Commercial Property Law: Purchasing, Selling and Leasing

05 Apr 2024

Finding new premises for your business is an exciting time for any business. Once you’ve found the property you want, what’s involved in the legal process of commercial conveyancing?

Buying and Selling Commercial Property: The Process

The process for buying and selling commercial property has similar steps to a residential conveyancing process, but there are a few additional complexities to it.

1. Agree heads of terms (buyer and seller)

The buyer and seller first agree on the heads of terms. These set out the basic terms that the parties intend to abide by. They are not legally binding, but they comprise the initial framework of the agreement.

2. Prepare the contract package (seller)

The seller’s solicitor drafts the sale contract, title documents, and replies to Commercial Property Standard Enquiries (CPSEs). They will include the Energy Performance Certificate, asbestos survey, fire risk assessment, and gas safety records to name a few.

3. Due diligence (buyer)

The buyer’s solicitor carries out due diligence checks on the property. These checks are in place to discover any problems with the property that might affect the purchase price, the insurance requirements, the title to the property, or pose any problems for the buyer’s intended plans for the property. The searches include finding out whether any planning permission has been granted in favour of the property and carrying out environmental searches.

4. Liaising with the lender (buyer)

If the property is being purchased with a mortgage, the buyer’s solicitor will review the mortgage papers and any other documents from the lender. They respond to lender’s queries and report on title.

5. Negotiation (buyer and seller)

Depending on the results of the searches, there may be a period of negotiation between the buyer and seller. Typically issues to negotiate will be price, completion date, and any conditions attached to the property or the sale.

6. Contracts exchanged (buyer and seller)

Once the contract of sale is agreed, it is signed by both parties. Then contracts are formally ‘exchanged’ and the buyer’s solicitor pays the deposit to the seller’s solicitor. It’s at this point that the deal is legally binding.

7. Completion (buyer)

On completion, the buyer’s solicitor receives the funding from the lender, and sends the remaining balance to the seller’s solicitor. Legal title in the property passes to the buyer.

Purchasing Commercial Property: Legal Considerations

When you’re buying commercial property, you must consider the use of the property, for example does it fall within office, retail, industrial, leisure, or healthcare?

The designated planning use of the commercial property will want to align with your business plan, or you may receive an enforcement notice for non-compliance. If you want to change a building’s use, and turn an industrial space into office space (for example) you may need to apply to the council for planning permission.

Another key thing for buyers to have on their radar is restrictive covenants. Restrictive covenants are a promise not to do something on the property. So there might be a restrictive covenant attached to the property to limit or deny its development, expansion, or change of use.

Restrictive covenants will be listed in the title documents and your solicitor will advise you if any restrictions affect your property.

Selling Commercial Property: Legal Considerations

One of the seller’s most cumbersome responsibilities during the conveyancing process is replying to the CPSEs (Commercial Property Standard Enquiries).

There are seven possible CPSE forms that you could be asked to complete. They include:

1. General pre-contract enquiries

2. Supplemental pre-contract enquiries for properties subject to tenancies

3. Supplemental pre-contract enquiries on the grant of a new lease

4. Supplemental pre-contract enquiries on the assignment of a lease

5. Enquiries before the surrender of a rack rent commercial lease

6. Supplemental pre-contract enquiries for properties subject to residential tenancies

7. General short form pre-contract enquiries.

You won’t be asked to complete all the forms; only those relevant to your circumstances.

Your answers must be accurate and comprehensive and it’s usually worth getting the guidance of a solicitor to complete them. Completing the forms incorrectly could expose you to liability for misrepresentation, which could result in damages being awarded against you.

Leasing Commercial Property: Legal Considerations

When you sign a lease for a commercial building, you’re legally bound to its terms. So you want to ensure you’re fully aware of what you’re signing up to, and confident that you can comply with all the terms. If you breach the terms of your lease, you could end up forfeiting your premises and paying damages to your landlord.

A solicitor can help you understand the lease, and identify any onerous terms, which you may want to negotiate with the seller. Common things to look out for are:

Defined use: Does the use of the building, as defined in the lease, exactly match your intentions for your business? For example, it may be a permitted warehouse building, but do you want to put an office in the building too?
Rent reviews: How often will the landlord review the rent? Mostly rent review clauses are ‘upward only’. Check how rent reviews will be calculated. Will it be on the open market, or stepped or turnover rent?
Break clauses: Can you terminate the lease before the end of the term? Pay careful attention to the provisions of any break clause.
Sub-leasing or sharing: Are you allowed to sub-lease or share all or part of the building to another company? Some tenants may want that flexibility from a financial point of view or for additional services to offer to their customers.
Maintenance costs: It’s normal for a tenant to be responsible for non-structural repairs to the building. But what other obligations do you have? Are you responsible for maintaining common areas, corridors, and stairways? You may need to make provisions to be able to comply with all of your responsibilities.
Alterations: Does the lease allow you to alter the property to suit your proposed use? You may need to obtain your landlord’s formal consent to alter the property.

When to Instruct a Lawyer