Commercial property sales and rentals are major transactions for the parties involved. Getting things right from a legal perspective is essential. We provide a summary of the key elements of the process along with some tips and guidance.
Identifying Premises or Target Market
A number of factors determine what types of business commercial premises are suitable for. Those considering renting or buying premises must ensure they are compatible with their planned business operations. It is also in the interests of landlords and sellers of commercial premises to be aware of the kinds of businesses suited to buying or renting their property.
Commercial properties fall into planning classes determining the use of the building (eg. A1 for a shop, A4 for a pub). Businesses are subject to regulations regarding facilities like fire escapes and disabled toilets that they have on their premises and so the property must be consistent with this. The premises may also be subject to restrictive covenants affecting their use.
Commercial premises can be rented through a license or a lease. A license allows the landlord to come and go to the property as they please and can normally be terminated at very short notice by either party. A lease gives the business exclusive possession of the premises, meaning the landlord can only enter for specified purposes such as making repairs. A lease normally lasts for a period of several years with the parties having to pay compensation if they terminate early.
Lease agreements must be very carefully drafted and checked by both parties. Lease relationships typically last for several years and so there is a high potential for disputes. Some of the key issues to be aware of are the division of responsibility for repairs and maintenance; method for determining rent increases; and the process for terminating the lease early.
Buying and Selling
Once a buyer has identified suitable premises, they will make an offer. This is subject to satisfactory due diligence checks and to their obtaining financing for the purchase. The parties may make a “lockout” agreement. The seller promises not to negotiate with other parties while the buyer is making due diligence checks, and the buyer commits to paying a financial penalty if they do not go through with the purchase once due diligence has been satisfactorily completed.
The due diligence process consists of the buyer (through their solicitor and advisers) checking that the premises are what they appear to be and that there are no nasty surprises. So, for example, they would review the seller’s title documents; surveyors and environmental reports; and restrictive covenants and planning rules affecting the property.
Once due diligence is complete the parties can exchange signed contracts and the buyer pays the deposit. The purchase then becomes legally binding. A completion date is arranged on which the buyer pays the outstanding purchase price and stamp duty, and registers their ownership at the land registry.
Commercial property transactions are complex and have lasting consequences for both parties. It is strongly advisable to use the services of a solicitor at all stages of the process.
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