Doing business in the UK: property issues

This is part 3 of 7 of our guide: 'Doing business in the UK'.

Ownership

In England and Wales there are two types of property ownership:

• freehold title (outright ownership)
• leasehold title (ownership for a limited period of time, subject to the terms of the lease which is granted by the owner of the freehold title or the owner of a superior leasehold title).

There are two stages to the ‘purchase’ process: exchange and completion.

Exchange

Property contracts are negotiated on a ‘subject to contract’ basis, enabling the parties to withdraw from the transaction up until the time of formal exchange. Prior to exchange the buyer carries out an investigation into the ownership and characteristics of the property. This investigation includes making enquiries of the seller and third party agencies such as the local authority, investigating the seller’s title to the property to establish what rights, covenants etc affect the title, and a site inspection/survey. The seller/landlord will normally require the buyer/tenant to take the property as he finds it and will exclude all liability for its repair and condition. The buyer/tenant should therefore consider commissioning a full structural survey and a ground/environmental report prior to exchange.

Once the buyer/tenant is ready, the contract is formally exchanged and a deposit is paid. Typically, the deposit is 10% of the purchase price, though this figure is negotiable. Once the contract is exchanged it is binding on both parties. The buyer is likely to be responsible for insuring the property from exchange.

Completion

Completion is far more of a formality than the exchange process. On completion, the balance of the purchase price becomes payable. The period between exchange and completion is subject to negotiation and it is possible for completion to take place at the same time as exchange.

The length of the lease or ‘the term’ is a matter for negotiation and there is no minimum or maximum. Leases for a term of more than seven years must be registered at the Land Registry. The length of the term will directly affect the value of the landlord’s interest in the property. The landlord will usually want the longest possible term in order to maximise its investment. The tenant needs to weigh the benefit of the security offered by a longer term against the flexibility provided by a short term. Short term leases – five years or fewer – are now far more common than they used to be.

Effectively, there are two types of occupational lease:

• full repairing and insuring lease, where the tenant is responsible for the building as if it were his own
• internal only repairing, where the tenant is normally only responsible for decoration, including fixtures and fittings, but will be indirectly responsible for contributing towards the repair of the structure and other parts of the building, the insurance and other management costs, by way of a service charge.

When a buyer purchases an existing lease from the current tenant it is known as an ‘assignment’. It is not normally possible to negotiate the terms of the lease on an assignment, as it is already in existence.

The landlord’s consent to an assignment will normally be required, and this is granted by way of formal licence. References and financial information will normally be required before consent is given, and in many cases, security in the form of guarantees or rent deposits will be required by the landlord. On the grant of a new lease the tenant can usually negotiate the specific terms of the lease. Any alterations to the property that the tenant wishes to carry out will normally require the landlord’s approval. This is usually granted
by way of formal licence following the provision of drawings and specifications. In the case of an assignment, the tenant will usually be responsible for the landlord’s costs for dealing with the licence. On the grant of a new lease, the landlord would usually be responsible for its own costs but this is subject to negotiation.

If the landlord or tenant is a foreign company, a legal opinion may be required as to the proper formation of the company and its ability to enter into the lease. Such opinions are obtained from lawyers in the foreign company’s country of incorporation and are usually expensive to obtain. 

Requirements for surety

Often, if the tenant is a new UK limited company, the landlord will require a guarantee from a third party. Therefore, the foreign parent company may need to act as surety for its subsidiary’s liabilities and obligations under the lease. Alternatively, the landlord may be prepared to accept other forms of security. These may include a bank guarantee or the provision of a rent deposit. The deposit is usually refundable to the tenant either at the end of the lease or when the landlord is satisfied that the tenant has reached certain financial criteria, such as having made profits for three consecutive years equal to or in excess of three times the current rent. Planning law and environmental law

Local authorities have the responsibility for the development, maintenance and enforcement of planning law, subject to the direction of central government. Any negotiations to purchase or lease a property must include a full review of the planning permissions for the property. Environmental law provides for the remediation of contamination in respect of land, water and air. A local authority has power in certain circumstances to serve a notice on an owner of contaminated land, specifying the steps it requires the owner to take to remedy the contamination. Therefore any property purchased or leased must be surveyed to establish its history and to identify whether there could be any environmental concerns. In addition, any environmental licences or permits required for activities on the property must be transferred or obtained.

Stamp Duty Land Tax (SDLT)

Subject to reliefs and exemptions, SDLT is payable on most land transactions. On the sale of commercial freehold land it is payable by the buyer at rates of between 2% or 5% depending on the value of the consideration. On the grant of a lease SDLT is payable by the tenant at 1% or 2% of the ‘net present value’ of the total rent payable over the term of the lease. There is a nil rate band of £150,000 for freehold and leasehold commercial transactions.

Scotland and Northern Ireland

There is a separate legal system of property ownership and transactions in Scotland, as well as a different property tax, known as Land and Buildings Transaction Tax (LBTT). Advice can be obtained from our real estate team in Scotland.

Northern Irish property ownership and transactions are similar, but not identical, to those undertaken in England and Wales. SDLT is payable on Northern Irish property transactions. Advice can be obtained from our real estate team in Northern Ireland.