Real estate. A guide to commercial property investment in England and Wales

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1 Financial institutions Energy Infrastructure, mining and commodities Transport Technology and innovation Life sciences and healthcare Real estate A guide to commercial property investment in England and Wales

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3 Real estate A guide to commercial property investment in England and Wales A Norton Rose Fulbright guide April 2014

4 Norton Rose Fulbright Norton Rose Fulbright is a global legal practice. We provide the world s pre-eminent corporations and financial institutions with a full business law service. We have more than 3800 lawyers based in over 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia. Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare. Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact. Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members ( the Norton Rose Fulbright members ) of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients. References to Norton Rose Fulbright, the law firm, and legal practice are to one or more of the Norton Rose Fulbright members or to one of their respective affiliates (together Norton Rose Fulbright entity/entities ). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a partner ) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of the relevant Norton Rose Fulbright entity. The purpose of this communication is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points of law discussed. You must take specific legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright. Norton Rose Fulbright LLP NRF /14 (UK) Extracts may be copied provided their source is acknowledged.

5 Contents Introduction 07 Land ownership and registration systems 08 The formalities of buying land 11 The role of professional advisers 15 Choosing a suitable investment property 18 Terms of occupation and status of the occupiers 24 Financing an investment 28 Co-ownership 30 Taxation 33 Glossary 39 Contacts 41

6 06 Norton Rose Fulbright June 2013

7 Real estate group Introduction Real estate is one of the principal strengths of Norton Rose Fulbright. We attract considerable industry recognition for our involvement in some of the largest and most innovative development, investment and property finance transactions and infrastructure projects. Our team consists of experienced leading practitioners in the real estate sector with extensive knowledge in the full range of real estate transactions. We work closely with banking, restructuring, corporate, securitisation, construction and tax lawyers with a genuine understanding of the real estate market, both nationally and internationally. We act for clients on innovative development, regeneration and property finance transactions and projects, including joint ventures, leasing structures and outsourcing. We advise on hotel and leisure work, construction and engineering, insolvency, real estate disputes, restructuring and property taxation. We are also a market leader in Islamic finance and have extensive experience of real estate work using Islamic financing techniques. When clients consider investing in commercial property in England, some of the questions they ask are: Am I allowed to buy and sell property? How easy is it to do so? What are the formalities? How do I prove ownership? How can I draw (and maintain) an income from it? What taxes will I have to pay? This guide answers these and other questions from the legal standpoint and is designed to help our non-uk clients and their professional advisers. It describes the law and practice in England and Wales (shortened throughout to England). It does not deal with Scotland or Northern Ireland where the law, and consequently the practice, is different although commercial, tax planning and environmental considerations are broadly similar to those in England. Nor does it deal with residential property investments, to which different criteria apply. Although the terms real estate and real property are understood in England it is more usual to refer to land or property, and this guide will use those terms. Detailed professional advice should be taken from both lawyers and surveyors before any particular investment is made, and this briefing is not a substitute for that advice. Lawyers will deal with commercial issues in a legal context and the technical legal formalities; surveyors will advise on values, location, rents and growth prospects as well as the condition of the property. Norton Rose Fulbright has regular contact with the leading firms of surveyors and is accustomed to working closely with them on all types of property transaction. An investor or his professional advisers should always make sure he visits the property he intends to buy before being committed to buying it. This is partly so as to be able to relate the legal documents to the physical property, but also to confirm he is buying what he thinks he is buying. It is also necessary for the investor to see the property in the context of the surrounding area as a whole. More than that, it is to make sure that he will be content to invest in and hold the property. What liabilities/regulatory requirements apply to commercial property ownership? Who will give me objective advice? Is there any development potential? Norton Rose Fulbright April

8 Land ownership and registration systems General No restriction on who may hold land Freehold land Leasehold land The land registration system

9 Real estate group Land ownership and registration systems General Under English law there are only three types of ownership interest in land. They are freehold, leasehold and commonhold. Of these commonhold is not widely used and relates primarily to residential property so is outside the scope of this guide. Land includes the earth below the surface, down to the centre of the earth, and the air-space above the surface, without height limit; it also includes the buildings standing on it and, usually, the fixed plant and machinery in them. An owner of land has full rights to do what he likes to the land, subject to any laws or agreements to the contrary. So for example the owner of land can buy, sell, lease, build, demolish and change the use, although in practice he may find that in the case of leasehold land he needs his landlord s consent to do these things, and in the case of building, demolition and changing the use he also needs the consent of the local authority in the form of a planning permission. Other consents may also be needed. Ownership of land gives the right to occupy the land, although where a lease exists that right belongs to the tenant, not the landlord. It is not necessary in England for documents relating to land to be notarised. No restriction on who may hold land Any person over the age of 18, of whatever nationality, may buy and sell freehold land without restriction and may buy or sell UK-incorporated entities owning freehold land without restriction. Similarly, any corporate entity, wherever it is established, may hold and dispose of freehold land provided it has the corporate power to do so. This is subject to any applicable UK, EU or UN sanctions in force at any time. Freehold land Freehold land is owned outright forever. The land may be subject to or have the benefit of rights and covenants, such as rights of way over adjoining land, or covenants restricting use or development. It is possible to split the ownership of mining rights and minerals from ownership of the land, and in mineral bearing areas this is often done, so a landowner may not own the minerals under his land or the right to mine them. Freehold land may also be subject to a lease, in which case there are two owners of the land: one owns the freehold and is called the freeholder, landlord or lessor; the other owns the lease and is called the tenant or lessee. The right of occupation belongs to the tenant. Leasehold land A lease grants ownership of property for a stated period of time, so leasehold land is owned by the tenant for the length of the lease. A lease exists at the same time as the freehold: the freehold lasts forever and is subject to the lease for the period of the lease. That period can vary in length from a day to 1,000 years or more. A lease may be granted either for a premium or at an annual rent, or a combination of both. A tenant can grant a lease out of his own leasehold interest, called a sublease or underlease, although this will sometimes require the consent of the tenant s landlord. A chain of leases can be created in this way to meet the requirements of investors and occupiers. The right to occupation belongs to the owner of the lowest lease in the chain. Leases fall into two broad types, investment leases and occupational leases. An investment lease is one which an investor would buy for its actual or potential income stream, so it will typically be a lease for 125 years or more either without a rent or at a very low rent. The owner of such a lease owns the value in the property. Norton Rose Fulbright April

10 A guide to commercial property investment in England and Wales An occupational lease is one under which a tenant who does not want to participate in the risks and rewards of long term investment would occupy, so it will typically be a lease for somewhere between 5 and 25 years at a rent equal to the full annual rental value of the property. Occupational leases will not normally acquire any significant value and the owner of such a lease merely pays rent for the right to occupy. The lease will contain details of the rent and the rights and obligations of the landlord and the tenant to each other. There are very few provisions implied by law into a lease of commercial property, so the practice is to set out all the terms in the lease itself. This can result in leases being anything up to 100 pages long, although most investment leases would not be that long. Even though there are a number of standard principles which one expects to see in a lease, there is no standard wording, so leases require careful negotiation by experienced lawyers. Occupational leases normally contain restrictions on the tenant s ability to dispose of the lease, underlet, demolish, alter or extend the property and restrictions on the uses to which the tenant can put the property: for example, the use might be restricted to offices. In most cases these restrictions are imposed to protect the value of the landlord s interest, since it is the landlord and not the tenant who owns the valuable interest in an occupational lease. However, there is a balance to be struck since if the landlord seeks to restrict the tenant more than is normal in the market he will find that the rent achieved, either initially or on rent review, is lower than the market rent. The position is different for investment leases where it is the tenant who owns the valuable interest in the property. There tend to be many fewer restrictions on tenants in investment leases, and those that are included tend to be lighter. Most leases contain a statement that if the tenant fails to pay rent or is in breach of its obligations the landlord can terminate the lease. Termination in those circumstances is called forfeiture. There are statutory restrictions on the landlord s right to forfeit a lease. The land registration system Ownership of land, and the majority of the rights and burdens which affect it, must be registered at the Land Registry, a government agency. The vast majority of the property in England is registered, including nearly all property in London. When properties change ownership, they have to be registered if not already registered. The registers contain details of: the property, both by description and by reference to a plan the owner the price paid by the owner rights which benefit the property any restrictions on its use any security held over it (mortgages) any registrable leases which the property is subject to. Anyone can obtain copies of the registers and any documents referred to in them although commercially sensitive information can be withheld from copies of leases, mortgages and other documents. The price paid for the property by the owner cannot be withheld. Some matters are not included in the registers. Examples are the rights of actual occupiers of property, leases for seven years or less and matters falling within the province of the relevant local authority, such as town and country planning (zoning) matters and road improvement schemes. It is also often difficult to identify the extent of adjoining land over which there are mutual rights or obligations. The registers are therefore not complete records of all interests in or burdens on the relevant land. A registered title is guaranteed by the Land Registry, subject to any matters entered on the registers and to matters not covered by the registration system. Registration of a lease, when title to the freehold interest in the property has not been registered, will be subject to any matters affecting the freehold at the time when the lease was granted. 10 Norton Rose Fulbright April 2014

11 The formalities of buying land Contractual formalities Money laundering checks Types of sale: private sales, tenders and auction The contract Completion of the purchase Title Terms of any investment lease

12 A guide to commercial property investment in England and Wales The formalities of buying land Contractual formalities English law requires that an agreement for the purchase, lease or mortgage of land and buildings must: be in writing contain all matters expressly agreed be signed by all the parties be contained in one document, although terms may be incorporated by reference to other documents. The words subject to contract should be included at the top or bottom of any letter written during negotiations for buying, selling or leasing land. This avoids a binding contract being entered into by mistake at too early a stage. Buying land is a two-stage process. The first stage ends with a contract to acquire the land. It is not itself an immediate transfer of ownership, but commits the buyer to buy and the seller to sell the property. The second stage ends with payment of the price and the transfer of ownership. It is possible (but not usual) for the two stages to be concluded simultaneously. Money laundering checks Money laundering is the process by which the proceeds of crime are disguised so that their original source cannot be identified and the source of the assets or funds appears to be legitimate. In England, money laundering is a criminal offence and there has long been a significant onus on banks, other financial institutions and professional advisers to report suspected money laundering activities. However, the legislation in England is no longer restricted to the proceeds of drug, terrorist or other serious crime; it applies to the proceeds of any crime, no matter how minor, and includes, for example, tax evasion. A deliberate attempt to obscure the ownership of illegitimate funds is not necessary. Anyone investing in England must follow anti-money laundering policies and procedures and expect to provide all necessary details to their professional advisers to enable them to comply with their obligations under the anti-money laundering regime. Unless the required information is provided the advisers will not be able to act. Types of sale: private sales, tenders and auction If a property is being sold privately, reputable firms of surveyors or agents will usually market it to a selection of potential buyers and then select only one potential purchaser to negotiate with for a stated period. If good progress is being made that period may be extended by the seller if necessary, formally or informally. Nevertheless, either party can lawfully withdraw from negotiations at any time before a formal contract is signed without being under any obligation to the other. Property is sometimes sold by informal tender, such that the potential purchaser making the most attractive (but not necessarily highest) informal offer for a property will be the person with whom the seller starts serious negotiations. Again, either party can withdraw from negotiations unless and until the formal contract is signed. On other occasions, property is sold by formal tender, such that the successful potential purchaser is, on acceptance of his offer, committed to buying the property. Property can also be sold at auction. At an auction, the successful bidder will be required to sign the purchase contract and pay any required deposit before leaving the auction room, so all bidders must have carried out their due diligence before the auction: this can result in significant costs for the unsuccessful bidders. The sale of property at a public auction in England does not imply, as it does in some countries, that the sale is forced on the seller or is a distress sale. 12 Norton Rose Fulbright April 2014

13 Real estate group The contract On conclusion of negotiations, a formal contract (the detailed terms of which will have been agreed during the negotiating period) will be signed by the buyer and seller. A deposit is usually paid on signature of the contract and where paid it is usually 5 or 10 per cent of the purchase price. The balance is paid when the property is transferred to the buyer, usually within the following three to six weeks: a process known as completion. There are no formal rules or requirements as to the timing of completion and the buyer is free to negotiate a longer or shorter period before completion. The contract will provide for the terms on which the ownership of the property transfers from the seller to the buyer. These will include provisions for collection of any arrears of rent, for management matters, for disputes with tenants (if any) current at the date of the contract or arising between the date of the contract and the date of completion, and for the continuation, if desired, of maintenance contracts, employment of caretakers or other staff and other similar matters. A contract may be conditional on the fulfilment of agreed conditions such as obtaining planning permission for development. Any such conditions are a matter for negotiation. Unlike in some countries, raising finance would not be a normal condition. At or shortly following completion the buyer will also have to pay his agent s commission (if he engaged an agent to negotiate the purchase), his lawyers fees (which will vary dependent on the nature and size of the transaction and its complexity), stamp duty land tax (currently 4 per cent of the purchase price and any Value Added Tax for commercial properties with a value over 500,000) and registration fees at the Land Registry of a current maximum of 910. Title An investor will want his property to have a registered title with no blemishes. It is rare in England to find property which is not affected by any rights or covenants, mainly because there has been a market in property for hundreds of years in England, and most property has changed hands and been redeveloped many times during that period. Property is often affected by rights and covenants which are no longer of any relevance. Sometimes property is affected by rights and covenants which are still relevant, or which might be relevant. An example is a covenant restricting the use of land to, say, housing which may have been imposed 100 or more years ago, and may now have outlived its usefulness, but which would still be a concern if in fact the buyer did not intend to use the land for housing. It is common to require the seller to buy an insurance policy to benefit the buyer which protects against such covenants being enforced. Completion of the purchase On completion of the purchase, the buyer pays the purchase price (or the balance of it, if a deposit had been paid) and title to the property is transferred to the buyer. The formal document of transfer is then recorded at the Land Registry by the buyer s lawyers. The buyer is free to dispose of, and receive income from, the property at any time following completion of the purchase, whether or not registration at the Land Registry has been completed. Norton Rose Fulbright April

14 A guide to commercial property investment in England and Wales Terms of any investment lease If the property is leasehold, the terms of the investment lease under which it is held will need to be considered carefully. The following are some of the more important points: The length of the term of the lease. The amount of the rent payable to the landlord, or the formula for calculating that rent. The amount of control by the landlord over new lettings, repairs and alterations, and day-to-day management. Any restrictions imposed by the landlord on the use of the property or on redevelopment. Whether the landlord contributes to the cost of redevelopment, either by a capital contribution or by way of an adjustment to the rent payable to him. The circumstances in which it can be forfeited. These and other provisions of the investment lease will have a material effect on the value of a potential investment. They will need to be considered in detail by the investor with his lawyers and surveyors early in the negotiations. 14 Norton Rose Fulbright April 2014

15 The role of professional advisers Lawyers Taxation Surveyors and agents Managing agents

16 A guide to commercial property investment in England and Wales The role of professional advisers Lawyers Lawyers fulfil a number of different functions when acting for property investors. Most obviously, they will act for the investor in dealing with the legal aspects of acquiring a suitable property, documenting lettings of it if it is empty or as vacancies occur, and eventually handling the legal side of selling it. At each stage they will make certain that all necessary matters of contract and title are resolved. In the course of acquiring a property, lawyers make numerous enquiries about the property, asking questions of the seller and his managing agents (if any), the local authority and the local planning authority, and other public bodies. They will report on title to the investor before contracts are exchanged, confirming that the title is good and marketable, or giving details of defects. In addition, lawyers will draw attention to any matters of environmental and planning risk based on the information received from an environmental survey and/or an evaluation of relevant planning documents such as planning consents. Often such risks, if not properly addressed, can delay, or potentially put a stop to, property transactions. Areas of risk for investors may include that the land they intend to invest in is contaminated (resulting in potential liability), is in a flood risk area and/or that planning permission cannot be obtained to use the land for its existing or intended use (affecting the investment value of land). Other areas of risk could include those arising out of asbestos being in buildings on the land. This is a common risk in buildings built prior to 1990 and costs can be associated with the removal and/or ongoing management of that asbestos. Checks should be made to ensure that a risk assessment as required by the Control of Asbestos Regulations 2012 has been competently carried out, an asbestos register is maintained and that any recommendations made as a result of the assessment have been attended to. Lawyers will also report on the extent of the liability of existing tenants to pay for insurance, repairs and management of the property, on the terms and enforceability of rent review provisions in occupational leases and on other matters of importance relating to the return achievable on the investment. A number of firms of lawyers have wide experience of property investment matters and will make that experience available to their clients. Lawyers in England do not usually limit their advice to purely technical and legal points but are expected by their clients to make their own views known on commercial matters. After an investment property has been acquired, the investor s lawyers will document leases to new occupiers and advise on other property management matters relating to occupiers, acting on the instructions either of the investor or of any managing agents who have been appointed by the investor. Taxation A potential investor should always obtain tax advice before incurring any significant professional fees, in order to establish the extent of the tax liabilities associated with the transaction (such as a transfer tax called stamp duty land tax which is payable at up to four per cent of the price) and the tax he will have to pay on the income from the property and on any capital gain made on a later sale. Taxation matters are dealt with in the Taxation section of this guide but initial discussion with the investor s lawyers and accountants (or other tax adviser) is essential. Surveyors and agents It is usual for commercial property to be bought and sold using the advisory and introductory services of surveyors or agents. There are many large reputable firms of agents in all parts of England, many of whose partners or directors will be members of the leading professional bodies the Royal Institution of Chartered Surveyors or the Incorporated Society of Valuers and Auctioneers. Agents and surveyors are customarily remunerated by being paid a commission by the person who engages them, who might be either the seller or the buyer. Those fees are a matter for negotiation, but are generally expressed as a percentage of the sale or purchase price; in a large transaction one per cent is not unusual. Frequently, the arrangement is that no fee is paid if the property is not sold or bought, as the case may be, although expenses may be payable. 16 Norton Rose Fulbright April 2014

17 Real estate group A buyer or seller is only required to pay agents it has appointed. Unlike in some countries there is no law in England under which a person who buys a property after receiving details of it from an agent he has not appointed has to pay the agent, although the buyer must be careful not to appoint the agent by a course of action such as dealing through it. Many individuals other than qualified surveyors, and other organisations, also give advice to prospective buyers and sellers of commercial property. Some are long-established, reputable firms but, as a general rule, the most professional and wide-ranging service is provided by those firms and companies whose members have a recognised professional qualification. Engaging security, cleaning and maintenance staff. Managing agents also handle rent reviews, advising on and negotiating new levels of rent with existing tenants, and negotiating rents with new tenants. They will advise whether, in order to maximise the income, a particular building should be let to a single tenant or to a number of tenants and whether a refurbishment of the building is required. For an investor to obtain the maximum yield on his investment, he needs a dedicated team of professional advisers pro-actively managing the property. Some firms of surveyors based in London have a particular reputation for the purchase, as investments, of properties in the course of development either before construction has started or while it is being carried out. All of the major firms will advise on the investment yield likely to be achieved from any particular property or type of property, and will advise on their view of the likely future performance of different types of property (offices, business parks, distribution centres, industrial or retail) in investment terms. Managing agents It is convenient for an investor to have a managing agent to manage the investment for him. The major firms of surveyors all have management departments and are accustomed to supplying the following services: Advising on the terms of existing or new leases from a management point of view Assessing the creditworthiness of new tenants Installing systems for ensuring prompt payment of rents, service charges and insurance premiums and for accounting to the investor Managing the property and attending to all necessary repairs and renewals Administering the service charge fund Norton Rose Fulbright April

18 Choosing a suitable investment property Selection of property Existing or planned development Planned developments Contaminated land and environmental liability Flood risk Development control/zoning Condition survey of an existing building Buying a new building Insurance generally Buildings insurance Public liability insurance Environmental insurance Protection of employment Energy efficiency

19 Real estate group Choosing a suitable investment property Selection of property The criteria for choosing an investment property will obviously vary for each investor, and he should discuss the detailed requirements with his agents. Whether to buy an office property, as opposed to an industrial or retail one, will depend partly on the investor s view of the future growth prospects for the type of property concerned and partly on the location of the chosen property. An investor will want to be satisfied that the property he is buying will be easily marketable when a sale is required, although the ease of disposal and the price which is obtainable will to a large extent depend on market conditions at the time. All these matters will be of considerable interest to subsequent investors as well. Where a property is not free from difficulty at the outset, an investor will have to consider not only his own view of the difficulty, but also the potential views of any lender financing the purchase and any future investor to whom he may wish to sell the property. Existing or planned development One of the decisions which the investor will have to take is whether to buy a completed property or one being developed. Among the possibilities are the following, although there are many others: a building which is already an investment property occupied by tenants and being sold by an existing investor a completed development, being sold by a developer on completion of the project, either with tenants in place, or with an obligation on the developer to find tenants and, in the meantime, itself to pay rent to the investor Planned developments In the case of a planned development, there are two usual methods by which an investor can buy the property, the first called forward funding and the second called forward purchase. In a forward funding, the developer and the investor will enter into a complex agreement under which the investor will buy the land at the start of construction, the developer will construct the building in a manner acceptable to the investor, and the cost of construction will be met by the investor in stages. During, or at the end of, the construction period, the developer may be obliged to find tenants, and guarantee a minimum return to the investor both before and after finding tenants for the property. The developer is paid a profit depending on the rents achieved on letting the completed building. Forward funding is commonly used by UK developers when selling to pension funds, life assurance companies and other institutions. Where leases have not yet been agreed with future occupiers, the investor will have considerable control over the form of the leases and the quality of the tenants to whom the property is to be let. The terms of occupation and status of the occupiers section of this guide should be read with this in mind. In a forward purchase, the developer and the investor will enter into a complex agreement under which the developer will construct the building in a manner acceptable to the investor, and the investor will buy and pay for the property on completion of the development. During, or at the end of, the construction period, the developer may be obliged to find tenants, and guarantee a minimum return to the investor both before and after finding tenants for the property. This method is not now used very much, unless a development is already in the course of construction, partly because stamp duty land tax is payable at up to four per cent of the price of the completed development, whereas under forward funding it is payable on the price of the undeveloped land, so is much less. a proposed development or (less usually) a development in the course of construction. taking advantage of relaxation of planning controls over existing use of buildings so that they can be used for different uses that attract greater revenue. Norton Rose Fulbright April

20 A guide to commercial property investment in England and Wales Both a forward funding and a forward purchase allow a developer to finance developments while removing exposure to fluctuations in the investment market during the construction period. They allow investors to lock into the yields current at the time of the agreement, and (usually) to buy at a lower price than would be payable for a property which is completed and leased to tenants. Contaminated land and environmental liability The contaminated land regime in England provides for strict and retrospective liability for the remediation of contaminated land. This raises the prospect that innocent owners or occupiers of land may find themselves liable to criminal fines and penalties (and/or civil damages) for contamination liabilities pre-dating their period of ownership or occupation of the land. In order to manage risks of liability, environmental surveys should be carried out by experienced technical environmental consultants prior to the land being purchased. The types of survey available include: (a) an assessment of potential contaminants and other potential environmental risks based on analysis of past and current site use carried out by reference to current and historic publicly available registers, plans and records (a Desktop Survey); (b) a Desktop Survey and a site visit which does not involve intrusive investigations (a Phase I Survey); and (c) a Desktop Survey and intrusive investigations such as taking soil and water samples (a Phase II Survey). Where contamination is identified, an appropriate remediation strategy will need to be designed. Appropriate remediation should render the site fit for its current use. Site assessment and remediation can be an expensive, time consuming and complex process involving liaison with the relevant regulatory authorities. In addition, not all sites are deemed suitable for remediation, particularly if the costs may exceed the value of the land after development. Lawyers work regularly with environmental consultants to make certain that a thorough analysis of potential risks is undertaken. Legal advice should always be sought in relation to the best potential legal remedies and/or measures that can be put in place to minimise risks. In addition, legal assistance may be provided to explore the availability of commercial insurance for identified environmental risks. Flood risk Due to the increase in flooding in recent years, insurers are now using more detailed flood risk information to assess a site and raising premiums for higher risk sites. Therefore, prior to land being purchased, specific flooding reports should be considered. These reports will identify whether further investigation and/or potential flood risk mitigation measures are required and such issues may need to be taken into account during the transaction negotiations. Lawyers work regularly with environmental consultants to make certain that a thorough analysis of potential risks is undertaken. Development control/zoning With few exceptions, the construction of any building or structure in England requires approval from the local authority before it is carried out, as does a material change of use of the land or building. The approval is called a planning permission and may be subject to conditions which will be binding on all future owners and occupiers. In areas of architectural or historic interest, and for individual buildings of particular merit, there is much tighter control over how land or the buildings on it can be altered or used. Additional consents can be required in these cases called conservation area consents and listed building consents, which, again, may be subject to conditions. An investor would expect that a building which he is intending to buy has all necessary permissions but, nevertheless, will need to make sure that no development has been carried out without permission and no condition has been breached before committing himself to the 20 Norton Rose Fulbright April 2014

21 Real estate group purchase not least because local authorities have a range of enforcement powers including significant criminal penalties which can be levied against the current owner notwithstanding that it may not have been that owner who carried out the unauthorised development. This will be especially important where a building is listed as there is no statutory time limit on listed building enforcement action. The local planning authority may require payments to be made towards local infrastructure either via an agreement entered into before the grant of planning permission or through a local development tax called the Community Infrastructure Levy. Agreement will need to be reached with the seller as to who is to be responsible for these payments. Condition survey of an existing building Although it is likely that the cost of maintaining and repairing an investment property will be borne directly or indirectly by the occupiers, the investor will nevertheless need to be satisfied that the building was competently constructed and is suitable for its purpose. For this reason, he should instruct a building surveyor to carry out a detailed examination of the structure of the building, and its plant and machinery where applicable, at an early stage during negotiations. The leading firms of surveyors and agents all employ condition or building surveyors who are able to carry out such an examination. They will produce a comprehensive report on the condition of the building, highlighting areas where works may be necessary in the short to medium term. The buyer may then use the faults highlighted by that report either to seek a reduction in the price or to require the seller to carry out any necessary remediation work before completion of the purchase. A building surveyor will also draw the buyer s attention to those areas where specialist advice will be necessary; in the purchase of a typical office building, the building surveyor may not feel able to comment on the condition of the lift machinery, the heating and air conditioning systems or the safety of the electrical installation in the building. In such a case, the building surveyor will recommend suitable specialist advisers who will be able to carry out appropriate tests and inspections. The cost of a structural survey will depend on the size of the property, the amount of time which the surveyor has to spend at the property, and other more general matters such as the degree of urgency. It is advisable to agree the basis of charging before the survey itself is carried out. The charges of any specialists who carry out specific tests and inspections will not be included in the basic survey cost. Buying a new building There is no implied assurance by a seller in English law that the physical condition of a building is satisfactory. In addition, the buyer of a building has very limited rights under English law to claim compensation from the builder or designer of the building for faults in construction or design. Accordingly, the buyer of a new building will normally demand express warranties from the building contractor and design team, and sometimes also from the seller, as to the physical condition of the building. In the case of the building contractor and design team these will be warranties that they have used all due care in carrying out their duties and that they will maintain adequate indemnity insurance in case of any claim against them in the future. Most developers will require that as part of their terms of engagement the building contractor and design team agree to allow future investors to rely on such warranties. Breach of such a warranty will entitle the buyer to compensation. The level of compensation may (depending on the terms of the warranty) extend beyond the cost of remedying defects to include compensation for any consequential losses, whether of income or of capital value. Warranties normally last for 12 years, so this is a point which is relevant not just to new buildings, but to ones up to 12 years old. In the case of a sale by a buyer within the 12 year period, the buyer would normally assign the benefit of the warranties to its purchaser. Ten-year insurance policies giving insurance cover against damage arising from faulty design or construction may also be obtained for new buildings or buildings under construction, but such policies are rare and expensive in England. Norton Rose Fulbright April

22 A guide to commercial property investment in England and Wales Accordingly, a buyer who is unable to obtain any contractual rights against the builder or designer of a building, and who is not able to negotiate an agreement with the seller that he will put right defects, may well have no right to compensation if defects arise in the building after completion of the purchase, although in the case of a building which is let, the buyer may well find that the cost of remedying the defects falls on the tenant. Insurance generally Insurance policies in England are contracts of indemnity, indemnifying the insured against loss caused by the occurrence of a named risk up to a stated amount. Insurance on buildings is not tied to an index of construction costs or other index, as in some countries. No particular period of notice is required for cancellation, unless a long-term contract has been entered into rather than the more usual annual one. Buildings insurance Insurance policies on buildings usually cover the entire cost of rebuilding the property, demolition costs, professional fees and value added tax. Risks covered are fire and other usual perils such as storm, tempest, burst pipes, overflowing tanks, aircraft, articles dropped from aircraft and terrorism (if available). War risks and damage caused by radioactivity are usually excluded, and flood cover is subject to special arrangements in areas liable to flooding. Loss of rent during any likely rebuilding period is usually included at an additional premium. Insurance cover for new buildings in the course of construction is normally maintained by the building contractor. Insurance of the main structure of buildings being repaired or refurbished is normally maintained by the owner, with the building contractor carrying the risk of fire and other perils to the works. Public liability insurance The liability of a property owner to the general public (for example for articles falling from a building) is covered under most buildings insurance policies. During construction work, the contractor generally maintains the insurance cover against this risk. Environmental insurance The liability of a property owner to remedy land contamination may be covered under environmental impairment insurance policies. Whilst such policies are becoming more widely available, high premiums often deter investors from purchasing them. Protection of employment In common with the rest of the EU, English law provides protection for employees on the transfer of a business. For this purpose ownership of a tenanted property counts as a business, so buyers of tenanted property where the seller employs (either itself or through managing agents) people who work at the property such as security guards, receptionists and maintenance staff will be required to take over the employment of those people when they purchase the property. Most non-uk investors would achieve this by appointing a managing agent who would itself employ the people. Energy efficiency The energy efficiency of a property is increasingly regarded as an important consideration when buying commercial property. One reason for this is that the development of a new era of zero-carbon buildings (further to the Government s aim for all commercial buildings to be zero carbon by 2019) may result in existing energy inefficient buildings becoming less attractive to tenants (thus requiring the owner to carry out costly renovation works or to reduce the rent). In addition, energy efficient buildings are considered to be cheaper to run than their inefficient counterparts (and thus are attractive to future tenants). 22 Norton Rose Fulbright April 2014

23 Real estate group When purchasing a property, the following energy aspects need to be considered: The Carbon Reduction Commitment Energy Efficiency Scheme (CRC) The CRC is a mandatory emissions trading scheme for the UK, designed to cut energy use and encourage investment in energy efficient technologies. Participating organisations include those which (either on their own or as part of their corporate group) consume roughly 500,000 in electricity per year and have a half hourly electricity meter. To encourage energy efficiency, CRC participants are required to purchase sufficient allowances to cover their annual carbon dioxide emissions arising from energy use. Purchasing an inefficient property may have significant cost for CRC participants. Energy Performance Certificates (EPC) The Energy Performance of Buildings (England and Wales) Regulations 2012 require that sellers, prospective landlords or persons carrying out the construction of a new building provide an EPC and Recommendations Report on the sale, letting or construction of a building. EPCs contain information about the energy performance of a building. Essentially they show an energy rating for a building which is based on the characteristics of a building and its services (e.g. heating and lighting). Norton Rose Fulbright April

24 Terms of occupation and status of the occupiers The length of the lease The rent Rent reviews Responsibilities of the landlord Responsibilities of the tenant Assignment by the tenant Tenants security of tenure Pre-lettings of new developments Anchor tenants Green lease clauses

25 Real estate group Terms of occupation and status of the occupiers The length of the lease The period of a lease is called the term. There is no custom or rule in England that occupational leases must be of any particular length. Traditionally, institutional investors have looked to grant occupational leases for terms of 25 years or longer, with no provision for early termination by the tenant. More recently, with the market changing more in favour of tenants, occupational leases have tended to become much shorter, for terms of 10 or 15 years, with the tenant sometimes being able to terminate the lease after the fifth or tenth years. The rent Rent is almost always expressed as an annual amount (such as 100,000 a year) but paid by equal quarterly instalments in advance. On the grant of a new occupational lease it is normal for there to be a rent free period, the length of which will depend on the rent and the then current market terms: it can range from a month to several years. Leases of shops and hotels are sometimes granted on the basis of rents based on turnover or profits. Such arrangements are not always acceptable to institutional investors because of the uncertainty of the prospective rental income from year to year, making valuation of the property equally uncertain, but they are slowly becoming more usual, especially where there is an agreed minimum rent. Rent reviews Because occupational lease terms in England are relatively long compared to other countries (where terms of five years or less are common), there is normally provision for the rent to be adjusted to the open market rent every five years. This is called a rent review. The reviewed rent is normally agreed between the agents acting for the landlord and the tenant or, if they cannot agree, settled by a third party who has experience of similar types of property. Most rent review clauses provide that the rent cannot be reduced at review (such a review being known as an upwards only rent review). This is an advantage to an investor, who knows that his return will not drop below a certain level. The negotiation and settlement of rent reviews will have a fundamental effect on the income from the property and therefore on its capital value, so rent review clauses are given very careful attention both when reviewing the occupational leases before an investment is bought and at the time of a review. Rent reviews based on increases in published inflation indices are becoming more popular with tenants. Responsibilities of the landlord An investor will want to be certain that the occupational leases impose no financial obligations on the investor as landlord other than those which can be recovered from the tenants. Thus, a lease of the whole of a building will impose on the tenant all of the responsibilities for maintenance and repair of the building, both inside and out, with the landlord s role being restricted to collection of the rent and, in most cases, insuring the building (the tenant reimbursing the landlord for the insurance premiums). A lease of a whole building will not normally include a service charge and therefore a landlord cannot normally recover from tenants the fee of any managing agent it appoints to collect rent and monitor the building. With a building containing more than one tenant the position is more complicated, but the principle remains that the landlord should receive a clear rent net of any costs of maintaining the building. Responsibility for repair and maintenance of the building (as opposed to decoration and cleaning of the premises occupied by the tenants), together with day-to-day management, is left with the landlord, who requires the tenants to pay a service charge to cover the cost of complying with these obligations. In practice, an investor will probably engage managing agents to administer the building. One area of particular concern for an investor will be any shortfall between the costs of operating the building and the amount recovered by way of service charge, since this will affect the investor s net return. Norton Rose Fulbright April