Commercial Property: Exchange Of Contracts, How We Get There?

In this article, we look at the key terms in a contract for the sale and purchase of a freehold commercial property.

Why do we need a property contract?

This is a legally binding commitment between the seller and the buyer for the sale of the property at the agreed price. Contracts for the sale of land are only valid if they are in writing and contain all the terms that have been agreed between the seller and the buyer. It is absolutely essential that the contract is clear and correctly reflects what has been agreed. The interests of both seller and buyer need to be carefully balanced.

Where do we start?

It seems obvious, but the basics need to be right: the names and addresses of the parties, full details of the property, title numbers of the property if it is registered, details of the unregistered title if it is not, details of any occupational leases and occupiers, and confirmation of the price that is going to be paid on completion.

What comes after the basics?

Here are some of the important terms that we need to consider in every commercial property contract:

• Unconditional or conditional: Many contracts are not conditional on anything and provide a legally binding commitment to complete on a certain date. However, it is also possible to make a contract conditional on a future event occurring, for example, the buyer obtaining planning permission, or the seller regaining possession from a tenant. Careful drafting is needed to ensure that the rights and responsibilities of both parties are balanced, and that the obligations to satisfy the condition are clearly set out, specific, and enforceable.
• Completion date: This is the date the parties agree that completion will take place. Unless otherwise agreed, the contract does not automatically terminate if the parties fail to complete on the agreed date. The contract continues until one party serves a notice to complete, making time of the essence. This notice can only be served by a party ready to proceed and must follow the correct procedure. Once served, the defaulting party has at least ten working days in which to complete. Serious consequences can arise if completion does not occur, including interest charges, loss of deposit, and liability for losses.
• Deposit: Typically, a buyer pays a deposit of 5% or 10% to the seller upon exchange of contracts. This is usually held by the seller's solicitor until completion. It gives the seller comfort that the buyer is committed, while protecting the buyer against seller insolvency.
• Environmental matters: A contract can allocate liability for the future cost of remediation of contamination to either party. Specific wording is required to reflect any agreement on this point.
• Vacant possession: Is the property being sold subject to leases and occupiers, or is it a sale with vacant possession – meaning it is empty, clear of rubbish, and free of tenants? If sold subject to leases, the contract should detail all occupiers and the relevant lease terms.
• VAT: If applicable, the contract will set out whether VAT is payable. Depending on the VAT status of the parties, it may be possible to treat the sale of a let property as a Transfer of a Going Concern (TOGC). Input from accountants is essential to structure this correctly.
• Capital allowances: The contract can allocate capital allowances between the parties. These can be valuable, so expert input from accountants is needed before exchange.
• Leases: If the property is subject to occupational leases, the contract should list them and deal with related issues: arrears, rent reviews, service charge reconciliations, rent apportionments, transfer of rent deposits, and property management between exchange and completion.
• Mortgages: The contract should include the seller's obligation to repay any existing mortgages and provide evidence of repayment to the buyer following completion.
• Chattels: If the buyer wants certain items left at the property, this can be included in the contract, along with any apportionment of price to reflect their value.
• Risk and insurance: The contract must address allocation of risk if there is a gap between exchange and completion. If the property is damaged in the interim, the contract should set out who bears the risk.
• Title issues: The contract deals with the seller's title and any defects. The buyer will have conducted title investigations pre-exchange. If issues arise, the contract may require the seller to provide indemnity insurance or otherwise resolve the defect prior to completion.
• Standard conditions: These refer to the Standard Commercial Property Conditions (SCPC), a standard set of industry terms commonly incorporated by reference into commercial property contracts. They cover technical matters such as delayed completion and misrepresentation.
• Exchange of contracts: This happens once all terms are agreed and both parties are ready. It is usually carried out via a phone call between the solicitors, following Law Society protocols. The transaction becomes legally binding at this point. Completion – the payment of the purchase price and transfer of ownership – can happen days or weeks later or simultaneously, which is common in modern transactions. Simultaneous exchange and completion remove the risk of delays or property deterioration.