A Guide to Selling Commercial Property in the UKLast updated 21 February, 2022
You may be seeking to sell a commercial property you already own or rent. Any good investor knows that this will eventually happen, and not everyone knows the best routes to take for an easy sale. Commercial property sales are handled differently than residential and you will need to understand the legislations that regulate the process of commercial property disposals, and what commercial property buyers are looking for from sellers. Read our top tips for putting a commercial building on the market.
The Steps for Selling a Commercial Property
As you would do when selling a home, you should make the property as appealing and presentable as possible to a broad audience, including prospective buyers. You must ensure that any potential owner can imagine operating their business from the premises.
Preparing Buyer Information
It is important to identify what a potential buyer will be looking for. Their main considerations are likely to be basic details about the property, including information about price, location and suitability for their business. Providing this and more extensive information in a buyers pack will help make their decision. A buyer pack might include:
Commercial Property Standard Enquiries (CPSEs):- a legal document (although not mandatory) containing a set of standard questions used to collect information for a commercial property prior to transaction whether freehold, leasehold, vacant or tenanted
Planning and Building Regulations Documentation:- these are established standards that had to be achieved in the construction and/or design of the building. Asbestos Survey:- undertaken within a building/property/structure with the purpose of identifying asbestos containing materials (this is only carried out if the property was built before 2000).
Fire Risk Assessment:- an organised evaluation of the building/property/structure to identify potential fire hazards and implementing safety precautions
Energy Performance Certificate (EPC):- measures the energy efficiency of the premises on a scale of A-G
It is always key to maintain communication with the buyer. To avoid delays in any sale transaction, the documentation should be provided to the buyer as soon as possible. While the above list sets out common items required, there may also be other documentation which may be relevant to a particular property transaction.
Other relevant information might include:
|Health and Safety File
|Electrical test Certificate
|Gas test Certificate
|Air Conditioning Maintenance Records
|Details of Business Rates
|Stamp Duty Land Tax
|Other documents detailing liability
Options for Selling
There are four routes open to you when selling. This will depend on the type of commercial property and other circumstances:
COMMERCIAL PROPERTY AGENT
The majority of commercial property in the UK is sold and bought through commercial property agents. They will be able to market the property and business to their database of prospective buyers. They can also assist in valuing other assets in the business and making sure all employment matters are dealt with.
You may want to sell directly to a property investor or business owner. The contact could come with posting either a non-disclosed advert in a local newspaper, using a listing agent, or searching online for a commercial property buyer. All negotiations are left between the buyer and the seller. It is worth noting however, that not all of these property buyers you may find online are genuine “principal buyers”. It is often the case that they are acting as a broker and are effectively playing the role of a commercial property agent, but often without the expertise.
It is worth asking the tenant if they would be interested in purchasing the freehold. The lease holds a major part of the business risk, so if the tenant can control that risk then it’s a great advantage to them. The offer to buy can lead to conflicts unless some rules and deadlines are put in place from the outset.
Vacant or Tenanted?
You should also consider whether you will achieve a better sale with a vacant or tenanted property. For some property owners, it is a lot easier to find a tenant who will run the business from the premises compared to seeking a buyer. For these reasons, paying rent and business rates is more affordable than paying commercial mortgage. In terms of taking on responsibility as a landlord, owners should bear in mind that an FRI (Full Repairing and Insurance lease) passes a lot of responsibility to the tenant, which in fact can be a more secure option than owning a vacant property.
Vacant buildings can remain this way for years, because the potential to redevelop far outweighs the short-term benefits of renting to a tenant. If the property has an income from a reliable business tenant then it is considered a safe and secure investment. If there is no income, then the space is practically worthless. If there is potential development for a vacant property, you will achieve a better sale price. A good example might be an old mixed-use building in an area where there is scope for it to be converted into flats.
Auction can be one of the quickest ways to achieve the highest price. In this case scenario, the seller is usually (but not always) the landlord of the freehold, rather than the business owner. There is a growing market for the auction approach and putting commercial office space up for auction often guarantees a fast transition from when the hammer goes down to the exchange of contracts, and is thus often attractive to those looking to sell off their property relatively hassle-free. If selling via auction, it must be just the property (tenanted or not), and not include the business that owns the property. This may not be the best solution for you if you are a commercial leaseholder.
How to Choose an Auctioneer
The choice of an auctioneer will depend on the type of property, tenure and development potential. There are specialist property auctioneers that focus on commercial property. Buyers who attend auctions are usually from corporate institutions, such as pension funds, who are looking for firmly established and secure investments that carry minimal risk. They may also be considering properties that are part-vacant, part-residential, or have development potential, which they tend to be more open to speculating on. If you would like more information on selling your commercial property at auction, please see our guide here: ()
Instructing a Commercial Agent for the Sale of your Property
We highly recommend that you choose the first option listed above. A professional commercial agent with the relevant expertise and competence can make a big difference to your sale proceeds. Employing a member of an accredited trade body, such as the Royal Institution of Chartered Surveyors (RICS), will normally provide you with a detailed valuation report before looking to market your property. They can provide you with an accurate appraisal, which will ensure that the price reflects current market conditions and is consistent with similar properties in the same area. All reputable agents carry personal insurance, which covers seller's damages if you receive negligent advice.
As well as hiring a commercial agent, you will also need guidance from a solicitor. Your solicitor will be responsible for a number of processes throughout the selling procedure. This will involve looking after any deposits, arranging the exchange of contracts, confirming monies have been transferred and answering any general inquiries. Any potential buyer will also hire a solicitor to handle the exchange of contracts, and thus involves a sale process:
- At the start of the transaction, a draft contract is sent out to the buyer’s solicitor, with any copies of property documents. Please see above for which documents you should provide in Preparing Buyer Information.
- If there is a mortgage secured against the property, they will liaise with your lender to obtain a redemption statement to check that sale proceeds from the property will be sufficient to redeem it.
- The buyer’s solicitor will review the draft contract and supporting paperwork provided. They will review, raise inquiries on and report to the buyer on the relevant CPSEs. Your solicitor will also respond to any inquiries raised by the buyer’s solicitor.
- Your solicitor will take any instructions you have given them before responding. Once any due diligence is completed, the documentation will need to be agreed upon.
- Once the buyer is satisfied and any requirements have been met, then both parties can proceed with the exchange of contracts and financial transfers.
Negotiating the terms of the sale, and agreeing on them in principle, will form the 'Heads of Terms'. These are not legally binding at this stage but do show serious intent, and are used by your commercial conveyancing solicitor when drafting the contract of sale. They will likely include price, the nature of the property, timescales, names of solicitors & any special conditions that will apply to the sale.
Marketing your Property
You can market your property with an agent of your choice, but it is important to make sure your agent understands exactly what you are looking to achieve. It can take from a couple of weeks to longer than a year to sell depending on market elements, such as local demand and price. Your agent should have an up-to-date understanding of local property values, so it is useful to provide them with the initial relevant information to assist in marketing property. Your agent will normally add to this with detailed descriptions and photographs, using their in-depth knowledge and history of previous sales. You will need to stage your commercial property with a view of helping potential buyers imagine running their business in the premises. Putting together a marketing flyer, taking interior and exterior images, investing money into improving property conditions and sharing within your business network can help make the property look more attractive and sell faster for a better price.
Costs will depend on a range of factors, but below is a list of selling costs to be aware of:
Commercial Agent fees:- Agents can make the process of selling property run more smoothly, but this can come with added costs. They will receive a commission, which is a percentage of the sale price. It is a competitive market, so it is worth discussing their fees with them before instructing them to sell your property.
Solicitor fees:- Solicitors usually carry out the required conveyancing for a fixed fee, but you may be able to negotiate a lower fee. so it is worth getting a number of quotes.
Mortgage Arrangement fees:- If you cannot transfer your existing mortgage for any reason, you may be liable to pay mortgage arrangement fees
Mortgage Redemption fee:- If you pay this off early, you may be liable to pay a redemption fee.
Capital Gains tax:- This will apply to any profit you make from the sale subject. You should speak to your financial advisor as you might be liable to pay capital gains tax
Removal costs:- You will have to remove any equipment, furniture or other assets in your commercial property that are not part of the sale. You will need to arrange for these to be removed at your cost.
Valuing your Commercial Property
Your agent will be able to help you with an accurate property appraisal, which will ensure that the price reflects current market dynamics. The Net Operating Income (NOI) is used to calculate and analyse the profitability of income-generating properties and determines their precise value. To calculate this, operating expenses are subtracted from the income that the property produces. This is also used as it can be hard to find similar properties in the area that have the same commercial purposes as your business. The calculation will also divide the NOI by your average yield rate, which is the sum of all other forms of income your property generates, such as parking structures or vending machines. The value of your property may be affected by proximity to rail and air links, footfall and shop frontage.
Accepting an Offer on a Commercial Property
If you receive an offer for your commercial property, they will go through your commercial agent. They will be required by law to inform you of this and will formally advise you on how to proceed. If you receive more than one offer, the following pointers can help you figure out which buyer to choose:
- Consider the position of the buyer and their financial status
- Look at whether they are a cash buyer, or will they have to apply for a mortgage
- If their mortgage is already secured, or if they have received a mortgage offer
If you have accepted an offer, a draft Sale Agreement will be prepared for you and the purchaser to approve.
Exchange of Contracts and Finalising the Sale of a Commercial Property
Once the contracts have been exchanged, the buyer will pay a deposit to the solicitor and a date for completion will be agreed upon. You will be ready to exchange the contracts when:
- Both parties are satisfied with the terms of the contract and any further searches of the property have been completed
- The buyer’s solicitor and the surveyor have carried out all the required inspections of the building
- Any conditional planning permissions have been granted and are no longer at risk of a successful legal challenge
- The buyer has the funds ready to complete the transaction
On the day of completion, the buyer will pay the remainder of the price and all legal factors of the sale will be completed. The mortgage lender will release the remaining money to the solicitor as well. The seller must hand over the keys to the property once this has taken place. Until you have exchanged contracts, you can change your mind and sell to another buyer if a lockout agreement hasn’t been entered. The sale is typically completed within a month, although it can occur much quicker, or be simultaneous with exchange in certain circumstances.
FAQs (Frequently Asked Questions)
- What Costs are Involved in Selling a Commercial Property?
The following costs need to be taken into account when considering selling commercial property. More details are found in the Selling Costs section of this article:
- Commercial Agent fees
- Solicitor’s fees
- Mortgage Arrangement/Redemption fees
- Capital Gains tax
- Removal costs
- Auction fees (if selling at auction)
- What are the Risks of Selling a Business Property at Auction?
The auctioneer will use a range of marketing tactics during the marketing period to help you sell your property. If your property doesn’t sell at the auction, the auctioneer will speak to interested bidders to try and sell it. Auctions have no guarantees that the property will reach the price wanted. If a property does not sell at auction, it will incur fees. Since auction is a one-time event, costs will not be refunded if the property does not sell.
- What Happens if a Commercial Property for Sale is Vacant or Tenanted?
Generally, commercial property owners will place a tenant in their property for the short-term benefits. A short lease tenancy might be a good idea for the property owner, while they wait for the property to sell. Finding a tenant is probably easier than finding a buyer. In some cases, it might not be worthwhile putting tenants in a vacant commercial property, as a building with development potential will be seen as a safe and secure investment, and will be worth more if it yields a good income.
- What are Heads of Terms?
Once you have accepted a suitable offer for your commercial property, you and the buyer can begin to negotiate the terms of the same, also known as the Heads of Terms. They are likely to include:
- The nature of the property or extent of the land being sold
- Any rights retained by the seller
- Timescales, the time allowed for the sequence of events
- The names of the solicitors who have been appointed