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REAL ESTATE INVESTMENT IN THE UKThe Legal Perspective

02 | Real Estate Investment in the uk – The Legal Perspective

A gUIdE foR THE oVERSEAS INVESToR

Buying real estate in London and across the uk can often be a daunting task, just like entering into any type of transaction in a foreign country can be. This guide offers some insight into how the legal system in England and Wales operates and is aimed at covering the basics of investing in the uk real estate market for overseas investors – it is not an exhaustive guide. There are many details about how the law works that you will need to know more about.

For further advice please contact:

Ian Brierley [email protected]

1. THE fAcTS 03

Types of ownership 04

Demonstrating your ownership 04

2. BUyINg yoUR pRopERTy 05

Due diligence – know your property 06

The Building itself 07

What can you do with it? 08

Is it healthy? 09

The contract 10

The money part 11

Closing the deal 11

3. TAxATIoN 12

Tax on acquisitions 13

Tax on rental income 13

Tax on disposal 13

4. MANAgINg yoUR pRopERTy ANd dEALINg wITH yoUR TENANTS 14

How does the law affect how you deal with your tenants? 15

What do landlords and tenants normally agree in their leases? 16

Appointing a property manager 17

coNTENTS


THE FACTSThere are some basic facts you need to know before you buy a property in England and Wales (Scotland has a separate legal system and is outside the scope of the guide). Read this section before progressing to the step by step guide.

TypES of owNERSHIp

In England and Wales there are three types of real estate

ownership: freehold, leasehold and commonhold.

Freehold ownership (also known as having a freehold

interest) is permanent ownership which lasts forever.

Leasehold ownership (or holding a leasehold interest) lasts

only for a fixed period – although this can range from a

few months to hundreds of years. Typically, for example,

investment properties are held as leasehold interests for

between 125 and 999 years. Leasehold interests also have

a “reversionary” owner – that is, someone to whom the

property will be returned once the lease expires. Whilst

the leasehold interest lasts, the relationship between

the leasehold owner and the reversionary owner will be

governed by the terms of the lease agreement – this can

impose significant obligations on the leasehold owner,

including the payment of rent.

Commonhold is a new form of ownership – it is a hybrid

between leasehold and freehold. It has not yet been tested

and it is very rare. It is not relevant to the investment

market.

dEMoNSTRATINg yoUR owNERSHIp

There are two systems of demonstrating ownership of a

property in England and Wales; through a “registered title”

or an “unregistered title”.

“Registered title”

Almost all properties in England and Wales are registered

by the Land Registry. Any dealings with a freehold interest,

or with a leasehold interest where there is more than

seven years left to run, are now subject to compulsory

registration at the Land Registry – any legal ownership is

not valid until this has been done.

Once a property has been registered at the Land Registry

it benefits from a guarantee from the Government.

Registering a property with absolute title comes with the

highest form of guarantee the Government can provide.

The records maintained by the Land Registry cover

everything which may be relevant to ownership of a

property e.g. rights of way which benefit or burden the

property. The records are open to public inspection;

anyone who cares to look can find out who the current

owners are and how much they paid for it – if there is

certain information you wish to keep off the public record,

it is up to you to apply to the Land Registry to get this

information withheld.

“Unregistered title”

An old-fashioned system whereby proof of ownership of

a property is in a physical bundle of documents – or title

deeds – through which ownership can be traced over

the years. This way of demonstrating ownership is being

phased out. It is very unlikely that you will come across an

unregistered title when you buy an investment property.



Before buying your property you will need to be aware of the history of the building, and any defects or problems with it. The planning permissions that allowed it to be built, agreements with neighbours, its history and environmental issues also play a huge part in what you can and cannot do with your building – you can find out about all of this through a rigorous and comprehensive “due diligence” process.

BUyINg yoUR PROPERTY


what you need to know what you need to do

A seller and buyer may enter into a “lock out” agreement – whereby the buyer has “exclusivity” over the property for a set amount of time and no one else can buy it. A “lock in” agreement, which attempts to force a buyer to proceed with the negotiations and enter into a contract is unenforceable.

Discuss with your lawyers whether you need exclusivity before starting the expense of the due diligence process.

The responsibility of carrying out due diligence (pre-contract searches and enquiries) on a property rests firmly with the buyer. It is vital that you understand any matters existing, or intended to be created, near the property you plan to buy which would adversely affect the value or proposed use of your property.

get your lawyers to search various information registers such as Local Authority records, the Environment Agency files and Land Registry entries – the sources used will depend on the location of and type of property being acquired.

It can take up to four weeks for responses from each of these information registers to be received.

If you need to accelerate your enquiries, this is possible – in some cases the seller may have “prepared” these for the property in advance.

As well as various information registers and Government sources, you can ask the seller to provide you with information about the property.

get your lawyers to ask the seller of the property to reply to a standard set of enquiries covering key issues of concern which may affect the value, occupation or use of the property – the replies to these questions may give you the right to claim damages or even cancel the purchase if they turn out to be untrue. Sometimes these replies are covered by warranties in the sale and purchase contract itself.

In some cases you may be offered a “certificate of Title” – this document is issued by the seller’s lawyers (following a standard format) and contains various statements of information about matters which due diligence normally covers, it can be used as a full or partial replacement for the normal due diligence process. The seller will also provide a warranty to you that the statements in the Certificate are correct – if they turn out not to be, you may have a claim against the seller or their lawyers.

The extent to which you undertake due diligence is up to you, but you should seek to satisfy yourself that your intended purchase is fit for purpose.

dUE dILIgENcE – KNow yoUR pRopERTy



You need to know that there are no defects in the building (such as leaks, inadequate heating systems or poor quality foundations) which could make it unattractive for tenants or less valuable.

Visit and inspect the building – a full technical inspection by expert specialists may be required. Some defects may only become visible sometime after the building has been completed (even with careful inspection). If defects do appear, make sure you know your rights.

If the property was built or substantially refurbished more than 12 years ago it is unlikely that any claim can be made against the builders and designers if a defect arises in the building. In some cases this is the situation after just six years.

A review of contracts relating to the construction works is very important.

Sellers do not normally accept responsibility for the design and construction of a building.

you will need to establish whether you will be able to sue the company which actually carried out the design and construction works – your lawyer will need to review the contracts between the original owner and the companies that designed and built the property to establish your right to sue for the cost of repairing any defects using the “collateral warranties”*.

So, what if you do not have any collateral warranties?

There may still be an insurance policy against building defects which has been put in place at the cost of the original owner – this gives you some cover against faults in construction works, but these policies are not common.

As an alternative to collateral warranties the original construction contracts between the first owner and the builders and designers of the building may contain clauses giving “third party rights” – these allow certain buyers to sue the builders and designers directly.

If these clauses exist their validity needs to be thoroughly checked.

Sitting tenants – sometimes there are guarantees from the original owner in favour of the sitting tenants, which, legally, any buyer of the property must take on. If you buy the property you may have to compensate the tenants if a defect is found in the building.

Lawyers need to check whether these guarantees exist.

The seller may tell you that defects have already been discovered in the building.

Arrangements will have to be made for resolving or managing claims which have been made against the people who were responsible for the defects – a full technical inspection by specialists may be required.

THE BUILdINg ITSELf

It is wise to be aware of the history of any building you buy, what defects there may be and how can you protect yourself against hefty payouts. Read to find out…

* Collateral warranties are guarantees that a building has been constructed properly. They are issued by the builders and designers and are addressed to buyers (and sometimes the buyer’s bank and the tenants of the building)


knowing what your neighbours are up to and the plans for the surrounding properties may affect your decision about buying the property. Additionally, you may wish to evaluate the feasibility of developing the property you wish to buy in the future – being aware of planning and zoning permissions and restrictions is vital to a well thought out transaction.

wHAT cAN yoU do wITH IT?


In the UK the development or use of land and buildings usually requires formal planning permission granted by a local authority. The “planning permission” will define the nature and scope of development that is allowed to take place.

As part of due diligence, a review of the planning history of a property should be carried out to assess the impact of the conditions of the current planning permission and any relevant Section 106 agreement*, as well as the prospects for any future development of the site of the property.

decisions on applications for planning permission are made by reference to the planning policy, which is set at national, regional and local level – each local Planning Authority prepares a Development Plan for their area, setting out the planning policy.

For example, in London, the Mayor has published the overarching London Plan and each London Borough publishes its own Local Development Framework.

The development plan provides the strategy, policy and proposals for any area or region for the next five to ten years and will be highly relevant in regard to any application for planning permission as it gives an indication as to what redevelopment opportunities may be realistic.

Check the Development Plan in the region in which your building sits as part of the due diligence process.

A local planning authority may designate one area as a “conservation area” – this is an area of particular architectural, historical or environmental importance – development is likely to be restricted in these areas – in particular before you can demolish your building you may require “conservation area consent”.

Checks for “conservation areas” should be part of the due diligence process.



A “listed building” is a building of architectural or historical importance, registered by English Heritage – the body responsible for protecting the historic environment in England. It is an offence to make internal or external alterations to a listed building without permission and liability for a breach of this can be passed on to a new owner.

Check whether the building you want to buy is “listed” as a whole or in part and then check for breaches of listed building control as part of the due diligence process.


Environmental investigations into whether there is any contamination in the ground under a building or in the materials of which it is built are an important consideration when carrying out pre-acquisition enquiries.

It is wise to carry out a desktop study of the property to ascertain its previous uses and evaluate the risk of contamination. The cost of this is fairly cheap. However, if the survey does reveal areas of concern, a further more detailed investigation will need to be carried out – you will need the permission of the seller to go on to the property to do this.

You may be liable for the cost of remediation works to land even if you did not cause the contamination.

Most contracts now expressly specify that the buyer is acquiring the property in full knowledge of any previous contamination risk. If you agree to such a clause you need to be sure that proper investigations have been carried out.

IS IT HEALTHy?

* Section 106 agreements or planning obligations may restrict or regulate the activities that may be carried out on the land and may require money to be paid to the authority for things such as enhanced public transport or public open spaces.



The contract needs to be approved – it is usual for your lawyers to conduct the due diligence before entering into the contract, however, it is possible to enter into a “conditional contract”*.

The seller’s lawyers draft a contract which they send to your lawyers for approval.

All contracts for the sale of real estate must be in writing and signed by both parties – the contract must incorporate all of the agreed terms. If any are omitted the contract is invalid.

Once you are clear on the contract, go ahead and sign!

It is rare to have a contract which is conditional on a bank agreeing to fund your purchase.

Be aware that in most cases the bank’s process must begin and run before the contract is approved. do not sign a binding contract until you are sure that any funding you need will be available.

When acquiring a property it is usual for the process to be divided into two stages. The first stage is to enter into a contract including paying a deposit (commonly 10% of the purchase price) – once an unconditional contract is entered into both parties are obliged to perform. The second stage comes later (see under “Closing the deal”)

Sign the contract, pay the deposit and exchange your copy of the contract for one signed by the seller.

Simultaneous exchange and completion is normal where there is a corporate “wrapper” – i.e. where the buyer acquires the issued share capital in the holding company which owns the property.

THE coNTRAcT

Once your due diligence process is complete, it’s time to look at the fine print…

* In a “conditional contract” the parties involved agree a condition or a series of conditions which must be fulfilled before the buyer acquires the property, such as a condition which says that the buyer does not have to proceed if the due diligence reveals a serious problem.



If you’re borrowing money from an independent lender to purchase your property the lender will normally wish to take a “charge” or “mortgage” over the property – giving them legal controls over what can be done with the property. Before the lender confirms that they will, in fact, lend…

…the property will usually require a valuation by surveyors and there will need to be a review by the bank’s lawyers of all the information revealed by the due diligence process – alternatively, your lawyers may provide a “certificate of Title” addressed to the lender, telling the lender the same things as the buyer is finding out through due diligence.

Commonly a seller will have borrowed money to buy the property in the first place and, therefore, any charge or mortgage in favour of the seller’s lender will have to be removed.

If the seller repays the loan using the money it receives from your purchase this will be automatic – but your lawyers need to ensure that this is dealt with.

If your building is leasehold – a lender will not normally lend money if the lease agreement requires the leasehold owner to pay a full rent for that interest. Additionally, if the leasehold can be brought to an end early (through insolvency or breaches of a requirement in the lease agreement) lenders will not normally want to lend.

Lenders should be willing to lend if the leasehold interest is for a long term with a low rent and has no early termination rights. In this case most lenders hare happy to treat it as a “virtual freehold” which will give them security.

THE MoNEy pART…


Completion of the process is also known as “closing” the deal and usually takes place 7 – 28 days after the contract is entered into, but it can be simultaneous with the signing of the contract. If the purchase involves the acquisition of an existing leasehold interest the revisionary owner’s consent may be required before you can complete.

obtain any necessary consents from the reversionary owner (either you or the seller may have to pay his legal costs – the contract between you and the seller will need to cover this). On the date the contract says that completion should take place, sign the formal transfer document (and any other documents required to deal with other issues – including the mortgage or charge in favour of your lender), and pay the rest of the purchase price.

Any tenants which remain will start paying rent to you, the new owner, following completion. The seller may have collected some rent in advance and you will be paid a share of that.

Ensure that the contract covers whether you get a share of service charges the seller has already collected but not spent on providing services to tenants and how any arrears are dealt with.

If the purchase involves the acquisition of an existing leasehold interest the reversionary owner should be notified.

Ensure your lawyer gives the necessary notification.

After closing the deal there are formalities which must be dealt with.

Stamp duty land tax at the relevant rate will normally need to be paid (detailed in the “Taxation” section below). It is also likely that an application to the Land Registry will need to be made.

cLoSINg THE dEAL!


TAXATIONThe uk tax system is a complex regime. We have included some brief details below on what you need to know about the key tax issues which may affect you as an overseas property investor. Talk with your lawyer about receiving detailed tax advice tailored to your particular circumstances.


TypES of TAx

Tax on acquisition

Stamp Duty Land Tax (SDLT) is payable by the purchaser on the acquisition of uk land. SDLT is payable by reference to the purchase price and varies depending on the price paid. The top rate for commercial property is 4% and applies to all purchases in excess of £500,000. Purchases of residential property attract different rates of duty depending on price and acquisition structure.

The top rate for residential purchases is 7% (purchases over £2 million) A 15% rate applies to purchases of certain single residential properties worth over £2 million made via non-natural persons, and structuring advice should be taken.

In an attempt to avoid or minimise tax on acquisition, uk property is often sold by way of off-shore corporate or unit trust wrappers where the shares or units can be transferred free of SDLT.

Value Added Tax (VAT) (currently 20% and payable by reference to the purchase price) can be charged to the purchaser where the seller has opted to tax its interest in the property. In practice landowners invariably exercise the option to tax in order that they can recover VAT on overheads and other costs incurred by them in the ownership of the property.

On acquisition of an income producing asset, the transaction can amount to a “transfer of a business as a going concern” such that the transfer can be free of VAT. However, for this to apply the purchaser must also opt to tax prior to completion of the transaction.

Tax on rental income

Non-resident investors (whether they be individuals or corporate) will generally pay income tax (currently 20%) on the rents generated from the investment.

The income tax is levied on the net income with deductions available for capital allowances (a form of depreciation allowance for expenditure on plant and machinery), and revenue expenditure such as repair costs and interest on borrowings to acquire the property.

Non-resident landlords are subject to uk withholding tax so that tenants and property managers are obliged to deduct the 20% income tax unless HM Revenue & Customs (HMRC) agree that the rents can be paid gross. In giving consent, HMRC will want to check that the non-resident landlord will be of sufficient standing to account for and pay the tax on the net rental income.

Where any landlord exercises the option to tax then it must charge VAT on the rent.

Tax on disposal

Non-uk residents are generally not subject to uk tax on capital gains from the sale of property unless it has been held for the purposes of a permanent establishment, branch or agency for a uk trade. Profits arising from the sale of property in the course of development or trading transactions can be treated as income rather than capital gains and therefore may be subject to tax in the uk.

As a company incorporated in the uk is automatically resident for tax purposes it is important to ensure the acquisition vehicle is held off-shore to avoid tax on capital gains.


MANAgINg yoUR pRopERTy ANd

DEALING WITH YOuR TENANTS


How doES THE LAw AffEcT How yoU dEAL wITH yoUR TENANTS?

■ Your tenants will have signed lease agreements with the previous owner. If you attract new tenants you will need them to sign new lease agreements with you. A lease agreement creates a legal interest in land, and a tenant under a lease agreement may have the benefit of some statutory protections. A lease affecting property will bind anyone buying that property.

Freehold interests can be bought subject to headleases and leasehold interests can be bought subject to “sub-leases” or “underleases”.

■ A lease agreement does not always have to be written down and will be created in any case where the owner of premises grants an occupier the exclusive possession of the premises; for a definite period of time in return for the payment of rent.

In England and Wales landlords and their tenants are generally free to agree the terms of a commercial lease, however, there are a number of rules which will apply whether the landlord and the tenant like it or not…


The Landlord & Tenant Act 1954 part II (“LTA 1954”) was introduced to protect the goodwill of tenants associated with business premises and specifies: security of tenure for business tenants so that landlords can only terminate such tenancies in certain circumstances; the renewal of business tenancies at the end of the initial contractual period; and rights for tenants to receive compensation where a tenancy is not renewed at the end of the contractual period.

It is possible for landlords and tenants to agree that the LTA 1954 will not apply to a lease. This is known as “contracting out”. To do this effectively you must comply with certain preliminary formalities.

A commercial lease agreement which has not been “contracted out” can only be terminated at the end of the agreed term or by exercising a break – if it is not terminated in the agreed way it continues to exist on the same terms, including the rent payable. At this point a statutory tenancy arises – and a court procedure to agree a new contract has to be started.

If you cannot decide new terms a court will decide.

You, as the landlord, can oppose the grant of a new lease on the following grounds: where a building is to be demolished or reconstructed; where the tenant has been in persistent breach of covenant; where you may wish to occupy the premises yourself; or where you can provide suitable alternative accommodation.

You may be obliged to compensate the tenant for termination of the lease (if this involves demolition, reconstruction or where you may wish to occupy the building yourself).

The term of a lease agreement can vary – it is possible to create a lease agreement for a period of time (from a month to a year) which renews automatically at the end of the period until one party terminates the lease – this is a “periodic lease”. Typically, however, a lease has a defined start and end date. Long leases of 25 years or more are now less common than they once were in the uk, it is more often to have a lease of, say, ten years – reflecting the tenants need for flexibility. Break clauses can be and are often included in leases – this allows either party (if agreed) to end the lease agreement on a certain date by “exercising a break”.

Find out if there is a break clause or when the tenancy agreement will finish.

If a party seeks to operate a break clause they must comply precisely with the terms of the break, including any deadlines by which notice must be served.


wHAT do LANdLoRdS ANd TENANTS NoRMALLy AgREE IN THEIR LEASES?

■ The rent under a commercial lease agreement is usually represented as an annual sum but usually paid in advance in four equal instalments throughout the year. It is common for tenants to be offered rent free periods ranging from a few months to several years before the full rent becomes payable.

■ If rent goes unpaid the landlord will be entitled to claim interest on the amount outstanding. Depending on the financial strength of the tenant a landlord will often ask the tenant to pay a deposit of, say, six months’ rent at the start of the lease, which can be drawn down if the tenant fails to pay the rent on the due dates.

■ The level of rent is normally reviewed during the term of the lease, through: an open market review, which sets the rent as if the tenant was taking a new lease;

or, an index linked review, where the initial rent is agreed and then increased in line with a chosen index e.g. the Retail Price Index; or turnover rent, where all or part of the rent is a percentage of the turnover that the business earns at the property; or stepped rent, agreed between the landlord and the tenant at the outset of the relationship.

■ A change in the person actually occupying and using the property can happen in various ways – by way of assignment (where the existing tenant “sells” the lease agreement to another tenant), underletting (also known as sub-letting – where the existing tenant remains the tenant for legal purposes), or by allowing others to occupy the space. If there are no restrictions in the lease agreement a tenant can deal with its rights under the lease in any way it chooses. Landlords normally include controls on these changes (which are called “alienation”) in the lease agreement. This will help preserve your property’s investment value.


In a property with a single lease over the entire building, it would be usual for the lease to impose all responsibility for repair and maintenance on the tenant.

In these situations it is likely that you, the landlord, will have a responsibility to insure the building but recover the costs of its insurance from the tenant.

SINgLE LET pRopERTIES


In a property where there is more than one tenant, the responsibilities for maintenance, repair, operating and management are usually shared between the landlord and tenants.

Be clear on whose responsibility maintenance and repair is.

It is usual for the landlord to be responsible for common areas, shared services and the structure, and the tenants responsible for their own premises.

Be clear on who is responsible for which areas. Leases at multi let properties usually provide for the tenants to pay a service charge for the costs incurred by the landlord. The landlord normally prepares an annual budget for service charge which is paid by tenants through quarterly payments, followed by an annual reconciliation and balancing charge or credit.

As the landlord you will usually be required to fund any shortfall, such as service charges, where tenant contributions are capped, or where there are vacant parts of the property with no lease attached.

As part of the due diligence when purchasing a property you will need to make sure that all costs are recoverable under the leases.

MULTI LET pRopERTIES



For all multi let buildings it is likely that you will have a responsibility to insure the building.

Be sure that you are able to recover the costs of insurance from your tenant(s).

RIcS guidance Note – Service charges in commercial property sets out the industry standard best practice.

Refer to the RIcS guidance Note, which should be considered as a framework for managing all multi let commercial real estate with a service charge.

It is worth noting that where an asset includes any residential property (even if this is a minority part) there are specific statutory rules which govern the way in which service charges must be managed (assuming the residential leaseholders contribute to service charge).

Your property manager should be clear on whether or not the statutory rules apply and be experienced in managing the service charge appropriately on your behalf.

AppoINTINg A pRopERTy MANAgER

It is advisable to have a Property Manager supporting the due diligence process, to comment on relevant issues, and then appointed as agent, on behalf of the landlord, to assist with services from completion of the purchase. The services may include:

■ meeting your investment objectives, e.g. to preserve and enhance value or to facilitate a future redevelopment

■ maintaining comprehensive tenancy records

■ discharging their obligations under leases and ensuring tenant compliance with lease covenants

■ day-to-day tenant liaison and service satisfaction

■ ensuring compliance with relevant statutory risk management obligations

■ operating the property day-to-day on a sustainable basis including procurement of cost effective facilities management services

■ undertaking the financial administration of the property, including rent collection and service charge administration

■ ensuring that adequate insurance is in place to satisfy lease covenant and any lending institutions and administering any claims


dLA pIpER gLoBALLy coNNEcTEd

Investing is not always straightforward and relies on working with people who have a deep understanding of the local market, not just from a country perspective, but often from a regional or city perspective. As well as being a leading global law firm we pride ourselves on our local market knowledge and being part of our local business communities. We have more than 150 Real Estate experts based in London, Birmingham, Edinburgh, Leeds, Liverpool, Manchester and Sheffield.

Our dedicated teams in the uk and beyond have a vast range of skills and advise on areas including construction and engineering, regulatory, tax and funds law. We manage every type and size of transaction, quickly mobilising teams of any size.

DLA Piper is deeply rooted in the real estate industry. As we have expanded throughout the world, we have never wavered in our commitment to our real estate clients and the real estate industry. Our growth in the sector is directly linked to our clients’ growing needs.

Ian Brierley Head of Real Estate, UK T +44 20 7796 6232 M +44 7968 558 612 [email protected]

For further information please contact

Take a trip to the REALWORLD and discover answers to all of your real estate questions.

What types of property rights can be acquired?

What taxes are payable on real estate acquisitions?

What types of corporate vehicle are available to investors?

On this interactive website, you will find the answers to these questions and so much more. REALWORLD shows you how different property markets operate, highlighting the different elements of the investment cycle from funding to

development. REALWORLD will allow you to compare countries across the globe to help you evaluate your options.

Visit www.dlapiperrealworld.com to find out more.

STEp INTo THE REALwoRLd

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