Matthew Stratton Partner
Considerations when buying a property through the purchase of a company
Where UK real estate is owned by a company and that company wishes to dispose of it, buyers can, in certain circumstances, choose between acquiring 100% of the shares in the company from its shareholders or buying the property outright from the company. One of the main advantages of structuring a real estate transaction so that a buyer acquires the shares in the company is that the buyer can realise significant tax savings.
By way of example, Stamp Duty Land Tax (“SDLT”) might be as high as 18% of the purchase price if an individual purchases a property, whilst the Stamp duty for the acquisition of shares in a company incorporated in England and Wales is only 0.5% of the purchase price. The purchase of an overseas company will not usually be subject to UK stamp duty.
In this note we have set out some key considerations for buyers and sellers.
Please note there will be other tax considerations for buyers and sellers which fall outside the scope of this note.
Checklist for Corporate Real Estate transactions
The main considerations before embarking on an acquisition of a company whose only asset(s) is a property or a portfolio of properties are very similar to those for any other share purchase.
1. Financing of the acquisition
What is the source of the acquisition funds? In a real estate context this will often be a bank loan secured by a mortgage on the property. Any financiers and banks should be involved at an early stage to ensure there are no unnecessary delays to the transaction.
2. Pre-acquisition agreements
The main pre-acquisition agreements that any buyer and seller should consider are:
(i) A confidentiality agreement between the parties as the parties will have access to each other’s confidential information.
(ii) Heads of Terms (HOT) which will usually be prepared by the real estate agents. HOTs will set out the key terms of the transaction such as the purchase price, deposit, timeline and any exclusivity period for the buyer.
3. Due diligence
At this stage, the seller will usually upload documents relating to the company and the property into a data room. The buyer will investigate the target company and any liabilities it may have. This usually includes legal and financial/accounting due diligence. The due diligence exercise is commonly coordinated by the buyer's solicitors who will submit a due diligence questionnaire (an information request list) to the seller to obtain any relevant information about the company’s obligations and liabilities. In a corporate real estate transaction, the buyer should seek the assistance of a specialised real estate lawyer who will investigate the property’s title and conduct property searches. The buyer may also want to have a surveyor carry out a survey of the property.
Based on the outcome of the due diligence exercise, the buyer’s solicitors will usually prepare a due diligence report for the buyer highlighting any potential liabilities the buyer might acquire with the company. If significant issues are identified the parties may wish to renegotiate key terms.
4. Transaction documents
The next step will be the drafting of the share purchase agreement (SPA). This is the principal transaction document and will set out the terms of the purchase of the target company. The first draft is usually prepared by the buyers’ solicitors. The SPA will contain numerous seller guarantees (known as warranties) as to the state of the target company and the property (please see below). The buyer’s solicitors will usually negotiate the warranties based on the outcome of due diligence. As you would expect the main value of the target company is in the property, the real estate warranties are of particular importance and should be carefully negotiated. The buyer should ensure that any financial obligations of the company are discharged before completion so that the company is only acquired on a debt free (and potentially cash free) basis. The exchange of the signed SPA may either occur simultaneously with completion or completion may follow at a later point in time. Signing and completion will normally be split where there are certain conditions to be met in the interim period, such as any consents from third parties (for example, banks).
The seller's solicitors will usually draft a disclosure letter which will set out any matters which are inconsistent with the warranties. The disclosure letter will be negotiated by the buyer and seller.
Ancillary documents such as stock transfer forms, board (and potentially shareholder) resolutions will also be required. Depending on the individual circumstances of the transaction and the outcome its due diligence, a buyer might also require further documents, e.g. relating to the title of the property. Particular attention should be paid to any documents required for the release of any charges over the company's shares or the property.
Where one of the parties is an overseas company, the parties’ solicitors should liaise with local lawyers to advise on any jurisdiction specific aspects, such as the release of charges, the corporate history, tax implications and the parties should consider whether a Legal Opinion is required.
The warranties given by the seller in the SPA will cover various aspects of the company for instance:
1. its constitution;
2. the accuracy of its accounts and financial information;
3. environment; and
4. specific property warranties (e.g. title, encumbrances, planning and use of a property, condition, insurance).
If there is a matter which is inconsistent with the warranties and which has not been disclosed by the seller in the disclosure letter, the buyer may have a claim for breach of warranties and seek compensation from the seller.
However, the value of the warranties is only as good as the ability of the buyer to recover damages. Where the seller is, for instance, an overseas entity and/or has no other assets apart from the property, there is a risk that the seller might be dissolved after completion. In such circumstances the buyer may wish to seek additional comfort on the covenant strength of the seller.
Such additional comfort might be achieved by any of the following (amongst others):
1. The buyer may retain part of the purchase price after completion or the parties may agree to hold an agreed amount from the purchase price in an escrow account. If it discovers any breach of warranty in that time period, it may look to make deductions from the retention amount. Common retention time periods are two years. However, the buyer may seek longer time periods given that tax liabilities could arise up to seven years after completion. The seller would usually be reluctant to accept such long time periods.
2. The buyer may also consider taking out warranty and indemnity (W&I) insurance, which would allow it to make a claim for breach of warranty against the insurance company, rather than the seller. On the other hand, however, an insurer may require its own lawyers to review the due diligence prepared by the buyer’s solicitors or even carry out its own due diligence. In the UK and Europe the premium for W&I insurance will usually be around 1-1.5% of the insured amount, with deductibles at around 0.12% of deal value for real estate transactions.
3. Where the ultimate beneficial owner of the seller is an individual, the buyer may consider requesting a personal guarantee. This would act as a guarantee for any breaches of the seller’s obligations or warranties in the SPA. The wording of such a guarantee should be carefully negotiated, in particular where the guarantor is not based in the UK.
For high value real estate transactions in particular, pursuing the corporate route, rather than buying the property outright, might bring significant tax advantages for the buyer. For the seller, if there is a significant saving on SDLT this may increase the value of the property. Whilst most aspects of such a corporate transaction are similar to other corporate acquisitions, the parties should pay particular attention to the real estate specifics of such a deal.
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