Are you thinking of buying commercial property in the UK? Navigating how to purchase commercial property can be stressful and tricky. However, in this post, our solicitors are here to talk you through the entire process so you can be one step ahead in making an informed investment decision. Let’s get right to it!
Buying Commercial Property: What Is Commercial Property?
Commercial property is real estate used mainly for business rather than residential purposes. Here are some common types of commercial property:
- Offices
- Retail
- Industrial Properties
- Healthcare
- Leisure/Hospitality
Commercial property is classified based on several different factors, such as:
- Building quality: The building quality is based on the property’s age, construction, and general condition, divided into Class A, B, and C classifications. This classification helps investors get a better idea about a property’s value.
- Location: Properties in popular locations like city centres typically get valued higher and classified as better due to their accessibility and high demand compared to buildings further out of town or those in areas with high crime rates.
- Usage: Different commercial properties have different usages. Some properties may even allow for mixed uses, which means they have both residential and commercial purposes.
- Zoning laws: Owners and occupants of commercial properties have to follow the rules and regulations of local zoning laws, which determine what business activities can occur in specific areas.
Step-by-Step Guide to Buying Commercial Property
Here, we’ve put together a detailed guide on how to purchase commercial property, which you can use to better understand the process.
1. Find your perfect property
Before buying a commercial property, you first need to find the right property for you. This means finding one that fits your budget, is in a great location, and is the right property type for your business – a freehold or a leasehold. Consider the property size, parking facilities and other amenities, nearby transport links, and the impression it will give your employees, tenants, or clients. These factors could all have a significant impact on your business.
Plus, you’ll want to try to buy at a good time – preferably when market prices are low. A commercial property professional can advise you on this but be sure to consider the demand for commercial property, the availability of commercial mortgages, and tenant demand.
2. Work out how to finance the property
Once you’ve chosen which commercial property you would like to buy, you should talk to a broker and accountant about how you will finance your commercial property. You must first determine what the commercial property will cost you. Typically, you need to put down a deposit, but there are also other costs you’ll have to consider, which we’ll cover in more detail later in the article.
You may need to secure a loan to improve your buying position. The most popular route to take is securing a commercial mortgage, although, as there are so many lenders out there, you should do your research to find the best deal.
Remember that lenders will demand considerable information before agreeing to your commercial mortgage. You may be required to represent a business plan, bank statements, and a proposal for mortgage repayments.
An alternative to securing a mortgage is a bridging loan – a short-term method that allows you to purchase commercial property before a long-term financing option is secured.
If a surveyor is involved, they may be able to negotiate the property’s purchase price, resulting in a memorandum of sale, which records this agreed price. Commercial property solicitors like those in our expert team will be able to use this to draft and review all the paperwork involved at one of our offices.
3. Ways to purchase
Once you’ve found the right property, you may want to think about how it will be owned. For example, purchasing a commercial property in a partnership or as an individual owner is popular. However, you may prefer to purchase it as a limited company.
Speaking to a tax advisor or accountant here will help you make an informed decision before you take the plunge.
4. Surveys and searches
During property due diligence, you will need to hire professionals to thoroughly survey the property, ensuring no structural or maintenance issues need addressing. This can be a little time-consuming, taking several weeks to complete, but it is necessary – these issues will become the buyer’s responsibility once completion is reached.
The same goes for searches. Your commercial property solicitor can obtain searches and will report on their results, including planning, Local Authority, water, and environmental searches. Your mortgage lender sometimes requires specific searches.
5. Title checks
The seller’s solicitor will provide your solicitor with copies of the property’s title. Your solicitor will thoroughly review this, ensuring that the commercial property has all the rights it requires and that no rights will be granted to third parties. This can give you, as the buyer, peace of mind that everything is in check for such a large investment.
6. Standard Commercial Property Enquiries
Commercial Property Standard Enquiries, or CPSEs, form various enquiries, which can differ depending on the property’s use, for example, tenancy. Your solicitor will review these and report to you, as the buyer, on the results.
Once the searches, title checks, and CPSE replies are all complete, there will be an exchange between solicitors, which may result in more enquiries. These reviews ensure the buyer encounters no nasty surprises once the purchase is complete.
7. Exchanging contracts
The buyer and seller’s solicitors will negotiate the contract terms and transfer, leading up to the signing of the contract. Both parties must sign the contract and return it to their solicitor. As the buyer, you will pay the agreed deposit price and a completion date with the seller will be agreed upon.
The solicitors will then exchange contracts and fix the completion date, making the process legally binding.
8. Post-exchange actions
After the contracts have been exchanged, the seller will prepare to move out of the property while the buyer will prepare to move in. You should book your removals and make other preparations to move your business.
The period between exchange and completion typically lies between seven and ten days, giving both parties sufficient time to get all their arrangements in order. The buyer’s solicitor will submit the title certificate to the buyer’s bank, allowing them to prepare the withdrawal of funds for completion. As the buyer, you can additionally transfer any other sums required.
On completion, your solicitor will transfer the money to the seller’s solicitor. Once they have received it, they will date the transfer, making you the new owner. You will receive the property’s keys, and your solicitor will handle any post-completion formalities, such as drafting up, reviewing, and finalising a Stamp Duty Land Tax return and applying to register the new ownership at the Land Registry.
Benefits of Buying Commercial Property
So, is commercial property a good investment in the UK? Here are the potential benefits you stand to gain from purchasing commercial property:
- Potential for income
Commercial buys can offer higher rental yields than residential housing, especially if you lease them out to long-term business tenants. This means you will be better positioned to maintain income over a longer period.
- Capital gains
If you purchase a commercial property in a desirable location, it may appreciate in value over time, enhancing the potential for capital gains whenever you decide to sell.
- Tax benefits
When you buy commercial property, you can enjoy a variety of tax deductions, such as mortgage interest and property management costs.
- Control
As a commercial property owner, you can exercise control over property management decisions, rent adjustments, your tenants, and more, meaning you can have a direct influence over your investment’s performance – which, in essence, is exactly what you want when you’ve just invested a lot of money into something!
Are There Any Potential Pitfalls?
Potential drawbacks of buying commercial property could be:
- It doesn’t suit your business
While commercial property is a go-to investment for many companies, this doesn’t necessarily mean it will be a good fit for yours. For example, if most of your employees work remotely, you must consider whether buying office space is necessary.
- It can be expensive
Different businesses have different budgets, but there’s just no getting around the fact that buying – and then maintaining – a commercial property can be costly. Plus, if interest rates skyrocket or the market value decides to decrease, it may be more trouble than your business thinks it’s worth.
- Potential risk
Just because you buy a commercial property, this doesn’t mean that you’re immune to disputes. For example, your commercial tenant could stop paying rent, leading to costly problems later down the line. Commercial properties are also sometimes seen as a higher risk to lenders, so the percentage you’ll have to raise as a deposit can be more than for residential property.
What are the Costs of Buying Commercial Property?
When you come to buy commercial property in the UK, you don’t just have to think about the upfront price. There are a few other costs to consider, which may affect your decision to purchase. Ensure you think about all the costs you’d need to cover before starting the process of buying commercial property.
- How much deposit do you need for a commercial property?
The deposit you’ll pay for a commercial property in the UK can vary around the property’s value. The exact amount will depend on the property type and condition, your credit history, and the economic conditions at the time you want to buy.
- Do you pay stamp duty on commercial property in the UK?
Yes – you are obliged to pay Stamp Duty Land Tax if you purchase commercial property which is priced above the SDLT threshold. In Wales, Stamp Duty has been replaced with Land Transaction Tax, whereas in Scotland, it has been replaced with Land and Buildings Transaction Tax. This is something to be mindful of if you are purchasing outside of England.
- Are there any other pre-purchase fees buyers need to consider?
You should consider fees associated with legal assistance, VAT, and commercial mortgage arrangements.
- What are the post-purchase costs associated with buying commercial property?
The payments don’t end once you’ve completed your purchase. You may have to spend money decorating the property and transporting your goods there.
After this, you’ll have to cover insurance, maintenance and repairs, local authority charges, energy costs, and commercial mortgage repayments. You may consider sharing some of these charges with your tenants if you have any.
Also, don’t forget about business rates, which are taxes on non-domestic buildings. The Valuation Office Agency sets these, revised every five years.
You may have to pay a service charge for common part maintenance on some properties. Thus, it’s always worth checking with your agent during the purchasing process to find out if there are any service charges payable. If the agent is unsure, your solicitor must check the property title when conducting due diligence.
Therefore, you mustn’t just consider the upfront cost when buying commercial property – this is a long-term investment you must continue to direct funds towards.
Are you Ready to Start the Process of Buying Commercial Property in the UK?
Here at Newtons Solicitors, our team is well-equipped with the expertise of buying commercial property and will be very happy to address any queries.
If you want to explore this field of commercial property law in more detail, please don’t hesitate to contact us and put our team’s knowledge to the test! We can also assist in commercial property development, business leases, and selling land to developers.