Introduction

Buying or selling a business in the UK involves many moving parts, and one critical aspect often overlooked is the commercial property tied to that business. Property considerations can significantly impact the transaction if the business operates from a leased shop, an owned warehouse, or any commercial premises. This comprehensive guide breaks down what you need to know in plain English – from dealing with lease assignments during an asset sale to conducting property due diligence in a share purchase. I’ll also cover key legal points, practical steps for a smooth transition, common pitfalls to avoid, and real-world examples to illustrate the concepts.

Although I don’t personally deal with property work myself, I’ll always lead the overall project and engage specialist commercial property solicitors at Nexa to work as a team on your sale or purchase of a business. This teamwork ensures you get expert advice in every area.

So, let’s dive into the key commercial property considerations when buying or selling a business.

Lease Assignments in an Asset Sale

When a business sale is structured as an asset sale (meaning the buyer purchases the business assets rather than shares of a company), any property lease held by the seller’s business usually must be assigned to the buyer. In simple terms, an assignment transfers the lease (and all its rights and obligations) from the seller (the current tenant) to the buyer (the new tenant). This is crucial: if the lease isn’t properly transferred alongside the business, the buyer could end up without rights to the premises, and the seller could remain stuck with ongoing lease liabilities.

The lease assignment process generally requires the landlord’s consent, which must be obtained in writing before the assignment can occur. Landlords include these clauses in commercial leases to maintain control over who occupies their property and ensure that the incoming tenant is financially stable and capable of meeting the lease obligations. To obtain consent, the buyer may be required to provide financial information, business accounts, and references demonstrating their ability to take on the lease responsibilities. In cases where the buyer is a new business with limited financial history, the landlord may require additional security in the form of a personal guarantee from the buyer’s directors or a deposit held as security for the rent.

In addition to obtaining consent, landlords often impose standard conditions on an assignment. One common requirement is an Authorised Guarantee Agreement (AGA), where the outgoing tenant (seller) agrees to guarantee the lease performance of the incoming tenant (buyer). If the buyer subsequently fails to pay rent or breaches the lease terms, the landlord can pursue the seller for the costs. While sellers generally prefer not to remain liable once the business is sold, agreeing to an AGA is often the only way to secure the landlord’s consent for the transfer.

Timing is an important consideration when dealing with lease assignments. Obtaining landlord consent can take weeks or even months, particularly if the landlord requires approval from external parties such as a lender or managing agent. Unanticipated delays in receiving landlord approval can significantly hold up the business sale. In some cases, if a landlord unreasonably withholds or delays consent, the law may allow the assignment to proceed without it, but this is a risky approach that could lead to legal disputes. The safest option is to ensure compliance with the lease’s procedural requirements and allow sufficient time for the landlord to review the request and grant consent.

When considering a lease assignment in an asset sale, reviewing the lease terms carefully is essential. The lease should be scrutinised for any unusual restrictions on assignment, any fees payable to the landlord upon transfer, and the remaining lease term. If the lease has only a short period before expiry, it may affect the buyer’s willingness to purchase. It is also important to clarify who will cover the costs associated with the lease transfer, including legal fees, landlord’s fees, and potential Stamp Duty Land Tax liabilities. Finally, the lease assignment process should be coordinated with the overall business transfer to ensure that both complete simultaneously without exposing either party to unnecessary risks.

Potential Issues to Watch For

• Review the lease terms closely before committing to the sale.
• Check if there are any unusual restrictions on assignment or any fees payable to the landlord upon transfer.
• Ensure the lease has sufficient time remaining to be attractive to the buyer.
• Clarify who will pay for legal fees, lease transfer costs, or potential Stamp Duty Land Tax liabilities.
• Align the lease assignment process with the overall business transfer to ensure both complete simultaneously.

Freehold Property in an Asset Sale

If the business owns the freehold property as part of its assets, the transaction will not involve a lease assignment but rather a property transfer. In this scenario, the buyer is purchasing the freehold interest in the property, making them the outright owner upon completion.

A freehold transfer requires a thorough title investigation to ensure that the seller has a clean and marketable title to the property. The buyer’s solicitor will examine the title deeds to check for any restrictions, mortgages, or encumbrances that might affect the property. Property searches, such as local authority, environmental, and drainage searches, will also be conducted to uncover any hidden risks that could impact the buyer’s intended use of the premises.

In addition to title investigations and searches, due diligence should extend to planning and compliance matters. The buyer must ensure that the property has the correct planning permissions for its intended use and that there are no outstanding planning enforcement actions. If the property has undergone modifications or extensions, it is important to verify that all necessary building regulations approvals have been obtained. The buyer must also consider whether the property transaction will trigger Stamp Duty Land Tax (SDLT) liabilities, depending on the purchase price and whether the property falls within any SDLT exemptions or reliefs.

Once the transaction is complete, the buyer’s solicitor will register the transfer at HM Land Registry to ensure the legal ownership is updated. While a freehold purchase is often more straightforward than a lease assignment, it requires careful due diligence to avoid potential legal and financial pitfalls.

To summarise, the key steps in a freehold transfer include conducting a thorough title investigation, undertaking relevant property searches, ensuring planning compliance, considering SDLT implications, and completing Land Registry registration. Addressing these aspects diligently will help facilitate a smooth and risk-free transition of property ownership as part of the business sale.

Key Steps in a Freehold Transfer

• Title Investigation: The buyer’s solicitor will review the title deeds, checking for any restrictions, mortgages, or encumbrances that might affect the property.
• Property Searches: Standard local authority, environmental, and drainage searches will be conducted to uncover any hidden risks.
• Due Diligence on Planning and Compliance: Ensuring that the property has the correct planning permissions and no pending enforcement actions.
• Stamp Duty Land Tax (SDLT): Depending on the property’s value, the buyer may need to pay SDLT on the purchase.
• Land Registry Registration: After completion, the buyer’s solicitor will register the transfer at HM Land Registry to reflect the new ownership.

This process can be more straightforward than a lease assignment in some respects, as no landlord is involved. However, careful due diligence is required to ensure that the property is legally and structurally sound before purchase.

Due Diligence in a Share Purchase (Property Due Diligence)

In a share purchase, the buyer is acquiring the company’s shares that owns and operates the business. From a property perspective, this means the ownership of any commercial property (freehold or leasehold) does not change hands directly, as the company remains the legal owner or tenant. However, because the company itself is changing ownership, conducting thorough due diligence on its property interests is essential.

Due diligence in a share purchase typically involves reviewing lease or title documents to verify the company’s rights over its premises. If the company is a tenant, the lease must be examined to assess critical terms such as the lease duration, rent obligations, break clauses, and repair liabilities. For freehold properties, the buyer must check the title deeds for any restrictions, charges, or encumbrances. Searches such as local authority searches, environmental searches, and planning searches should also be conducted to uncover any potential risks associated with the property. Additionally, it is important to ensure that all necessary planning permissions, building regulations approvals, and energy performance certificates (EPCs) are in place. If the company’s premises are leasehold, the buyer should check whether the lease contains any change of control clauses that could trigger landlord intervention.

Key Property Due Diligence Steps

• Reviewing lease or title documents: Checking critical terms like lease term, rent amount, break clauses, and repair obligations.
• Searches and inquiries: Conducting local authority, environmental, and planning searches.
• Physical inspection and condition: Engaging a surveyor to assess the property’s state and any potential repair liabilities.
• Compliance and use: Ensuring planning permissions, building regulations, and energy performance certificates (EPCs) are in place.
• Landlord relationships and obligations: Checking for disputes, outstanding rent, or break clauses triggered by the share transfer.

Common Pitfalls and Mistakes to Avoid

Even with the best intentions, there are common mistakes in business transactions involving property. Here are some pitfalls to be wary of:

• Delaying landlord engagement can lead to refusals, unexpected conditions, or delays.
• Inadequate due diligence: Overlooking property issues like title defects, planning violations, or lease obligations.
• Misunderstanding repair liabilities: Tenants often assume landlords handle repairs when they are responsible.
• Overlooking lease break clauses: A buyer may assume the lease runs longer than it does.
• Failure to involve property specialists: Commercial property law has complexities that general business solicitors may not catch.

Conclusion

Buying or selling a business is a significant undertaking, and the commercial property aspect is often the linchpin that holds the deal together. By understanding lease assignments, conducting solid due diligence, minding the legal details, and preparing for the practicalities, you can facilitate a smooth business transfer with no loose ends.

At Steven Mather Solicitor, I collaborate with dedicated property law solicitors at Nexa Law to ensure that all these property considerations are handled with care. 

If you’re considering buying or selling a business and want expert guidance on the legal process, contact us today. Let’s have a no-obligation chat about your needs, and let’s ensure your business transaction is a success with all the right legal support in place.