What you need to know when undertaking commercial property searches

Whether you are purchasing or leasing on behalf of your client, the onus is on the purchaser to be absolutely clear what the risks involved are. And in truth they will be looking to you as their solicitor for guidance and advice.

And whereas with residential conveyancing the value of the property may be a few hundred thousand pounds, commercial property values run into the millions of pounds and therefore the need to mitigate risk is much increased.

Purchasing vs Leasing

Clearly the biggest difference is affordability. But there are many similarities in the process for your clients. It is important to ensure whether they are the purchaser or the leaseholder (depending on the terms of your lease) they understand they are responsible for everything to do with that property.

It is important to advise them that SDLT, for example, is still payable on leases. Upon acquisition of an interest in property, even where the interest is acquired for a short term under a lease, SDLT is due based on the rent over the length of the term. Generally speaking, the longer the term and the higher the rent, the more likely that SDLT will be payable.

It is also compulsory to register commercial leases over seven years at the Land Registry.

Understanding the Risks involved in a Commercial Property transaction

If your client doesn’t know what the potential issues are, they cannot budget or prepare for them, or even decide to walk away before they sign any paperwork. You will also need to be sure that the property can be used for what your client’s intended use is, before they commit to paying rent for years at a time.

There is a reason commercial agreements, whether they are purchasing agreements or lease agreements, are complicated! Any attempt to simplify the complex legalities only risks ambiguity further down the line. Concise drafting ensures that any unintended consequences of the agreement, whether that be years down the line (including successors in title), can be avoided.

Poorly drafted leases often end up in expensive legal proceedings where the decision ultimately ends up in the hands of the courts.

Mitigating Risk on Commercial Property transactions

One of the most effective ways to mitigate risk for clients when it comes to commercial conveyancing is to undertake commercial property searches on their behalf .

These searches provide research on what has happened and what may happen to a particular property and the surrounding area including:

• planning applications that may be relevant to the property, either current or historic,
• building control history
• nearby infrastructure, road schemes and motorways
• flood risk
• new or intended developments
• contaminated land

We would encourage all Commercial Transactions to undertake a Local Authority search and Drainage and Water searches. The main purpose of the searches is to look into any plans that may affect the property in anyway and to ensure there will be no unpleasant surprises and hidden-costs. A drainage and water search (CON29DW) will also outline the existing layout of drainage infrastructure.

More often than not these will both cost more than a standard residential report.

Environmental search providers offer a two stage report, depending on the complexity of the site and the value of the transaction. In most cases, a desktop survey will suffice, using existing datasets to understand if historic activities could result in liability for the property owner under relevant contaminated land regime and if remediation is likely to be required.

They will also be able to tell you if environmental permits are held for the property or by neighbouring properties and if current operations in the surrounding area could cause contamination of the property

The second stage is an optional site visit to undertake further research. These are completed by specialists who subsequently provide a full report for the client and/or lender.

Developers and commercial property transactions are increasingly concerned with legislation around Local Air Quality Management and the implementation of over 550 Air Quality Management Area, or AQMAs, already allocated in Great Britain, which are spread across 239 Local Authorities and cover a total area of 3,600km². Air Quality Management searches will help with the early indication of existing and future air quality issues, ensuring clients are aware of potential future changes.

Energy and Infrastructure reports will highlight any relevant planned changes and mapping for key infrastructure like High Speed 2, energy exploration including 'fracking,’ renewable energy initiatives like wind farms /turbines and solar farms and in London these will also consider Crossrail.

Case Study: A hole lot of trouble

In 2013, a housing developer bored piling shafts through an underground railway tunnel in London.

The subsequent report by the Rail Accident Investigation Branch (RAIB) highlighted the need for vigilance when it comes to development on sites which may have been used historically for other purposes.

The report identified that the developer and builder in this case were not aware of the tunnel until the incident because:

• they had not been advised to conduct a specialist Network Rail search when the site was purchased in 2010
• the tunnel itself was omitted on most standard mapping, including all current and historic Ordnance Survey maps and plans. It is Ordnance Survey policy not to show railway tunnels considered to be part of an ‘underground system’ on its maps. Importantly, maps showing underground railways often show a stylised, but incorrect, alignment;
• The developer proceeded without understanding the significance of a Land Registry entry for the development site stating ‘so much of the sub-soil as was vested in the Great Northern and City Railway is excluded from the registration’ (this railway company no longer existed but its assets, including the incident tunnel, have passed to other organisations).

The full report makes for interesting reading and it still available here: https://assets.publishing.service.gov.uk/media/547c8fb940f0b60241000157/R032014_140213_Old_Street.pdf

As with any commercial conveyancing transaction, there are inherent risks. The role of commercial property searches is to mitigate the risk where it can and provide a degree of reassurance not only for the purchaser, but also for the lender.

For more information on what we can offer click here to view our commercial property searches webpage or speak to a member of our team on 0800 197 1757.