This article presents some insights into the processes by which international trustees may ensure that they are best placed to acquire the better UK commercial and residential investments, particularly in the recently reviving City/central London market. Investors have been seeking to take advantage of realistic pricing, the fall in sterling and the absence of leveraged buyers, but there has been fierce competition for prime property. This article provides a summary of the acquisition process and some points on setting up and implementing an acquisition strategy.
There are three principal stages to the acquisition of property in England. The first is the Offer Stage, at which properties are either marketed or sourced and an offer made and accepted on a ‘subject to contract’ basis. In the current market, there has been a limited supply of prime property and significant competition from many sectors including international investors and UK funds, institutions and individuals. Many prime properties are offered off-market to a small number of selected bidders, often with an informal tender to submit best bids. Speed and an ability to demonstrate the prospect of a quick and certain purchase are all-important at this stage.
Next comes Exchange of Contracts, the stage after an offer is accepted ‘subject to contract’ at which lawyers undertake due diligence and negotiate and exchange the contract – a binding agreement for sale arises. Generally, a buyer will be expected to exchange within five to ten working days of a receipt of a full legal package. Lawyers undertake a full exercise in due diligence, checking all title, planning, construction, tax and other legal matters with surveyors undertaking building surveys, floor measurements and testing of services. Contracts are exchanged on the basis that the buyer has accepted the property and its title and is not entitled to raise any further enquiries. This is the stage of principal activity and liaison between trustees and their advisors.
After exchange, the parties proceed to the Completion Stage with document execution and other formalities leading to the actual transfer of the property. Completion is often between ten and 20 days after exchange of contracts. Where trustees are lining up a related intra-trust loan, the final terms and particularly the interest rate will be settled.
If international investors and their trustees have decided to invest, it is important that they have an effective strategy for the process of property acquisition particularly in terms of:
- selecting the tax structure;
- observing the tax structure through proper management and control by the trustees and any company directors involved;
- assembling the acquisition team;
- settling all necessary procedures for bidding, exchanging and completion; and
- identifying and understanding issues likely to be relevant for trustees and the directors of off-shore companies on acquisitions.
For UK tax reasons it is very often appropriate for a property acquisition to be made by a company incorporated outside the UK, the shares of which will normally be controlled by a trust created by an individual investor. There are thus three separate parties on the buyer’s side: the directors of the company, the trustees of the settlement that controls the company and the investor himself (or herself).
Offshore tax structure
For an offshore tax structure, it is vital that key decisions as to the management and control of the trust, the property owning company and the property itself are conducted offshore. Otherwise, the eventual gain on sale of the property may be taxable in the UK when the whole point of the structure is to keep the re-sale profit out of the UK tax net.
An initial strategy should be put in place to ensure that company directors, trustees, the investor and lawyers liaise on property acquisition procedures so that from offer through to completion of the purchase and eventual management of the property it is the individuals who are directing the project and making the decisions. Trustees and lawyers need to ensure that the client is fully briefed as to the importance of this offshore management and control.
Trustees may wish to consider at an early stage setting up in-house onshore service companies. These offer limited liability in the context of employing outside professionals to undertake any required post-completion management and development. It means accepting that the activities of the service company will give rise to a taxable profit in the UK, but setting up such a company contains the issue and reduces areas of potential dispute with the Revenue authority.
There are several matters that trustees may consider in setting up a process to ensure efficient bidding and actioning of due diligence. Once a property is sourced, the trustees will need to submit an offer letter that is most likely to secure acceptance of the bid. Trustees should in advance liaise with the team to devise a standard form letter, particularly setting out:
a) the track record of the trust in acquiring properties;
b) the identity of the purchasing entity;
c) details of available funding;
d) the identity of the acquisition team;
e) confirming the timing for the purchase; and
f) (if applicable) giving reassurance as to the Value Added Tax (VAT) status.
Given the commitment of time and funds in undertaking due diligence once an offer is accepted, trustees should ensure in advance that they have standard form exclusivity letter to put to the seller. This ensures that the seller will be obliged to deal only with the buyer and to remove the property from the market for a set period. For the letter to be of value (in that it imposes an enforceable damages obligation on the seller for any breach), it should specify the sum to be paid to the buyer in the event of breach – this figure may represent estimated abortive surveyors’ and lawyers’ fees.
Trustees should ensure that legal opinion letters as to the validity of the purchasing entity’s obligations and execution of documents are available in a standard form with the process for issue clearly identified – this will ensure that delays are minimised.
Trustees may wish to have regard to the following matters as part of the formation of the initial strategy.
(a) Acquisition of special purpose vehicle (SPV) owning the property rather than the acquisition of the property itself.
As Stamp Duty Land Tax at 4 per cent is payable on acquiring prime properties, sellers often offer buyers the opportunity to purchase the shares in the special purpose vehicle that owns the property; no duty is payable. Buyers and their advisors will often need to make a quick decision as to whether to accede with the seller’s offer to sell the SPV; relevant issues are:
- establishing that, in accordance with the tax structure giving rise to the ownership of the property through an SPV, there is proper evidence of offshore management and control. Often, the board minutes and other company documentation is inadequate to enable the buyer to satisfy itself that it will be able to demonstrate to Revenue and Customs that the company has been effectively managed and controlled offshore;
- generally the due diligence takes longer and is more costly;
- trustees will be concerned to obtain warranties and indemnities in respect of liabilities (particularly tax liabilities) of the SPV;
- where warranties and indemnities are given, these are often by trustee companies limited to the assets of the relevant trust.
On commercial property acquisitions, VAT is a key factor. Generally, commercial properties are sold on a Transfer of a Going Concern (TOGC) basis, which means that although the seller has opted to charge VAT on the property, no VAT is actually payable on the purchase price. As it is the seller’s liability to pay any VAT that is payable if the sale is deemed not to be a TOGC, the seller will insist that the buyer registers for VAT and opts the property for VAT. The buyer will be required to comply with the TOGC procedure and to indemnify the seller in respect of any VAT. There are instances when the seller requires security from the buyer in respect of this indemnity.
Accordingly, for offshore trustees purchasing through a new SPV the trustees need to be able to demonstrate to the seller that the purchasing entity will become VAT registered and will opt the property for VAT in accordance with the sale contract. A competing UK property company or fund will generally not have this issue and therefore any need to reassure the seller.
(c) VAT opted office buildings where the purchasing entity may wish convert to residential use or to occupy through its private office
A number of prime London West End buildings originally built as substantial houses but subsequently used as corporate headquarters have been coming to the market; these may be of particular interest to international investors. Early VAT consideration is advised particularly where the purchasing entity may wish convert to residential use or to provide occupation for a related private office.
(d) Lawyers’ role at the offer stage
Lawyers may assist in supporting the offer to the seller’s agents – for example offering clarification as to the structure of the purchase and the buyer’s ability to meet required timescales and undertaking any initial checking of title/leases.
Commercial property contracts are likely to contain buyer’s indemnities for example in respect of any VAT liability (as indicated above) and for any future environmental liability.
(f) Auction purchases
Special procedures and provisions apply to auction purchases. From the management and control perspective it is important for the trustees to identify the appropriate person to bid. Also, trustees need to consider the arrangements to authorise and indemnify the bidder (the bidder may be personally liable) and to place the funds for the deposit payable on a successful bid.
Trustees and the team should identify the process for agreeing the terms of any required intra-trust loan and particularly the amount and interest rate on market terms. This is to ensure no delay once due diligence is underway.
(h) Sales by insolvency practitioners
A current market feature is the number of disposals by insolvency practitioners. To avoid uncertainties at offer/acquisition stage, trustees should be briefed in advance as to the particular aspects of insolvency sales. Key features are the more limited information available about the property and practitioners generally insisting on limited liability with little underlying security.
The matters covered by this article are based on acting for international investors in the recent market and are intended to assist offshore trustees in achieving an equal or, perhaps, a better footing as regards competitors for the better properties. A strategy that has regard to these matters may well pay off… ‘time spent on reconnaissance is seldom wasted’!
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