Real State Law in the UK (2)

These are the highlights if you want to know the essential of Real State Law in the UK.  This entry was drafted by  McCarthy Denning Law Firm for”E-IURE COMPENDIUM” 2018. Link to e-IURE Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case “McCarthy Denning” is an excellent option in the United Kingdom

This is the second part of Real State Law in the UK. If you want to read the first part, click here.

1.-Legal Protection for Buyers and Sellers

In general, the law gives no special protection to buyers or sellers of UK property.  Those involved in property transactions will invariably use a solicitor to represent their interests.  It is the job of the buyer’s solicitor to ensure that the property being bought is free from undisclosed restrictions or obligations and that it is validly transferred at the correct price.  The Latin phrase “Caveat Emptor” or “Let the buyer beware” is the fundamental principle:  it is the responsibility of the buyer to ensure that it and its professional advisers carry out all appropriate due diligence to ensure that they understand exactly what it is that they are buying and all the implications which ownership of the property will entail before they commit to its purchase.

2.-Restrictions on Development

UK law prohibits the development of land without planning permission.  Development includes changing the use of land or carrying out building, mining or engineering operations on land.  A planning permission is a permission given by the planning department of the relevant local authority.  The local authority is allowed eight weeks in which to reach a decision on any planning application.

Some types of minor development are permitted without planning permission. Specialist advice needs to be sought on to understand what is and is not allowed is tightly controlled.

The law also requires that anybody carrying out building works must comply with building regulations and generally obtain a building regulation consent.  That is a formal consent from the District Surveyor (a local government officer) who will consider the plans and specifications of any building works before giving consent and inspect the progress of the works at key times and at their conclusion.

All local authorities prepare plans for how they want different parts of their areas to be used and developed.  Those plans are available to the public.  They will set out areas or zones where the local authority wishes to encourage particular uses (eg shopping, residential or industrial) and discourage other uses.  The local government will consider any application for planning permission in the light of these plans so that, for example, applications for industrial development in residential areas will not succeed.

3.-Leases

A lease is the most common way of holding commercial property in the UK.  The length of leases will vary depending upon the circumstances and requirements of the parties.  There is however a standard which is called an institutional lease.  Such a lease is in a form which might be granted by a major financial institution such as an insurance company, investment trust or property company.  Institutions tend to look for longer leases, eg: 15 years or more (though terms of 10 years and even 5 years are not uncommon).  Sometimes, landlords or tenants are given a right to terminate a lease before it expires.  The rent will usually be subject to review most commonly at 5 yearly intervals.  Rent reviews in the UK are almost invariably on an upwards only basis.  This means that the terms of the lease guarantee to the landlord that either the rent will go up in line with market rents or it will remain the same even if the market rent has fallen below the existing rental level.  It is very common for no rent to be payable for a short time at the beginning of a new lease in recognition of the fact that tenants will usually want to fit-out their new premises and not be able to trade from them for a while.

An institutional lease will also be a “clear” lease.  This means that the rent the landlord receives will be clear of any deductions to cover the cost of, for example, repairs and maintenance of the building, the supply of services to the building and the cost of insuring the building.  All these expenses will be payable by the tenant or (in a building containing a number of tenants), by all the tenants together.  These extra payments on top of rent are generally called a “service charge”.

In addition to rent and service charge, there are local taxes to be paid to the local authority which are called business rates.  These can be quite significant, particularly in cities.

The lease will impose obligations and restrictions on the tenant.  The obligation which is most significant from a financial point of view is the obligation to repair, decorate and, if necessary, re-build or pay towards the cost of rebuilding.  In an office block, for example, the tenant will be responsible for maintaining, repairing and decorating his own property.  He will also be responsible through the service charge to contribute towards the cost of repairing and maintaining the building of which his offices form part including all services to the building (eg lifts, air-conditioning and heating plant and systems and so on).  It is often the case that these expenses are not capped and if the building and its services are old, the tenant can face very significant extra costs through the service charge.

Some of the other important provisions in a typical commercial lease are as follows:-

• restrictions on use
• restrictions on alterations to the property
• restrictions on disposing of the property
• VAT is often payable on the rent of commercial property.

Any lease granted for more than 7 years must be registered at the Land Registry.

Tenants of property used for business purposes will often (but not always) have statutory rights to remain in the property when the lease comes to an end.  They will have to negotiate a new lease and pay a commercial rent, but the landlord cannot insist that they vacate unless special circumstances apply.  It is quite common for the statutory rights to be excluded by agreement between the parties.

4.-Stamp Duty Land Tax

Stamp Duty Land Tax (“SDLT”) is a tax payable to the government on land transactions.  Any sale of freehold or leasehold land or the grant of a lease at a rent gives rise to SDLT.  The tax is payable by the buyer or the tenant.  The legislation is frequently changing and advice should always be taken on the amount of tax payable on a transaction.  The method of ownership as well as a number of other factors can have a bearing on the amount of tax payable.

5.-VAT

Value added tax is generally not payable on residential land.  In some circumstances it is payable on the purchase price of commercial land and it is also often payable on rent and charged to tenants.   Professional advice should be sought in every instance.

6.-Setting Up in Business in the UK

The property choices for a business setting up in the UK include:

Serviced Office

These are usually small offices where office services are supplied as part of the package.  The extent of services varies between providers but normally they will include furniture, use of equipment (such as photocopies and fax machines), telephones and telephone answering, conference facilities and secretarial services.  The commitment is short term and the cost is relatively high.  Such arrangements, however, can be extremely flexible.

Short Term Licence

This is similar to a lease but very short term (i.e. 6 months to a year).  It would generally give the new business the space only.  The tenant would have to supply furniture, equipment and personnel.  There would be no security when the licence comes to an end.  Sometimes arrangements are granted on a rolling basis, that is they continue indefinitely until brought to an end by notice.

Lease

The minimum commitment would generally be for between three and five years.  Shorter periods are sometimes available from tenants who themselves have surplus space (ie by taking an underlease).  Landlords wish to be satisfied above all that the incoming tenant is able to pay the rent and fulfil the tenant’s obligations in the lease.  They want to see accounts and references that demonstrate this.  They may also require a guarantor or a rental deposit or some other form of collateral security.

Buy a Freehold

This would involve a major capital commitment and may be inappropriate for smaller businesses.  It does however avoid entering into longstanding obligations with landlords and avoids an ongoing obligation to pay rent and usually means there is more control over when an expenditure is incurred, for example to repair buildings.