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Selling Commercial Property subject to a Lease

Are you selling a property that is subject to a commercial lease? Are you wondering how the lease might affect the sale?

Are you selling a property that is subject to a commercial lease? Are you wondering how the lease might affect the sale?

When a commercial property sale has the addition complexity of being subject to a lease it is not just the impact on valuation that is important to consider. The existence of a lease is something that will certainly add to the complications of a sale of commercial property, so it is important to take legal advice in order to establish how the lease should be dealt with in relation to the commercial property sale. Here are some of the legal issues that will need to be considered:

Additional property due diligence

A buyer of a property that is subject to a commercial lease will almost certainly want copies of all of the following documents, as applicable:

  • the lease agreement or licence to occupy
  • any supplemental licences (for alterations, for example, or changes of use)
  • deeds of variation
  • rent review memoranda
  • rent deposit deeds
  • underlease
  • charges
  • notices served on and by the tenant
  • details of any legal proceedings issues in relation to the lease
  • details of any pending rent reviews or lease renewal negotiations

In addition, a well-advised buyer will ask for replies to CPSE2 enquiries, which are applicable where a commercial property is being sold subject to a lease, in addition to the replies to CPSE1 enquiries, which are applicable to any commercial property sale.

For more information

Please do not hesitate to contact an Everyman Legal Solicitor on 01993 893620 for a free discussion or email geoffrey.cotterill@everymanlegal.com

How does a seller deal with rent, insurance rent and service charges?

On the sale of a property that is subject to a commercial lease the rent will usually be taken care of at completion by way of an apportionment between the seller and the buyer. Following completion of the sale the Seller will be required to send a rent authority letter to a tenant explaining that the property has been sold and accordingly future rents should be paid to the buyer.

Insurance rent and advance payments of service charge are similarly dealt with by way of an apportionment at completion between the buyer and the seller. However, where the service charge is subject to balancing payments at the end of the service charge year the contract for sale made need to make provision for how this will be dealt with/apportioned at the end of the service charge year.

How can a seller protect itself against further liability under the lease?

A landlord has contractual duties to his tenant under a commercial lease. There is no automatic legal release for a landlord on the sale of a commercial property that is subject to a lease unless the lease contains a provision that requires the tenant to give such a release. This means that, technically, a seller will still be liable to perform all of the landlord’s obligations under the lease. Therefore, it is usual for a seller to ask the buyer for an indemnity that the buyer will observe and perform all of the landlord’s covenants under the lease. If the buyer fails to do something then the seller is able to claim any costs, claims and expenses that he might incur from the buyer’s failure to do so.

How are rent deposits dealt with?

The purchase of a commercial property will expect to receive the benefit of a rent deposit deed. If the lease is a “new lease” under the law (entered into on or after 1 January 1996) then the purchaser will automatically inherit the benefit and the burden of the rent deposit deed on the sale of the property. However, if the lease is an “old lease”, the landlord’s obligations under it do not run with the land and do not bind the buyer of the property.  The purchase will therefore have to contain an indemnity from the buyer to observe the form of covenants in the rent deposit deed.  So far as the tenant’s obligations are concerned, the seller of the freehold can assign the benefit of these unless specifically prevented from so doing under the rent deposit deed.  If either of these cause difficulties, a new form of rent deposit deed would have to be entered into with the tenant which the tenant is unlikely to agree to.

In either case, a seller of property that is subject to a commercial lease should also note that under the law he will remain liable under the covenants in the rent deposit deed unless an express release is obtained from the tenant. Sometimes, therefore, both a seller and a buyer want access to, and control of, the deposit money in order that they can each discharge their obligations. If this a problem, the most effective solution is for the buyer to enter into a direct rent deposit deed with the tenant (if the tenant is willing to do so) where the tenant releases the seller from his obligations. A solicitor will be able to provide you with legal advice on the contract terms necessary to protect your interests.

Our dedicated team of solicitors, based in Witney, Oxfordshire, would be happy to answer your questions.

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