Transfer of liability to buyers
The default legal position
In the UK, the principle of “buyer beware” applies to any property acquisition (including both freehold and leasehold acquisitions). This essentially means that the onus is on the buyer to identify any issues with the property that they are seeking to acquire, before proceeding with the acquisition. If the buyer fails to do so, then – subject to very limited exceptions – the buyer will take on responsibility for any related liabilities post-acquisition. The principle applies to property acquisitions made through corporate transactions (i.e. where a buyer purchases a company that already owns or leases property) in the same way that it applies to a stand-alone property purchase. For this reason, it is key to engage property lawyers in connection with any corporate transactions that include a property acquisition to help you identify and deal with any potential areas of concern.
Common liabilities incurred by buyers
Below are a number of examples of issues that buyers commonly come across. Discovering these through property due diligence before proceeding with an acquisition can often enable a well-advised buyer to renegotiation the price and/or terms of the deal. In particular, a buyer may unwittingly…
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Take on responsibility for the cost of putting the property into “full repair”, irrespective of its condition at the time of the acquisition (which could be very poor). In such circumstances, if the seller has not kept the property in perfect condition, the buyer could later face a large bill for dilapidations at the end of the lease term.
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Inherit obligations to reinstate any works actioned by the seller or previous occupiers to a leasehold property, which could be very costly. This could include the obligation to, for example, undo certain actions taken by the seller (e.g. the addition or removal of internal walls, installation of new flooring, or painting of walls) in order to restore the property to its previous condition.
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Become responsible for major environmental liabilities, even if the buyer had no interest in the property when (for example) contamination occurred. If asbestos is found in the property, the buyer could even become subject to criminal enforcement if the asbestos regulations are not complied with.
Common issues and restrictions faced by buyers
There may also be various restrictions that apply to properties which could thwart a buyer’s plans for the property post-acquisition. For example…
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Buyers may be unable to adapt a property for their ongoing needs, for example if the lease contains restrictions on redevelopments, refits and alterations.
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A lack of information regarding planning permission and the permitted use of the property may open the buyer up to the risk of enforcement/stop notices, especially if the buyer’s intended use is prohibited.
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Unsuitable insurance wording in the lease could mean that the property is insufficiently insured. This could mean, for example, that if a fire or other form of destruction occurred, the buyer could be stuck paying for a property that it cannot use.
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Buyers may face significant unexpected costs, depending on provisions relating to service charges, rent reviews, or the return of rent deposits.
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If a break clause has been agreed, the conditions attached to the clause may be so strict that in reality it cannot be invoked.
Other important considerations
If the corporate transaction is a share sale, then properties owned by the company being acquired will not – legally speaking – be “transferred” to a new owner. The target company will remain the owner (it is simply the target company’s shareholder structure that changes). If a leasehold property is being acquired as part of a share sale, it is therefore unlikely that any specific consents will be needed from the landlord under the leasehold documents, but we would still want to check for any change of control provisions (which might be relevant in this scenario).
In contrast, if the transaction involves directly purchasing a leasehold property (i.e. an asset purchase), then it is highly likely that the landlord’s consent to the transfer of the lease will be required. This can cause major delays, because:
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The landlord will not be on the “deal” timetable, and there is no requirement for the landlord to act quickly;
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The buyer may need to offer a rent deposit/provide guarantors and the seller may need to provide an authorised guarantee agreement in respect of the buyer’s ongoing lease compliance (all of which can take time to negotiate and arrange); and
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Consent can usually be withheld if the seller has breached any of their covenants with the landlord (and rectification of such breaches can take time).
How we can assist
Our highly experienced commercial property team can help to mitigate the above-mentioned risks and issues, for example through:
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Reviewing property documents in the data room and flagging any key omissions;
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Carrying out property searches and reporting on anything potentially of concern in public registers;
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Reviewing the freehold/leasehold titles to identify any significant areas of concern;
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Reviewing leases to identify any unusual or potentially problematic clauses; and
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Preparing a report for the buyer with a list of key recommendations.
Our recommendations for any corporate property transaction
A seller will likely list all “searches”, “information available via the Land Registry” and responses to “enquiries that a prudent buyer would usually make” in their list of deemed disclosures in the disclosure letter. This means that regardless of whether the buyer actually carries out these searches or makes these enquiries, they will take the property subject to anything that would have been revealed by taking such actions. To that end, any warranties given by the seller will be qualified by anything that would have been identified through such searches and enquiries.
Given that the disclosure letter is often drafted towards the end of a transaction timetable, it will often be too late by this stage to protect the buyer (as certain property searches are not instantaneous). It is therefore important to involve the property team from the outset.
In particular…
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We would advise a buyer client to make “CPSE 1” enquiries (these are a set of standard pre-contract enquiries that buyers can send to sellers), as the buyer will be responsible for anything such enquiries would have uncovered (regardless of whether the enquiries were actually made). These enquiries cover critical information relating to, for example, insurance, asbestos reports, fire safety surveys, planning, disputes, VAT registration and service charges.
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We would recommend that you (or us on your behalf) carry out a basic Land Registry check to confirm the ownership and title structure of the property and whether any lenders involved might need to consent to the transfer.
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We would also recommend carrying out a local search, as unless the seller gives us full planning information as part of their replies to CPSE 1 enquiries, we will not know if the buyer’s intended use of the property is permitted (and if it isn’t, the buyer could be stuck paying rents under a lease it cannot use).
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Finally, we would strongly advise that you instruct us to review any key leases so that we can make you aware of any unusual or potentially problematic clauses.
Contact us
Our team can also help you with any other property related matters. For more information, feel free to get in touch via property@ignition.law
This short guide has been prepared for directors and owners of private limited companies for information purposes only, in particular to provide high level information on the importance of carrying out due diligence before acquiring or leasing a property. This guide does not constitute legal advice and should not be relied upon. For specific queries and any further information, please contact Ignition Law for advice relating to your particular circumstances.
