Commercial property is an aspect of law that every business will need to get to grips with at some stage – leasing a shopfront, buying office space, extending a warehouse – these are all legal activities where a commercial property solicitor will provide invaluable (and in some respects essential) input.
Commercial property solicitors can be a trusted guide to help any business through what can often be a hair-raising time given the money and level of commitment involved.
Understanding the role of a commercial property solicitor
Fundamentally, the role of a commercial property solicitor is to ensure that their client(s), whether they buying or selling a commercial property, are legally protected to the extent possible. Where legal risk exists, the commercial property solicitor’s role is to ensure that their client fully understands that risk and is able to mitigate it (if possible).
The obvious difference between a commercial property transaction and a residential property transaction is the type of property/land that is being sold (or leased). Accordingly, commercial and residential parties will typically have differing considerations and focuses, even if the substantial activity (transferring an interest in property from one person or entity to another) is the same in both circumstances.
With the purchase of residential property, in most cases the buyer has less power and ability to negotiate and accordingly there are less pre-contractual negotiations. Especially in hot residential property markets like London, if the seller does not like the price and/or the terms of the purchase, it can walk away and move onto the next buyer. Commercial property, in contrast, will typically have a smaller pool of potential buyers – only so many businesses would be willing and able to purchase the commercial space to operate a pub or a large office.
Because of the commercial nature of the transaction, most commercial parties will be looking for flexibility and (often) a shorter term of the lease. This is because if the business is not successful, the last thing a proprietor would want is a lengthy lease or restrictive leasehold. Whereas private individuals buying residential property usually wish to obtain the most extensive interest possible. Therefore, most commercial transactions will involve the purchase of a leasehold or entering into a lease which, because of he shorter term, will typically be heavily negotiated. It is for this reason that commercial tenants have a statutory right to renew their lease under the Landlord and Tenant Act 1954 (subject to conditions). Commercial parties are less likely to purchase/sell a commercial property outright, unless they are a very established business.
Navigating the legal aspects of commercial property transactions
Broadly, a commercial property solicitor would be assisting their clients with the following aspects of a commercial property transaction:
- Negotiating pre-contractual documents such as a Heads of Terms (the commercial basics that the parties will agree to before embarking on the transaction proper), exclusivity, and confidentiality – the latter being mostly specific to commercial property transactions.
- Assessing potential areas of tax liability (and ensuring that the client obtains the necessary advice from its tax advisor), reviewing financing documentation, and/or negotiating the terms of the deposit (if any).
- Investigating title or responding to title queries (also known as due diligence). Whilst in both residential and commercial property transactions, assessing title is equally important, what is looked for as standard differs. In most transactions, commercial property solicitors will utilise the Commercial Property Standard Enquiries, known as CPSE. The tenant/leaseholder’s commercial property solicitor will then prepare what is known as a ‘Report on Title’ that their client can use to assess what (if any) risks there are to the property itself, such as flood risk, licencing issues, and so on.
- Commercial property solicitors will then negotiate the contract, and provide a report to their clients to approve and subsequently exchange. Again, most commercial property solicitors will utilise the Standard Commercial Property Conditions (Third Edition) (SCPC) on which the structure of the contract is based – certain terms of the SCPC will be contracted in/out of, depending on the needs and agreement of the parties to the transaction.
- There are strict legal formalities that need to be complied with when property contracts are exchanged as set out in the Law of Property (Miscellaneous Provisions) Act 1989.
- The contract will contain terms that the commercial property solicitors on the transaction need to follow. Completion, in short, is where the tenant/leaseholder provides the money (or portion of the money, if there has been a deposit) to the landlord/freeholder. Importantly, a commercial solicitor will provide what are known as ‘completion undertakings.’ These are binding commitments made by solicitors themselves to do certain things on the completion date. Undertakings made by solicitors can be enforced by the Court and it is a significant breach of the solicitor’s Code of Conduct to not perform an undertaking. Primarily, undertakings pertain to the transfer of money (so parties can have additional confidence that their monies will be handled properly). Without the involvement of a commercial property solicitor, a seller, for example would have no other recourse other than the rights given to it under the sale contract to ensure that the necessary monies are paid to it if something was to go amiss. Other, more administrative, points might also be dealt with at this stage such as concluding mortgages, entering/removing charges against the commercial property, handover of keys, and so on.
- Deal with any post completion matters such as the registration of any applicable interests in the commercial property.
Lease agreements and negotiations
The lease (whether a direct lease or a purchase of a leasehold) will not only contain provisions around payment of rent, but it should also deal with maintenance, break clauses, subleasing, use, and so on. All of these points are just as, if not more, important than just payment and subsequent access to the commercial property.
In terms of repair obligations, the basic point is that the landlord/freeholder will want as little to do (and/or pay) as possible, and the tenant/leaseholder will want the landlord/freeholder to do as much as possible. Each agreement will be different and dependant on the negotiating strength of the parties, and a commercial property solicitor can help you negotiate these. However, one of the key issues that is routinely negotiated is the condition that the commercial property must be left in once the tenant/leaseholder moves out.
Break clauses need to be properly drafted. Commercial property solicitors will ensure that they are not defective (i.e issues around notice) as this can lead to various unintended outcomes that all parties would want to avoid.
Handover provisions can often have importance. Where a party is taking over a business completely (e.g buying a shop as an ongoing concern), it is often crucial that the seller gives contractual commitments to work with the buyer in handing over the business – demonstrating how it operates, introducing the buyer to existing clients, and so on.
Compliance with regulations and local laws
A commercial property solicitor can help you by navigating the often fraught process involved in the obtaining of licences and/or obtaining planning permission for any change in use.
There are many different types of business licences required. For example, most are familiar with the requirements of the Licencing Act 2003, by which a licence is required to sell alcohol. However, most local authorities enforce their own rules around licencing other types of business premises. For example, the City of London requires that all hairdressers within its borders to register with the local authority. Businesses that fail to register or otherwise do not obtain permission to operate can be subject to enforcement action.
Likewise, commercial clients may be acquiring a business premises to turn it into something more profitable. For example, rural buildings are often converted into pubs or hotels. At a minimum, the new owner can expect to at least be required to notify the local authority about the change in use – but it is not unusual for a full application to be made and subject to formal approval.
These points are frequently dealt with in commercial property transactions. The commercial property solicitor can assist you in navigating any clauses that affect a change in use or make the transaction subject to successful planning permission.
Resolving disputes and litigation
Considering the high value nature of most commercial property transactions, disputes and potential litigation can arise at any stage of the relationship between the tenant/leaseholder and the landlord/freeholder. It is not only non-payment of transaction monies, or rent, that leads to disputes.
For example, freeholders will typically seek to retain as much flexibility as possible in determining the applicable service charge the leaseholder must pay them. This can lead to unexpected price hikes not contemplated by the tenant/leaseholder when it originally set up the business. A commercial property solicitor is a specialist at interpreting the complicated terms in a leasehold, and, alongside other dispute lawyers, can successfully resolve disputes in your favour by providing the necessary expertise.
It is important to remember that litigating matters in Court is not the only option. A commercial property solicitor can also advise you on the best potential forum to resolve disputers – for example through mediation or arbitration. Clauses to this effect typically cut both ways; it is usually more convenient for landlords/freeholders to be able to go straight to Court (i.e to obtain an order for eviction) but likewise tenants/leaseholders may not want to be restricted in their options to get their landlord/freeholder to do something (typically repair work). Even so, all of these issues can be dealt with (to a degree) in the original contract.
A commercial property solicitor is essential for clients to be able to fully think through the potential pitfalls and problems that can arise as a result of a commercial property transaction. There are lots that can go wrong, but, with open communication and the help of expert advisors, lots that may go right.
At EM Law, we are experts in all types of commercial property transactions. If you require assistance in acquiring or disposing of an interest in a commercial property, contact our lead commercial property solicitor James Williamson or our general inbox here.