Whether you're a seasoned investor or a first-time seller, it's important to understand the key steps involved in selling commercial property. In this guide, our expert commercial property solicitors walk you through the process from preparing for an upcoming sale to post-completion obligations.
Contents:
- Evaluating your reasons for selling
- What is the value of my commercial property?
- How do I prepare my commercial property for sale?
- What paperwork do I need to sell a commercial property?
- Marketing your commercial property
- How to negotiate with a commercial property buyer
- Can you sell a commercial property without using a solicitor?
- Legal considerations
- The cost of selling a commercial property
- Tax implications of selling a commercial property
- Completion and handover
- Common challenges when selling a commercial property
- Summary
Evaluating your reasons for selling
As your business evolves or objectives change, there may come a time where you need to dispose of your asset(s). Perhaps you need a larger workspace to accommodate your growing business, or you are looking to cash-in on your investments as part of retirement planning. There may be operational challenges or financial pressures driving a sale. Whatever your motivations, it is worth consulting with trusted professional advisors to ensure you make the most of your sale. If market conditions are not suitable, it may be worth holding onto your asset until the situation improves. Alternatively, there may be other ways to achieve your objectives – such as refinancing or releasing equity to access capital.
What is the value of my commercial property?
There are a number of different methods that can be used to determine the current market value of a commercial property, the most common being:
- Sales comparison: this involves comparing the property to similar properties recently sold in the same area to arrive at a market value.
- Income approach: this method is often used for income-generating properties and involves estimating the property's net operating income then dividing it by a capitalisation rate (cap rate) to determine the property's value.
- Cost approach: this method calculates the property's value based on the cost to replace or reproduce it. It is more suitable for unique or specialised properties where income or sales comparison data may be limited.
- Investment analysis: this involves analysing the property’s cash flows, projected income, expenses and potential appreciation to determine its value to an investor.
How do I prepare my commercial property for sale?
For most, preparations begin with evaluating the current status of the property, identifying any issues or aspects that can impact the sale, then taking action accordingly.
That said, how you prepare the property for sale will depend on your marketing strategy. It is common knowledge that properties in good, clean and presentable condition are likely to attract a higher price. If, however you are looking for a quick sale or going to market as a renovation opportunity, your priorities may be different.
There may also be legal or practical considerations to address before going to market. For e.g., most commercial buildings require an Energy Performance Certificate (EPC) to sell.
If your commercial property is rented, you may need to notify current tenants of your intention to sell or serve notices if you intend to sell with vacant possession. For owner occupiers, it is a good idea to notify your customers and suppliers in advance that you are planning to move location.
Repairs and maintenance
Unless you intend to market the property as a renovation project, you may need to take care of repairs or maintenance before listing the property to enhance its value. A well-advised buyer is likely to commission a property survey, so addressing any issues upfront can avoid problems further down the line.
Repairs and maintenance could entail structural, electrical, plumbing, or mechanical issues, as well as any visible damages, such as broken windows or damaged flooring. If any works relate to health and safety, environmental, fire or asbestos management, these should be prioritised.
What paperwork do I need to sell a commercial property?
Common items include:
- Title deeds and plan: if your property is registered, electronic copies of these will be held at the Land Registry, otherwise you will need to locate the physical deeds.
- Energy Performance Certificate (EPC): this must be provided to potential buyers.
- Lease agreements: copies of the agreements if the property is leased, along with any relevant licenses, consents, and rent schedules.
- Property information and management pack: in some cases, particularly if the property is part of a larger development or managed by a management company, you may need to obtain and provide a property information pack containing details about service charges, ground rent, maintenance responsibilities, and other relevant details.
- VAT documentation: such as a VAT certificate or evidence of an opted or exempt status.
- Insurance documents: copies of insurance policies and any associated documentation, such as certificates of insurance or renewal notices.
- Compliance documents: this includes documentation relating to asbestos management, fire, electric and gas safety, and risk assessments.
Marketing your commercial property
Marketing the property across a variety of channels is key to getting it noticed. There is multiple opportunity, such as online listings, building signage, email campaigns, industry magazines, or even social media platforms. Enlisting the help of a commercial estate agent with local knowledge can also make a huge difference. Agents have access to extensive networks, databases, and industry connections, enabling them to reach a wider pool of potential buyers.
How to negotiate with a commercial property buyer
Negotiating the price and terms of any offers made is a common part of the sales process. In general, negotiating involves both parties making some compromises and coming to a mutually beneficial agreement. It helps to go into the process with a negotiation strategy in mind. Consider which terms and conditions you are prepared to be flexible with and to what extent. At the same time, set your limits and bottom line with regards to terms that are crucial to your commercial objectives.
Can you sell a commercial property without using a solicitor?
While it may be possible to sell a commercial property without a solicitor, it can be risky.
As solicitors, we play a crucial role in protecting your interests in the transaction. This includes ensuring that the sale complies with legal obligations and tax requirements (albeit advice is limited due to financial regulations – it is recommended you seek advice from a tax professional), in addition to highlighting and addressing any potential issues or liabilities. We also structure and negotiate the sale in line with your commercial objectives, and handle funds.
While using a solicitor may involve additional costs, it is generally considered a prudent investment to protect your interests.
Legal considerations
Choosing a commercial property solicitor
Choosing the right commercial property solicitor can greatly impact the success of your transaction. Experience, reputation and specialist expertise in the field are all important factors to consider, as well as costs. Ideally, you want to benefit from high-level expertise at affordable prices.
Check online reviews, testimonials, and ratings to understand what it is like to work with them from previous customers. Assess how responsive and accessible the solicitor is during your initial enquiry, as this often sets the tone for communications going forward.
A legal team with a strong track record and success rate in similar transactions, property types or industries may give you more confidence. At the same time, it is vital to have a solicitor with whom you feel comfortable and confident in, build a good rapport and who demonstrates a genuine interest in your success.
Title deeds and Land Registry
As the seller, you need to demonstrate to the buyer that you have clear title to the property. Most properties are now registered and maintained electronically by the Land Registry. If you do not have a copy of your title, your solicitor will be able to download it for a small fee, unless the land is unregistered (less than 15% remains unregistered in England and Wales).
If your land or property is unregistered, then you will need to provide physical copies of the title deeds evidencing your ownership. The buyer’s solicitor will then apply for first registration following the sale. Things can get complicated, and matters delayed if deeds are lost, misplaced or key documents missing.
It is wise to consider voluntarily registering your property in advance to facilitate a smoother transaction when the time comes to sell.
Heads of terms
The heads of terms are typically created during the negotiation phase and capture the key aspects of the deal agreed between the parties. Although not legally binding in themselves, they provide a framework for subsequent legal documentation. The heads of terms typically contain:
- details about the parties, their respective agents and legal representatives
- a description of the property or land being sold / purchased
- the agreed price and deposit
- any rights to be granted over retained land or reserved over the property, or restrictions on the property’s use
- specific conditions to be met before the sale can proceed, such as obtaining planning permission
- the allocation of costs between the parties
- the expected timeline for the completion of the transaction
- VAT position
Conducting due diligence
A well-advised buyer will conduct detailed investigations into the property to uncover any potential liabilities. As a seller, you have an obligation to disclose relevant information requested about the property in your knowledge. Typically, this is comprised in replies to the Commercial Property Standard Enquiries (CPSE), and any additional enquiries raised by the buyer’s legal representative. It is important that you do not mislead the seller, as this could lead to a potential claim against you.
The CPSE request details about the property’s title and ownership, planning compliance, environmental matters, service charges and utilities, boundaries and rights of way, VAT and taxation, insurance coverage and more. There may also be more specific enquiries depending on the nature of the transaction and property involved.
Sale agreement
In most cases, the seller’s solicitor prepares a first draft of the sale agreement based on the heads of terms and sends this to the buyer for review and comment. The specific wording of various clauses is then negotiated between the parties until they reach an agreement. Your solicitor will ensure that the contract accurately reflects your intentions and will seek your input throughout this process. You must also consider whether any chattels are included in the sale and if so, determine the apportionment of the purchase price.
Defining terms and conditions
When preparing the contract, it is important to use precise definitions and explanations of key concept and terms, and specify any contingencies that must be fulfilled for the contract to be valid or for certain obligations to be triggered. This ensures that all parties have a shared understanding of the terms being used, and helps prevent disputes and misunderstandings.
Price and payment schedule
In many transactions, the purchase price is split into an initial deposit payable at exchange of contracts with the balance on completion. The deposit is typically a percentage of the total purchase price.
If a payment schedule is agreed, details of when and how the purchase price will be settled must clearly be documented to avoid misunderstandings. For e.g., if the purchase price is to be paid in a series of instalments over a defined period, the payment schedule must clearly specify the amounts, due dates, and any interest or penalties for late payments. The same applies to a deferred payment structure, where a portion of the purchase price is paid upfront, and the remaining balance is paid over a specified period, typically with interest.
Completion date and handover
The completion date is the final step in the sale and purchase process. It is the day when the seller vacates, the buyer takes possession and assumes all rights and responsibilities of the property. It is commonplace that a buyer will complete a bankruptcy/ insolvency search against the seller ahead of completion.
Selling a property with tenants
If your property is tenanted, there will be additional considerations, such as reviewing the existing leases and rental income details, informing the tenants of the impending sale and complying with any legal requirements regarding tenant notifications and rights.
The cost of selling a commercial property
While actual costs may vary based on your specific circumstances, common items to budget for include:
- commercial agent fees (typically a percentage of the sale price)
- legal fees in respect of your solicitor’s costs
- various disbursements, such as: Land Registry fees, identity checks
- the cost of obtaining an EPC if your current certificate is out of date
Tax implications of selling a commercial property
It is best to consult with an experienced tax professional, but in general tax implications may include:
- Capital Gains Tax (CGT): you may be liable for CGT on the profit you make from the sale. The CGT rate depends on your overall income and gains in the tax year.
- Value Added Tax (VAT): Generally, commercial property sales are exempt from VAT, except in specific circumstances, such as newly built commercial properties or those that have been opted for the VAT regime.
- Income tax: if you have been receiving rental income from the property, you may need to account for income tax on the rental income for the period up to the sale date.
Completion and handover
Completing the sale
Typically, your solicitor will arrange for you to sign any relevant documents in readiness for completion, and simply date the documents on the day to execute the transaction. This includes the sale agreement and Land Registry transfer forms.
Handing over possession to the buyer
If you occupy the property, you must remove your belongings and vacate the premises for the buyer to take possession on completion. Provide all keys, access codes, and instructions for operating any security systems or equipment associated with the property to ensure a smooth handover.
Settlement of financial obligations
Certain expenses, such as insurance premiums, service charges, and ground rent, may need to be apportioned based on the date of completion. Your solicitor will prepare and issue a completion statement to the buyer in advance outlining these sums. If there is an outstanding mortgage or charge secured against your property, your solicitor will need to obtain a redemption statement from the lender to settle and discharge this.
Payment of the remaining balance
The buyer’s solicitor will arrange to transfer the remaining balance of the purchase price, taking into account any adjustments or apportionments as specified in the completion statement to your solicitor. If the buyer is using property finance, the lender must release the funds to the buyer’s solicitor first. This can take place the day before, but usually happens on the morning of completion.
Distribution of funds
Your solicitor will receive the purchase funds and distribute them as per the agreed instructions. This is likely to include paying off outstanding mortgages (if any) and settling any bills and invoices including estate agent and legal fees, before transferring the remaining funds to you.
How long does it normally take to sell a commercial property?
It can take several weeks to several months to sell your property depending on the complexity of the transaction, the responsiveness of the parties involved, and any unexpected issues that arise during the process. Working with experienced commercial property solicitors can help ensure a smoother and more efficient legal process.
Post sale obligations
- Cancelling utility services and contracts
- Notifying relevant authorities of the ownership transfer
- Handling any remaining legal matters
- Resolving disputes or issues
Once the sale is complete, there are still various obligations that both parties must address for a smooth transfer of ownership, which includes:
- Cancelling utility services and contracts: as the seller, it is your responsibility to cancel utility services such as electricity, water, gas, and any other relevant services in your name. This involves notifying the utility providers and settling any outstanding bills to enable a seamless transfer of these services to the buyer and avoid any disruptions.
- Notifying relevant authorities of ownership transfer: this may include informing the local council, tax authorities, and other relevant bodies that your property is registered with.
- Handling any remaining legal matters: following completion, solicitors will exchange counterparts of signed documents. The buyer’s solicitor will submit an online return and pay any stamp duty land tax due on the transaction, before making an application to register the property in the buyer’s name at the Land Registry.
- Resolving disputes or issues: it is not uncommon for issues to come to light post-sale, such as concerns raised by the Land Registry regarding the buyer’s application or the executed documents. Be proactive and responsive to the buyer’s request for information or assistance to enable registration to proceed without further delay. Do not be alarmed if queries arise months or even years after completion, the Land Registry is currently dealing with a backlog of applications.
Unfortunately, disputes can also arise following a sale for e.g. issues that become apparent once the buyer takes possession relating to the use or enjoyment of the property, or claims about failed disclosure of material information. It is recommended to engage in prompt and effective communication, negotiation, or mediation to resolve such disputes at an early stage so both parties can move on.
Common challenges when selling a commercial property
Dealing with delays and complication
While both parties often work to a common timeframe for completion, the reality is that delays and complications may arise that affect the timing and outcome of the sale. This can be for a number of reasons, such as delays with the buyer’s lender extending finance or concerns revealed by the buyer’s due diligence about the property that require further investigation. In some cases, this may even prompt the buyer to attempt to renegotiate the terms of the deal or abandon the purchase. In such situations, it helps if all parties maintain clear and consistent communication, manage their expectations and take a commercial view as to the continuity and prospects of the deal.
Legal recourse in case of a breach
In the event of a breach of contract, for e.g. if the buyer fails to complete the transaction on the specified date or transfer the balance on the day of completion, legal remedies you might look to pursue include:
Specific performance: this is where the court orders the buyer to perform their obligations under the contract by completing the purchase and fulfilling their payment obligations.
Damages: you might pursue financial compensation for any losses suffered as a result of the breach.
Retention of deposit: the contract should specify the circumstances under which the deposit can be retained in case of a breach.
Termination: you may be able to cancel the contract and seek alternative arrangements, such as selling the property to another buyer. The contract should outline the conditions under which termination is permissible, including the specific breaches that would entitle you to terminate.
It is best to consult with an experienced property litigation solicitor to determine which avenue is best suited to your particular circumstances.
Summary
Commercial property can be one of the most valuable assets held by a business, whether that is due to its value, goodwill, location or income generating potential. Selling is a big decision, so it helps to have a solid professional advisory team on board to ensure a smooth and successful sale. Here at Harper James, our expert commercial property solicitors have decades of experience navigating challenges and protecting the interests of business owners and investors just like you throughout the sales process.
