#3211 - Acquisition And Development Of A Commercial Site - Commercial Property

1. Proceeding to completion of the acquisition:

Under a CONDITIONAL Contract

• The condition = “Acceptable planning permission” [in contract]. Notify the seller.

• Developer has to complete within a certain amount of days / weeks [in contract]

• Payment [purchase price] is likely to be a fixed sum – because usually the Conditional Contract does not span over a long time [so market is unlikely to have changed]. Deposit usually already paid when contract was entered into.

Under a OPTION Agreement

• Developer to serve notice – exercise the option [check the TIME frame- can option still be exercised?]

• Pay Deposit of purchase price [this is in addition to the option fee already paid – non-refundable]

• Price will need to be determined [because market could have changed]

• Completion date may be linked to when the price is agreed and Option notice is served.

• Insurance issues – under the option agreement WHO is to insure the property?

Proceeding to completion

1. Option agreement / conditional contract exercised

2. Physical inspection – has anything changed?

3. Title Investigation [is an update needed]

4. Priority search [OS1/ K15]

5. Local Search [LLCI / CON29O/ Con29R

6. Draft transfer Deed – sign by both parties

7. Mortgage Deed

8. Standard Requisitions on title – send to seller

Post Completion

1. Send TR1 to Land Registry

2. Pay SDLT

3. Register any mortgage at companies house

2. TAX implications:

VAT

• Seller may have to pay VAT [payable on the construction services for commercial development and Professional fees – INPUT tax]

• Seller must account to HMRC if he charges VAT (OUTPUT tax) [seller must be registered to charge VAT]

• If seller opts to tax: Commercial tenant pays VAT on rent [OUTPUT tax for LL]

• Output tax will offset input tax for seller

• Drafting issues: S.89 VAT Act 1994

1. If LL elects to charge VAT after granting the lease = S.89 applies. Tenant must pay VAT on rents as an additional amount. NO Need to draft anything to cover this.

2. If LL elects to charge VAT BEFORE granting the lease = S.89 does NOT apply Rent will be inclusive of VAT unless the lease expressly states VAT is to be paid as an additional amount.

3. Can the tenant also offset VAT – if not then tenant will want to negotiate a reduced rent with LL. Tenants can only recover the VAT paid to the LL their business involves making standard rated or zero-rated supplies. This will apply to retail tenants.

SDLT

• Conditional contract: Developer pays SDLT on purchase price of the development site. Must pay within 30 days of completion of the C.Contract

• Option Agreement:

1. Developer pays SDLT within 30 days of completion of the option agreement [pay tax on the option fee]

2. Developer pays SDLT within 30 days of completion of purchase [pay tax on the purchase price]

• Developer charges SDLT on premium / rent / VAT– tenants have to pay [Payable on VAT also [tax on tax].

Capital Gains Tax

• Seller [who is a individuals] – pay on grant of the option and the completion of sale

Corporation Tax

• Seller [For companies] – pay on the gain treated as part of “taxable profits”

• Landlord [who is a company] – commercial and residential lettings are treated as part of “taxable profits”.

3. Agreement for a lease of the site

3. Issues on Construction Law [the liability issues for the LL]

• The Parties involved and their contractual relationship [i.e. the employer may have no contractual relationship with the sub-contractors]

• Employer wants power to enforce collateral warranties

Types of Construction Contract =

1. Build Only Contracts: Contractor is only responsible for building. He builds to the architect’s design specifications. Contractor is not liable for any fault with the design. It becomes necessary to assign liability. Can lead to costly construction litigation.

2. Design and Build Contracts: Contractor takes on liability for build AND design. Contractor uses his own architect to sign off on the development when it is finished. One party is liable [the contractor] – easier to settle in the event of litigation.

Potential problems that may occur in construction:

• Delay

• Insolvency of a key party

• Variations in design / build – leading to litigation

• Defects of design or construction

• Additional costs

Liability for defects:

• Design Liability Period: The period after completion where contractor must remedy any problems with design and/ or build. Usually between 6-12 months. After this period ends a “Final Complete Certificate” will be issued.

• Has the LL taken out Latent Defect Insurance – [cover against damage caused by design / construction defects for a set period of time – usually 10 years after completion]. The tenant client should check. If LL has this cover – he does not need to establish liability for the damage incurred. However, the insurance may be subject to “excesses” [i.e. LL has to pay first 50,000 of damage costs].

• How long is LL liable for repair of latent defects under the lease [check covenants]

Position of third parties

• Shop tenants / lenders / later purchaser of the site- they want protection from any defects / problems arising out of construction.

• Advise on how to reduce third party risk: