Sale of commercial property: a guide

The sale of commercial property is very broadly similar to selling residential property, but there are additional matters to consider and far more variables. In addition, the procedure itself is a little different, and it tends to take longer.

Preparing to sell commercial property

Just as with residential property, maximising both visual and legal ‘kerb appeal’ is essential. Decluttering is crucial, as are addressing necessary repairs and cosmetic issues. Remember, a potential purchaser needs to be able to visualise running their business from the premises.

It may be that you are selling your commercial property with a tenant already in situ. If so, your preparation should include ensuring there is a robust tenancy agreement in place.

Commercial tenants

On the sale of commercial property, a buyer may wish to occupy the property themselves. If commercial tenants are in occupation, you will need to consider issues such as serving notice, break clauses and dilapidations. It will also be important to know whether or not the tenant has security of tenure under the Landlord and Tenant Act 1954.

Valuing commercial property

Valuing commercial property is always more involved than with residential property. A host of factors come into play. Whether you opt for a full RICS valuation or a market appraisal, it will depend upon the building and its state of repair, its location, the advice you receive, and ultimately, personal choice.

A formal RICS valuation is also known as a Red Book valuation after the RICS Red Book, which provides rigorous guidelines for Chartered Surveyors on how buildings should be valued. Appraisals are faster and are usually provided by your commercial estate agent.

Buyer’s information pack

On the sale of commercial property, it’s crucial to understand what information will be important to a potential buyer. While not essential, putting together a buyer’s information pack is a good idea, so everything they need to make a decision is in one place. This might include (but is certainly not limited to):

• property deeds/Land Registry title documents;
• planning permissions, building regulation paperwork, use classes and lawful use certificates;
• energy performance certificate (EPC);
• information on business rates and other costs;
• an asbestos survey (if the property was built before 2000);
• replies to Commercial Property Standard Enquiries (CPSEs). Many standard CPSEs can be pre-prepared. Remember that your buyer can rely on the accuracy of your answers. Incorrect or misleading information can result in rectification or legal action;
• Fire Risk Assessment and maintenance records, together with a Health and Safety record;
• VAT registration documents and copies of options to tax; and
• Capital allowances information.

Selling costs

It’s essential to understand and budget for all of the various costs involved in the sale of commercial property. These may include:

• Surveyor’s fees for surveys, valuations and appraisals.
• Commercial Agent’s Fees – expect to pay between 1% and 3% of the property value, but just as with a residential agent, it’s always worth negotiating.
• Solicitor fees – your commercial property solicitor will provide you with an itemised quote to include their own fees plus disbursements. Disbursements are fees payable on your behalf by the solicitors to outside agencies such as the Land Registry and the local authority.
• Third party fees – for example, you may need your Landlord’s consent to the sale and a fee will be payable for that.
• Mortgage redemption fee – if you have a mortgage on the property and pay it off early, you may have to pay an early repayment fee.
• Capital Gains Tax (CGT) – you should discuss with your accountant or financial adviser whether the sale will generate a liability for CGT, and if so, whether this can be mitigated.
• Removal costs – any furniture, equipment or other assets in the property which are not included in the sale will need to be removed.

Marketing the property

When considering the sale of commercial property, most people choose to instruct a commercial agent. Before selecting an agent, it’s worth spending some time looking to see how they are marketing their current commercial stock, both locally and on platforms such as rightmove, Realla and Commercial People.

Once you have instructed your agent, it’s helpful to provide them with the buyer’s information you have prepared. Your agent will use their experience to add to this a detailed description, photographs and floor plans.

Another option you may consider is selling the property at auction. One advantage to auction sales can be that all parties will have undertaken a lot of the preparation work in advance of the hammer coming down. The price achieved will be uncertain, though the benefit is that the sale will be contractually agreed at the auction.

Heads of Terms and Due Diligence

Once you have accepted an offer, the agent will draw up the Heads of Terms, which is a pre-contractual agreement stipulating key clauses and providing a clear route towards concluding due diligence, followed by completion. Heads of Terms are not compulsory on the sale of commercial property but are recommended as they usually help to expedite the process and avoid nasty surprises after the contract is drawn up.

Due diligence is mainly a matter for your buyer. They will probably wish to carry out a survey (and possibly more than one type of survey), and you should expect a range of additional enquiries. The sale of commercial property is mainly subject to caveat emptor (‘let the buyer beware’). Even so, as the seller, you are obliged to provide prompt, accurate and detailed replies to any enquiries raised.

Be prepared for further negotiation at this stage if the buyer claims that any work required involving capital investment lowers the property’s value.

Exchange of contracts and completion

Following the completion of due diligence, your solicitor will request and accept the deposit on your behalf and arrange for contracts to be exchanged. On completion day, upon receipt of the balance of purchase monies, the transfer document will be dated and keys released to the new owner. If the property is sold subject to the ongoing occupation of a tenant, then they will be notified of the change of landlord.