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Due diligence on a commercial property acquisition

If you are considering buying a commercial property, it is up to you to find out as much as possible about the property and the surrounding area before you commit yourself.  You will need a solicitor to carry out formal searches of public data and look at any legal issues, but you must also look carefully at the site to make sure it will work for you.  There are traps waiting for the unwary, so make sure you get expert advice as early as possible.

You may be surprised to learn that “buyer beware” is the basic principle for land transactions in England and Wales. Your seller must answer questions about the property honestly, but generally does not have to volunteer information that you have not asked about. This means you need a well thought out due diligence process to uncover potential problems.

It is important that you discuss your future plans for the property with your solicitor.  This will inform the searches your solicitor conducts and the questions they ask, as well as helping you decide how much weight to give to anything you find out that might cause problems in the future.

Searches and enquiries

There is a huge amount of data about property available.  Your solicitor may be able to look at some of this online immediately, and to spot any obvious issues.  They will also carry out a range of formal searches, which in most cases give you the added benefit of some sort of recourse if any information given in response turns out to be inaccurate.  These will include a local authority search to request information about things controlled by the authority.  This will cover a wide range of matters, and examples include: traffic and transport schemes; compulsory purchase plans; planning matters; and who maintains nearby roads and drains. In most cases, an environmental search will be carried out to reveal flood risk and any known contamination of the land.  In some parts of the country, they may also do searches to reveal mining and quarrying operations for resources like coal, tin, china clay, and brine.

Your solicitor will also ask the seller (through their solicitor) for replies to a standard set of enquiries covering a wide range of things including boundaries, disputes, health and safety, and in some cases information about stamp duty land tax and capital allowances.  Alongside this, they will also look at the legal title documents to pick up anything that might affect your use of the property or cost you money in the future.

Deciding what is important

Once all the data, documents and replies have been received, your solicitor’s job is to interpret them and explain how they might affect your plans for the property.  They can also suggest ways to deal with possible problems.  These could include negotiating variations to legal documents, insurance, and indemnities or other contractual promises from the seller.  It is up to you to decide how important any particular issue is – some things may be so significant that you renegotiate the price or even walk away from the deal.

Buying a development site

If you are planning to carry out development on the site, you will need to look carefully at which utilities are on site already and make sure you know where any pipes and cables run in case they make your plans unworkable.  Contamination and flooding risk could also be significant, and proper access to an adopted highway is vital.  On any purchase, you should visit the site yourself, possibly with an expert surveyor.  You should look out for any signs that people might have rights of way across the site.  If you can see any mobile phone apparatus already in place, it may be difficult to get it moved because operators have wide-ranging statutory rights.  The same is true for utility providers, so you should discuss anything you see with your solicitor.  You may also pick up useful information by talking to locals, who may be aware of disputes, or plans that have not got as far as the local authority.

Buying a building to let

If you are buying an existing building as a letting investment, the due diligence should focus on anything that would affect your potential letting income.  If there is already a tenant in place, your solicitor will review the existing lease to check the terms of the letting and highlight anything unusual.  You should also investigate the tenant’s financial position, to make sure they will be able to pay the rent and comply with any other tenant obligations.  Whether the property is currently let or vacant, it is crucial to check the energy performance certificate (EPC) rating.  For letting to be lawful, it must be at least ‘E’, and you should ideally look for scope to improve the existing rating in case this is required in the future.

Buying a building to occupy

If you plan to occupy the property yourself, make sure you have considered any key requirements for your intended use and discuss them with your solicitor so they can pick up issues. For example, there may be restrictions on the permitted use of the property.

Futureproofing

If you plan to hold the property for some time, you should be thinking ahead when carrying out due diligence.  Climate change and the shift towards net zero carbon emissions are likely to affect owners and occupiers of commercial property in the future.  It is now possible for your solicitor to carry out searches which will give information about the possible impact of climate change on a specific property.  These are not yet automatically done on every transaction, so you should discuss whether this is something you want to investigate.  Your due diligence exercise should also look at the scope to add renewable heat and power, such as solar panels and heat pumps, and EV charging facilities, which may add to the value of the property and may even become compulsory in the future.

How we can help

The amount of information about a commercial property or development site can feel overwhelming, but our property law experts can help you decide what is important and explain any significant issues.  The better informed you are before you commit to a purchase, the more likely you are to end up with a successful investment.

For further information, please contact Hedley Adcock in the commercial property team on 01543 442100 or email hja@adcocks.com

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

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