies

Redundancies may arise on the closure of a business or part of a business or where there is a reduction in the number of employees required, for example on the merger of two businesses or a TUPE transfer. Care should be taken to ensure that the redundancies are carried out in a procedurally fair manner, with particular regard to any applicable collective consultation requirements.

Terms and conditions of employment

An employer may decide to change or harmonise terms and conditions of employment on the acquisition of a new business. This can be a difficult process, especially where there has been a TUPE transfer (see above).

4. Procedure – What are the steps in a sale and purchase transaction?

Transactions formally start when proposed heads of terms are drafted, negotiated and agreed by the brokers for the seller and the buyer. The heads of terms (or memorandum of understanding) set out the principal terms agreed between the parties and are generally expressed to be “subject to contract” and not legally binding. They form the basis of the documents to be drafted by the lawyers.

Once the heads of terms have been finalised, they are sent to the parties’ lawyers. The seller’s lawyers will usually collate all information relating to the property and send it to the buyer’s lawyers together with a draft sale and purchase agreement (contract). The form of the sale agreement will vary according to whether the property being sold is under construction or already built and the extent to which leases to tenants have already been granted.

The buyer’s lawyers consider and suggest amendments to the draft sale agreement and at the same time will undertake general due diligence investigations.

Once the sale agreement is in an agreed form, the seller’s and buyer’s lawyers will “exchange” agreements signed separately by the seller and the buyer. Normally exchange is carried out over the telephone by the respective lawyers for the seller and the buyer in accordance with the procedures set out by the Law Society.

After exchange of agreements, the buyer’s lawyers will raise “requisitions on title” of the seller’s lawyers to check that the previous replies given to any enquiries made of the seller’s lawyers are still correct and to agree procedures for legal completion (or closing).

The buyer’s lawyers will also conduct pre-completion searches, including a protective search at the Land Registry, and, in the case of unregistered land, a search of the register of companies (if the seller is a company) to ensure that there are no financial encumbrances affecting the property and a search of the Land Charges Registry.

If the seller is a foreign registered company, generally the buyer will require an opinion letter from an approved lawyer practising in the same jurisdiction confirming that the company is properly incorporated, has power to sell and has carried out appropriate authorisation procedures.

Legal completion of the sale and purchase transaction may occur in person at a completion meeting or by telephone between the parties’ lawyers. Completion may take place at the same time as exchange, depending on the acquisition timetable. Where the purchase is made with borrowed finance a charge over the property will be completed at the same time. The lender of the finance may instruct its own lawyers to carry out due diligence procedures on its behalf and negotiate security documentation.

Following completion, the buyer’s lawyers need to deal with registration of the transfer documents (and any charging documents) at the Land Registry and payment of stamp duty land tax (SDLT), which is assessed on the price paid for the property.

5. Contract terms – What provisions does a real estate contract contain and what is implied by law?

Provisions of the contract

An agreement for the sale and purchase of land must be in writing, must contain or clearly refer to all main terms and conditions, and must be in a form in which either one part is signed by both the seller and the buyer or, and this is the usual case, must be in two identical parts, each signed by one party and then exchanged.

It is common for the sale and purchase agreement to provide for a deposit of between 5-10% of the purchase price on exchange of agreements, where there is to be a gap between exchange and completion. The seller’s lawyers usually hold deposits, either as agents or stakeholders. If held as an agent, it means that the lawyers can deal with the monies on their client’s instructions alone, normally involving the deposit being sent to the client. If they hold it as stakeholder, they have to take concurring instructions from both the seller and the buyer before being able to deal with the money. It is therefore preferable for a buyer to require that the money is held by a stakeholder.

Because the buyer has the opportunity of conducting full title investigation or due diligence before exchanging agreements, the buyer is usually prohibited from making any objection to any matter of title after the date of exchange.

Where timing is crucial to the agreement, there may be a provision stating expressly that “time is of the essence”. This means that any breach of the time limits in the agreement will be deemed to be a repudiatory breach, subject to a claim for damages. Normally, time is not of the essence and may only be made so by one party to the agreement serving notice on the others to make time of the essence.

Where there are matters of title affecting the property, such as restrictive covenants, the seller may require reciprocal obligations from the buyer and an indemnity in respect of any liability the seller may still have following completion of the transaction.

Real estate contracts commonly incorporate standard terms published by the Law Society, in the case of commercial property usually being the current version of the Standard Commercial Property Conditions. Where incorporated, the conditions will apply unless the contract expressly provides otherwise.

Provisions relating to value added tax will be included where relevant to ensure that the agreed tax position is preserved between exchange and completion.

Contracts for sale of property subject to occupational interests such as leases will include clauses to cover ongoing management matters, and provide for apportionment of occupational income and outgoings on completion of the transfer of ownership in the property.

If the property being sold is in the course of construction, the contract for sale will incorporate provisions dealing with the obligations of the seller to construct in accordance with an agreed specification and to provide to the buyer separate deeds of warranty from the building contractor and persons such as the architect in order to safeguard the buyer against defective design or workmanship.

Terms implied by law

Some of the most significant are as follows:

  • Buyer Beware (“Caveat Emptor”) – the overriding point of principle under common law is “caveat emptor” – let the buyer beware. The buyer must satisfy itself in all respects as to the nature of the property it is acquiring. However, this does not absolve the seller from the obligation to provide truthful replies to enquiries raised by the buyer’s lawyers
  • Title guarantee – the use of certain specified words (for example “with full title guarantee”) in a transfer of property imports various statutory obligations on the part of the seller in relation to the quality of the title being sold. The seller is also under a general obligation to be truthful in relation to matters affecting his title to the property
  • Unregistered interests – where a registrable interest is not registered against a property’s title number at the Land Registry, a buyer will take the property without being subject to it
  • Misdescription and misrepresentation – there are both statutory and common law rules which protect against clear misrepresentations or misdescriptions of fact made by the seller to the buyer which have the effect of inducing the buyer to enter into a transfer of land. In such cases, damages may be payable to the buyer or the buyer may be entitled to withdraw from the transaction
  • Unfair terms – agreements for sale that include exemption clauses, which seek to allocate risk, are subject to the Unfair Contract Terms Act 1977. The Act operates to restrict or render void the effect of clauses that unreasonably attempt to exclude liability
  • Standard conditions – contracts for the sale and purchase of land invariably incorporate by reference Standard Conditions of Sale published by the Law Society, which cover a variety of largely technical matters and which are the subject of appropriate variation by the express wording of the contract

6. Due Diligence – What investigations does the buyer normally make?

Pre-exchange of agreements

The prudent buyer is likely to commission a survey of the building and in appropriate cases, soil and geological investigations, plant and machinery tests, and environmental investigations. There are three limbs to the pre-exchange due diligence by the buyer’s lawyers.

Firstly, title to the property will be investigated. The buyer’s lawyers will consider the entries on the Land Register and where relevant historic title documents. Where title to the property is not registered at the Land Registry, the buyer’s lawyer will consider the unregistered deeds to satisfy himself that the seller has a good and sufficient title to the property.

By submitting a plan of the property to the Land Registry, the buyer’s lawyers will receive confirmation of whether or not the title is registered. Additional details of the registered interests then need to be obtained from the Land Registry.

Where the property is leasehold, or subject to leasehold or other occupational interests, the terms of the relevant occupational documents need to be considered carefully to ensure they are not contrary to the buyer’s intentions for the property. The buyer’s lawyers will also need to check whether these documents require the consent of any third party to be given to the transaction.

Secondly, the buyer’s lawyers will commence their own due diligence, which will include the conducting of various searches to check the position regarding municipal and zoning consents, environmental matters, utilities serving the property, financial encumbrances etc. Where the seller is a company, the buyer’s lawyers will also conduct searches against the seller’s name at the Companies Registration Office to ascertain whether the company is solvent and therefore able to dispose of its assets freely. Where the search result refers to security, the buyer’s lawyers will ask for confirmation that such matters do not encumber the property and that no third party consents are required for the transaction to proceed.

Thirdly, the buyer’s lawyers will raise pre-contract enquiries (“preliminary enquiries”) of the seller’s lawyers to obtain information regarding a large number of practical mattes which may affect the property and ask any relevant questions in relation to the title to the property. Whilst a seller must not knowingly or negligently mislead a buyer the general rule is “caveat emptor” (buyer beware). The seller generally gives replies, which may be actionable if wrong or misleading. During the due diligence process the buyer may often arrange that a survey is carried out at the property.

Pre-completion

After exchange of agreements and before completion the buyer’s solicitors will raise requisitions. These ask the seller to confirm that replies to pre-exchange enquiries remain correct and to divulge any further information that has arisen since exchange. The requisitions also deal with completion formalities such as the seller’s lawyers’ bank details etc. The buyer’s lawyers will also conduct pre-completion searches including a priority search of the Land Registry or Land Charges Registry.

Reporting to the client

Before exchange of agreements the buyer’s lawyers usually report their due diligence findings to their client, raising any matter of particular importance or concern.

Occasionally, and normally only where the buyer is acquiring property as a result of the acquisition of a company, instead of due diligence being carried out by the buyer’s lawyers, the seller’s lawyers provide a certificate of title addressed to the buyer and any lender to the buyer. This may occur where the sale has been planned for some time and the parties wish the transaction to proceed quickly.

7. Registration and Notarisation of real estate – What are the basic requirements?

The United Kingdom has a central land register. The Land Registry is run through regional district land registries which are responsible for specific areas of the country. Registration of land is now compulsory throughout England and Wales and to the extent that land is unregistered, once freehold land is sold or charged it must be the subject of an application for first registration. Some areas of land still remain unregistered, although an application for voluntary registration may be made by an owner at any time. A lease granted for a term of more than seven years is registrable. Once a freehold or leasehold interest is registered, any transfer or charge of that interest has to be registered at the Land Registry.

When a party acquires a registrable interest in land, it must apply for registration of that interest at the appropriate district land registry. Only when the registration is complete can the party properly prove its right of ownership.

To protect a buyer pending registration, the buyer’s lawyers carry out a protective search of the Land Registry prior to completion. This search gives the buyer a short period (generally 60 days) of “priority” during which time the Land Registry will not make any other changes to the relevant title pending registration of the buyer’s interest.

The Land Registry has the benefit of a state backed guarantee of accuracy. It is the definitive record of who owns what land, the nature of the interest and any registrable matters affecting that land. The title register for a particular property comprises the following three parts, namely the:

  • Property register, which gives a description of the property together with any rights benefiting the property
  • Proprietorship register, which gives details of the registered owner of the property and the price paid for the property by the current owner
  • Charges register, which lists all registrable matters that encumber the property such as rights benefiting other property, covenants, financial charges, contracts and registrable leases

The Registers may also contain, where appropriate, special entries that restrict the registered owner’s ability to deal with its title without obtaining the consent of another person.

Where title to the property is unregistered, the buyer’s search at the Land Charges Registry will provide a priority period similar to that for a search of the title register at the Land Registry. Again, this will protect the buyer from having a third party register an interest against the property for a limited period of time.

There is no requirement for notarisation of title in England and Wales. Contracts for the disposal and acquisition of interests in real estate are simply signed by or on behalf of the parties. Instruments effecting the disposition of the interest itself have to comply with certain formalities relating to execution and are known as deeds.

8. Permits – What permits are required for the use and occupation of real estate and are they personal?

Applications to obtain planning permission to “develop” land must be made to the local government authority which has the responsibility for controlling the use and development of land in its area. Local government authorities have statutory time periods within which a decision must be made as to whether or not planning permission should be issued. There are various statutory rights in relation to appeals, which can be made if an application is refused or not determined, and rights of challenge regarding the validity of any permission granted. For developments that are likely to cause significant environmental impacts, an Environmental Statement will need to be submitted with the application for planning permission, explaining the likely environmental impacts of the development.

Generally, planning permission will be required for the construction of a “new build” property, work that is proposed for refurbishment of an existing building, and where an existing use (for example office space) is to be changed to another distinct use (for example retail or licensed premises). Planning permission, when granted, benefits the land (although there are occasions when it can be personal) and will contain conditions which will regulate the impact of the development, for instance controlling hours of opening for a licensed premises or requiring landscaping surrounding a car park. Under the Planning legislation the terms “develop” and “development” have a much wider meaning than the construction or replacing of buildings. Minor building works or simple changes of use may amount to “development” requiring planning permission.

A different type of permit (called a “listed building consent”) is required when it is proposed to do work to historically or architecturally important buildings. Normally, planning permission will also be required, but listed building consent may be required even where planning permission is not (for example where works are not “development” but still affect the importance of the building as a heritage asset.

Larger districts or areas of buildings (called “conservation areas”) that have architectural or historical importance may also be subject to a separate regime of control that requires conservation area consent to be obtained before work is carried out that would damage the character and appearance of the area that the local government authority wishes to preserve and enhance.

During the consultation period that the local government authority must undertake when considering a development, third party groups are able to put forward objections (or support) that should be considered by the authority before deciding whether or not a permission should be granted. In addition, even after a permission has been obtained, there will be a three month period within which a third party group is entitled to challenge the validity of granting the permit and this should be kept in mind by lawyers and agents acting for the developer, before any work undertaking the development begins.

In addition to a planning permission, the building must also have approvals confirming that construction has taken place in accordance with applicable building regulations and health and safety legislation. Certain types of building may also have other kinds of certificate issued by independent bodies in relation to building or construction matters generally, such as BREEAM or NHBC certification.

In relation to operations and activities on the property, various environment related permits may be required. This will depend upon the nature of such activities and operations. Most commercial activities will require a trade effluent consent or agreement with the local sewage undertaker. Where prescribed industrial or commercial activities are undertaken, environmental permits may be required from the Environment Agency or the local authority.

9. Insurance and Risk – What insurance will the parties effect and when does the insurance risk pass at the time of sale?

Before a sale is contemplated, insurance is generally the responsibility of the owner of the freehold interest in a property. However, where such property is the subject of a lease or the property is a leasehold interest, the terms of the lease will prescribe which party has responsibility to insure. It is common for owners of long leasehold interests to insure rather than the landlord/freehold owner. Whatever the length of the lease, the tenant will generally insure the contents of the property belonging to the tenant and in some cases certain parts of the property for which the tenant is contractually responsible, such a plate glass.

The insuring party should have a fully comprehensive buildings insurance policy to protect the structure and fixtures and fittings of the property in the event of damage or destruction by any of a comprehensive list of insured risks, such as storm, lightning, fire and water damage. The policy may also cover additional special heads of cover such as subsidence, heave, earthquake and, if available, terrorism.

Generally it is the buildings, and not the land, which are insured for the reinstatement cost rather than the reinstatement value.

Insurance policies (the insurance contracts containing the contractual terms between the insurance company and the insured) may either comprise a single policy for one particular property or a block policy designed to cover a portfolio of properties. Larger institutional investors may self-insure.

Occupying owners generally have separate policies to cover the contents of the property, especially if the property includes costly plant and machinery. They will ordinarily have public liability insurance to cover liability to third parties arising from the property. These public liability policies will exclude most pollution and contamination risks (except those caused by a sudden and accidental event). Whilst not common, it is possible to purchase specialist cover for pollution and contamination risks.

Where the property is subject to an old restrictive covenant and the property owner does not know whether it is still enforceable, a special restrictive covenant indemnity insurance policy may be taken out to insure against enforcement of the covenant by third parties. Similar policies can be taken out if there is some specified defect in the title to the property. The benefit of such insurances may usually be claimed by subsequent owners of the property and tenants.

Insurance policies (except restrictive covenant and title policies) are personal and not transferable on sale. Where a sale is taking place, timing of the transfer of risk is normally prescribed by the sale agreement. Agreements for sale of leasehold land will still be governed by the insurance terms of the lease. It is common market practice for the parties to agree that the seller will continue to insure occupied property until completion.

10. Environmental – What are the common environmental issues?

Considerable change is occurring. Environment related sustainability issues are rapidly rising up the agenda. Currently, the most prevalent of these is the extent of greenhouse gas emissions attributable to the use of buildings (estimated at c50% in the UK and c40 % in the EU) and the potential impact of climate change on buildings. Current law is widely seen as ineffective. Considerable new legislation, policy and voluntary commercial measures are being implemented. There is a consensus that these are likely to have potentially far reaching impacts on development and retrofit, although there is no consensus yet on whether there will be a significant impact on investment values of new and/or existing building stock. For example, letting of residential premises with very poor energy performance ratings will not be possible (unless certain exceptions apply) from 2018.

Traditionally, the prime environment consideration has been potential soil and groundwater contamination as a result of current and former uses. Applicable environment law is a mix of common law and statutory law. Strictly, it is not unlawful for land to be contaminated and there is no absolute obligation to remediate contamination. Generally, legal obligations will attach if the contamination is causing, or has the potential to cause, harm or damage at particular levels (and these differ depending upon the applicable law). In principle, legal responsibility follows the “polluter pays” principle (i.e. the person who spilled, released or discharged the offending substance will normally be liable) but there are important qualifications to this. Environment laws may operate to make future owners and occupiers liable for contamination already present at the real estate when they acquire it. For instance, this may occur if the new owner fails to remediate harmful contamination of which it is aware or should be aware, if the original polluter can no longer be found or, by statute or contract, the risk is transferred by one party to another.

Acquisition due diligence may involve the appointment of environment consultants to consider documentary information and to carry out a site visit (Phase I). If considered necessary, further, intrusive investigations (Phase II) may then be undertaken. It is important to identify potential problems early so that there can be negotiation on terms and/or price and the need for and scope of any remediation. Negotiation of terms may take many forms, including contractual allocation of risks, obligations to remediate (contamination discovered pre or post-acquisition), indemnities in respect of first party loss or third party claims, or purchasing specialist historic liabilities environment insurance to cover any of these risks. If development is proposed, then planning permission may be made conditional upon the proper investigation and remediation, if necessary, of potential historic contamination.

If planned development is of a type considered potentially detrimental to the environment, the application for planning permission may need to be supported by an assessment of the development’s likely future environmental impact.

The presence of nuisance weeds (such as Japanese Knotweed) or protected species (such as badgers or newts) are due diligence and potential planning issues. They may impede on-site activities, have cost implications and impact on the duration of development.

Those who have control of places of work have a duty to assess the risk of asbestos being present in the fabric of the building and to manage the human health risks posed by any asbestos found. Buildings built before 1999 are presumed to contain asbestos unless there is good evidence (such as building plans) to the contrary.

11. Pricing/Valuation – What sets the price/valuation of real estate?

Pricing of real estate investments is a combination of the aggregate rent being paid by occupational tenants of the property and the value that investment buyers consider that a property of the specific type and location is worth at the time of valuation taking that income into account.

The rent for a particular property is likely to be assessed by multiplying the area of the property by the market rental value per square metre (although in the UK square feet are still used as an alternative measurement). The market rental value will take into account factors such as the location of the property, its type and condition, and the length of the lease term. The area of the property will be calculated by reference to the RICS Code of Measuring Practice, which uses generally accepted methods of calculation by reference to several core definitions, the most common of which are Gross Internal Area (used, for example, in relation to warehouses and industrial buildings) and Net Internal Area (used, for example, in relation to offices and shops).

In the case of retail shops, it is common for the rent of the property to have differential values according to the positioning of the floor space – that nearest to the frontage is the most valuable and will be described as “Zone A”. The rental values of the various areas will be added together to provide an overall rental value for the property.

The value of the property for investment purposes will generally be assessed by reference to the methodology laid down in the RICS Appraisal and Valuation Standards manual, universally known as the “Red Book” as a result of the colour of its cover. This governs the way in which a valuer will calculate the value, on the basis of a list of accepted assumptions according to the statements of practice. These apply to the specific use for which the valuation is made and in the case of investment property the valuation will be of “Market Value” as defined.

Investment properties are commonly referred to as being sold on a particular yield, meaning the investment return that will be gained from the capital sum which it is necessary to pay to buy the property. For example, where a property with an aggregate rent of GBP 100,000 is sold for GBP 2m, it will have a yield of 5%. Conversely, the interest can be said to have been sold at a YP (years’ purchase) of 20.

12. Taxes and Costs – What are they and who pays them?

The main tax on acquisitions is stamp duty land tax (SDLT) at a top rate of 4% of the purchase price in the case of commercial properties and a sliding scale up to 12% in the case of residential properties. Special rules (and a much higher rate) have been introduced as an anti-avoidance measure to apply to residential properties acquired by companies and other non-natural persons. SDLT is calculated as a percentage of the acquisition price and must be paid by the buyer within 30 days of completion of the acquisition. Failure to pay within the prescribed time is subject to significant penalties and interest. SDLT must be paid before the Land Registry will process the buyer’s application for registration. If the interest being sold is the creation of a new lease, extra duty will be payable according to the amount of rent payable under the terms of the lease.

Value added tax (VAT) may also be payable, where the property is the subject of a valid option to tax. The buyer may exercise the option immediately prior to or upon completion. An advantage of opting to charge VAT on property is that the parties may be able to recover any VAT on professional fees associated with the transaction.

The exception to the rule that VAT is payable on the sale of an opted property is where the transaction constitutes a “transfer as a going concern”, where the property is let and operated as a business unit. Subject to satisfying certain conditions, this will usually mean that no VAT is paid on the sale of a property which is subject to leases granted to occupiers.

Stamp duty payable on the transfer of shares in a company is calculated at different, lower, rates than SDLT. In relevant instances it is possible to achieve a saving in transfer taxes by structuring a transaction as the sale of a company rather than as the sale of the real estate.

During the due diligence for the acquisition, the buyer will also pay the costs of conducting searches, including in particular of the local authority (which includes zoning matters, building regulations and general municipal consents, notices, etc), and, if relevant, companies providing utilities, the local waterways boards, the Environment Agency, railway operators, and coal authority. The buyer will also pay for any valuations and surveys of the physical state of the property and any environmental audits or desktop studies.

The seller will pay the commission of any land agent or broker employed to find a purchaser.

Occasionally, the negotiated heads of terms for a transaction will provide for one or other party to pay the other’s costs. Generally each party pays its own expenses. If the property is leasehold, the seller is usually responsible for paying the costs of obtaining any consent required from any landlord in order to sell.

Finally, the buyer will be responsible for the payment of the Land Registry fees associated with registration of the transfer to the buyer. As no notarisation is required, no notary fees are payable.