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A. ACQUISITION OF REAL ESTATE
Applicable legislation
Contracts are primarily governed by case law. There are also additional statutory provisions relating to real estate transactions, including the Law of Property Act 1925 and the Land Registration Act 2002 and related regulations.
Is the purchase of real estate assets by foreign investors subject to restrictions?
No.
Do different legal regimes apply to the transfer of title to different kinds of real estate (commercial, residential, manufacturing)?
No, although contracts for the sale of commercial property tend to be drafted in a different way from those for the sale of residential property, and are governed by a separate set of "standard conditions". Where the property is an investment property, specific provisions are required to cover the management of the property, arrears, apportionments and other matters.
Do mandatory pre-emption rights apply to the sale of real estate assets?
Pre-emption rights are not imposed by statute. The owner of real estate may grant such rights to a third party so that he cannot dispose of the property without offering them first refusal.
Is expropriation (compulsory purchase) possible?
If so, under what conditions?
Local authorities and certain other bodies have powers of compulsory purchase where the acquisition of land is necessary for a proposed development. Compensation is available based on the value of the land acquired. Procedures for compulsory purchase can be protracted but most cases are concluded by negotiation between the acquiring authority and the real estate owner.
Is real estate registered?
If so, is this official information made available to the public?
Not all land is registered. Since 1 April 1990 (and before that in some areas) it has been compulsory to register land in England and Wales. However, this obligation to register only arises when the land is subject to certain transactions, such as a sale. It is also possible to register land voluntarily, and the Land Registry provides certain financial incentives to do so. Despite this, a considerable amount of land in England and Wales remains unregistered.
Once registered, the details of ownership of the land and certain title documents are made available to the public.
Is transfer of title recorded?
Can other related deeds (for example preliminary sale agreements) be recorded?
Yes. A buyer must register the transfer in order to be able to demonstrate their title to the property in the future. Registration must take place as soon as possible after transfer.
Contracts for the sale of land can also be registered to ensure the seller cannot transfer the land to a third party without them being subject to the buyer's contract.
Do buyers usually carry out due diligence?
If so, what due diligence is typically conducted and what is its timing (i.e. before or after contract execution)? Is there any protection for the buyer during the due diligence period (for example, an exclusive right to negotiate or buy)?
Yes. Buyers should rely on their own investigation of title, searches and survey.
The buyer's lawyer will review the title information provided by the seller's lawyer (including copies of the registered title, if applicable). He will also carry out a standard set of searches, including a local authority search. The seller's solicitors will prepare responses to a standard list of queries relating to the property, and the buyer's solicitor will review these, raising further questions as appropriate.
The parties will not enter into the sale contract until all the investigations are complete.
By law, there is no exclusivity during this period, although sometimes the parties will enter into an exclusivity agreement.
Is title insurance available?
Yes, although it is rarely used as a substitute for the investigation process outlined above. The parties may sometimes agree to take out title insurance in respect of a particular issue revealed by the investigations: for example, if a covenant appears to have been breached but no action has so far been taken.
How are deals typically structured?
Following the investigations, the parties will enter into a contract for the sale and purchase of the property. There will usually be an interval between the contract date and the date when the land is transferred. The contract sets out the documents that must be entered into at completion, including the formal transfer and any indemnities required at completion.
B. STRUCTURE OF THE CONTRACT
Are there formal requirements regarding the content and structure of the sale and purchase contract?
The contract must be in writing and signed by each party. In practice, two duplicate copies of the contract are prepared: one is signed by the buyer and one by the seller. The contract is then exchanged, with the lawyers sending the documents signed by their client to each other.
What is a typical contract like?
The contract must contain all the terms of the sale, including the land to be sold and the price. It sets out the date when the transfer will take place and the documents to be entered into on that date. The contract may also contain provisions regarding how the property will be managed between exchange and completion, and how income from the property will be allocated between the buyer and the seller, particularly where completion is some time in the future or if the sale is of an investment property.
Contracts also invariably contain provisions relating to insurance and what happens if the property is damaged before completion.
Finally, it is normal for a deposit to be paid on exchange of contracts (usually 10%) and the contract will set out what happens to this money between exchange and completion.
Are special consents required for certain transactions (for example consent by a spouse)?
Consent is required from a mortgagee, unless the mortgage will be paid off at completion (which is, in fact, the most common scenario). Consent may be required from a landlord if the land is leasehold. In the case of residential property, the buyer generally requires the consent of any occupier who is not one of the owners selling the property, and confirmation that they will move out.
What seller's warranties are provided under statute (for example the state of the building, asbestos, etc.)?
Can they be excluded or varied by contractual agreement? Is there a deadline for claims to be made?
The law does not require any warranties to be given, and in practice, warranties related to the state and condition of the building are very rare. It is, however, common practice for the seller to give a level of "title guarantee" confirming that there are no defects in the seller's title and that he will provide assistance in registering the buyer as the new owner.
The seller will always exclude from the guarantee any matters which he has already disclosed to the buyer or which should be revealed by the buyer's searches.
Since warranties are not compulsory by law, there is no limitation on excluding or varying them.
Any claim under title guarantee needs to be made within six years of the date of the contract.
What are the buyer's remedies against misrepresentation by the seller?
The relevant legislation gives the buyer the right to terminate the contract and/or to claim damages reflecting any losses suffered. Contracts often modify this so that the buyer can only terminate the contract if the error resulted from fraud or recklessness, or where the asset differs substantially from what the buyer expected.
Are there any interests in real estate other than exclusive ownership?
If so, what are they?
Interests under leases can be disposed of in the same way as freehold interests, subject to any limitations set out in the lease. Under the English system, it is common for leases to be granted for very long periods, for example 99 years, at nominal rents, and these can be as valuable as absolute ownership.
A real estate owner can also grant non-exclusive rights to third parties to use the land, such as granting a right of way. These are known as easements and, provided they are correctly registered, are binding on successors in title to the person who granted the right.
C. PUBLIC LAW ASPECTS RELATED TO THE ACQUISITION OF REAL ESTATE
What are the most important areas of public law for an investor to consider when purchasing real estate?
Part of the buyer's investigation will cover the planning history of the site and, in particular, whether any buildings have been duly authorised and whether the current use of the property is one which is permitted under law. There are also statutory regulations relating to building works, and a buyer should verify that the property complies with these.
Depending on the use of the property, further statutory regulations may apply, for example, compliance with fire safety and other health and safety regulations.
Is the buyer of a real estate asset responsible for soil pollution or contamination of the building even if it is not caused by him?
The person causing the pollution is primarily responsible for its clean-up. But if that person cannot be found or pursued, then environment legislation allows a local authority to pursue the current owners and/or occupiers of the land. Any buyer should therefore take careful note of any environmental issues identified in the survey and should seek to apportion liability for such issues or adjust the price of the property.
How can a buyer ascertain the possible uses of an area under the applicable zoning or planning laws?
Can uses be changed?
When a seller is demonstrating his title to a buyer, he will also provide information on the planning history of the site and show how the existing use is authorised. If the buyer is planning to change the use of the property, he will need to consider the local plan, which sets out the local authority's policies for each area. Receiving consent to change of use can be made a condition of the purchase contract, although the process of applying for a change of use can take some time.
Is it possible to enter into specific development agreements with relevant public authorities in order to facilitate a project?
Can public authorities make a charge for this?
In the case of a substantial proposed development, a local authority will usually require the developer to enter into a development agreement. In exchange for planning permission, the developer would then need to comply with certain obligations, including, for example, making a payment or carrying out public works.
As well as imposing a payment under the development agreement, the local authority will usually also require all its fees to be paid by the developer. Other statutory bodies, for example, water authorities, may also require development agreements.
D. TAXES RELATED TO ACQUISITION OF REAL ESTATE
Are there transfer taxes or sales taxes?
A buyer must pay stamp duty land tax ("SDLT") at a rate of 4% of the price paid for the asset, where the price is greater than £500,000.
Value added tax ("VAT") does not automatically apply to the purchase of land, although in a few cases (such as newly built properties) the seller must impose VAT. In addition, in the case of commercial property transactions, the seller will often elect to impose VAT in order to recover the VAT that he paid in relation to the property. For investment properties, the transaction may be treated as the "transfer of a going concern" which does not attract VAT, although the conditions for obtaining this relief are complex.
Where VAT is payable, the SDLT will also be subject to VAT, adding a further 17.5% to the SDLT payment.
What are the normal transaction costs?
As well as the taxes set out above, a fee is payable to the Land Registry for registering the transfer. This is usually around £700, depending on the value of the asset. The English system does not use notaries and all legal work is carried out by solicitors, whose rates vary depending on the complexity of the transaction. Most property is sold through estate agents, who will also charge commission for their services, normally conditional upon the completion of the sale.
How are transaction costs shared by the buyer and seller?
The seller invariably pays the agent's commission and the fees for his lawyer. The buyer pays for his lawyer, the surveys and enquiries, SDLT and registration costs. Because of SDLT, transaction costs will generally be higher for the buyer than the seller, although this may in turn have an effect on the purchase price. Where SDLT can be avoided, it is common for the benefit to be shared between the parties by adjusting the purchase price.
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