In every commercial property journey there comes a point where you’ll need to sell, so how do you sell a commercial property?
Selling a commercial property is similar to selling a residential property, but the process is likely longer and the conveyancing process is slightly different. Valuations are also more complex and it’s often recommended to opt for a full RICS valuation rather than a market appraisal, but this will vary depending on the building and other circumstances.
Without further ado, let’s take a look at how you sell a commercial property.
First off, your building will need to be available. That means communicating with any existing tenant(s), serving the notice, etc. Check the Break Clause assigned to the tenant on the contract. Repairs will have to be negotiated and completed with a fair regard to the wording in the contract. This will depend on the contract and possibly even the Heads of Terms.
Prior to selling a commercial building, you’ll need to decide whether or not now is an optimal time to sell. In 2020 and 2021, the government’s stamp duty holiday has turbocharged the residential property market which is really flying as of late. Sadly, the stamp duty suspension hasn’t applied to commercial property.
There has been strong investor demand for commercial property for a while now and Savills predicts that this will continue. The hottest commercial buildings to sell? Demand for retail warehousing, distribution and logistics buildings is very high, likely due to the rise of eCommerce. Since the government relaxed the rules on converting offices to residential, this has also driven investment in offices, which were previously pretty cold with historical low demand.
Another consideration for selling is the time of year. Historical data, primarily from the residential property market, has suggested the post-Christmas period before the new financial year every April is perhaps the optimal window for selling.
This makes sense on paper – the new year signifies new beginnings, new plans and strategies, and often, executing these before the new financial year provides a fresh start. However, there’s no robust consensus on this so it might not be worth reading too deeply into it. Plus, it really depends on the type of property. Demand for warehouse, retail and logistics property could easily jump pre-Christmas, from around late August or September, for example.
Finally, it’s worth considering longer-term trends. Converting idle offices to residential and the rise of warehousing and logistics are two trends that are worth considering in the next few years, but there are bound to be others.
It might not be possible to cease any operations and completely clear a building prior to a valuation or appraisal. It depends on your sales strategy – if you’re flipping commercial property by upgrading it in some way then you’ll need to time your works with the point the property goes on the market.
For example, say you, as an investor, target a small commercial shop with one residential unit upstairs. You might have a plan – to upgrade the derelict shop downstairs into a high-tech office designed for tech-oriented businesses whilst splitting the upstairs unit into two smaller units.
This is all well and good, but the important thing is obviously to finish the work on time prior to obtaining a valuation.
There are many ways to obtain a quick commercial property valuation. Whilst quick methods like the sales comparison approach are undoubtedly useful, commercial property will often warrant a more complete full property valuation.
There are two primary routes to obtaining a commercial property transaction:
- Market appraisal
- Formal valuation (RICS valuation)
Formal RICS valuations are also known as Red Book valuations. The RICS Red Book provides rigorous guidelines for how Chartered Surveyors should value buildings. Many variables are used, including the characteristics of the building itself (purpose, location, Use Class, condition etc), as well as local, regional and national market data.
The purpose of a Red Book valuation is to obtain an objective, thorough valuation that benefits all parties to the transaction. Chancellors highlight the low error margins of Red Book valuations and their robustness in Court.
Red Book valuations are not mandated – another option is to opt for a market or valuation appraisal. These are often provided by the commercial estate agent marketing your building.
A Red Book valuation provides you with an independent valuation that grants more flexibility with how and where you market the property, including to private buyers. Appraisals are the fast route and generally suffice when marketing a commercial property through an agent.
It’s very sensible to prepare financially for any forthcoming sales costs. These might also influence when you choose to sell a building, e.g. for when it is most economical for tax purposes
The primary selling costs are:
Solicitor fees: Solicitors charge fees for the commercial property conveyancing process. Conveyancing may be simple or more protracted in the case of more complex purchases where the buyer makes lots of inquiries.
Surveyor fees: Fees for surveys, valuations and appraisals.
Estate agent fees: Usually between 1% and 3% of the property value, likely to be lower the more expensive the property is.
Mortgage redemption fee: Fees for paying off a commercial mortgage early. Varies between mortgages.
Capital gains tax: It’s advised to seek financial advice prior to the sale of a commercial building as it will likely leave the seller and their business(s) liable to capital gains tax.
Removal fees: The property will have to be cleared unless equipment and furnishings are to be included in the sale.
It’s crucial to prepare for buyer’s requests. You will need to provide various building specifications to the estate agency, including:
- The property deed and Land Registry title documents
- Use Classes and associated lawful use certificates
- Planning and Building Regulations Documentations; copies of planning permission and building regulations
- Commercial Energy Performance Certificate (CEPC); usually supplied when marketing the property through the estate agent
- Asbestos Survey; for buildings of a certain age, a survey must provide documentation of any asbestos, if applicable
- Commercial Property Standard Enquiries; there are many standard CPSEs that you can pre-prepare documentation for. The buyer can rely on the accuracy of your answers by law and incorrect information could result in rectification or the buyer could even sue for misrepresentation.
- Fire Risk Assessment and maintenance records
Marketing the property through a commercial estate agent is the go-to option and is suitable for the vast majority of commercial properties, but auctioning is well-worth considering as the exchange is typically fast once the hammer goes down. It may also be possible to find a direct buyer. It really depends on the property and proposition for investors.
The property should be well-photographed and listed with a comprehensive set of accompanying information ranging from floor plans to energy certificates, Planning Permission, lawful uses, etc. The information excerpt should be clearly and properly written – the more detail, the more visible the property will likely be in property search engines.
Your estate agent will assist you in the offer process. If you have multiple offers on the table, you’ll be able to sort for the best one, which may take into account:
- The buyer’s financial status. More security = potentially quicker journey to completion.
- Whether or not they have a mortgage offer, other funding, or are a cash buyer.
The buyer can retract their offer at any time before completion. An agent will guide you on how long to leave your property on the market before either collecting your offers or removing it and going back to the drawing board, perhaps lowering the price or waiting until a different time to sell. You may also wish to change estate agents if you don’t feel that they’re marketing your property well, or are unhappy with their advice to lower the price.
After accepting an offer, the seller’s solicitors will draw up the Heads of Terms. A Heads of Terms is a pre-contractual agreement that stipulates key clauses, providing a clear path towards finishing the Due Diligence process and eventually, completion. The Heads of Terms should expedite proceedings, making it easier for all parties to work from the same page. The Heads of Terms also helps avoid any nasty surprises after drawing up contracts. They’re not a requirement, but they’re strongly recommended.
Read our guide to the Heads of Terms here.
Due Diligence is mainly the responsibility of the buyer who may wish to carry out a building survey and a range of CPSEs. Other surveys may be required, such as environmental surveys or contamination surveys. The buyer may even want to consult on new development plans prior to making the purchase. Whilst Due Diligence is for the buyer’s benefit – as commercial sales are largely subject to caveat emptor, or ‘let the buyer beware,’ the seller is still obliged to provide prompt, accurate and detailed responses to any enquiries. Due Diligence is still of mutual responsibility.
Negotiation on the offer is still possible at this stage, for example, if the buyer claims that there is necessary maintenance work that lowers the value of the building.
After Due Diligence, your solicitor should request and accept deposits, provide payment methods, and arrange for the exchange of contracts.
Commercial property contracts can be quite complex – check our guide to commercial property contracts here. There will be a lot for the buyer’s solicitor to check – the period between the Head of Terms and exchange could last more than a month.
Prior to exchange, the following will have been completed:
- Heads of Funds fulfilled and proof of finance given.
- Due diligence exercised – all property searches and enquiries satisfied.
- Insurance organised.
- Full finance granted ready for the transaction.
Once the final monies have been transacted, the seller will hand over the keys and all associated paperwork to the new owner.
The new owner will pay Stamp Duty and will be entered up into the Land Registry. This marks the final legal process in selling the commercial property.
Selling commercial property is not too dissimilar from selling residential property, but there is greater responsibility on the buyer to make suitable enquiries about the building and the seller must provide information and evidence that the buyer can rely on.
The process of Due Diligence prevents either party from committing a tort or offence – it lays bare relevant information pertaining to the property.
Whilst complex buildings will take some time to sell, simple commercial buildings sold through auction are quick and easy to shift onto a new buyer. This is advantageous for both parties, depending on the circumstances.
What Documents are Required to Sell Commercial Properties?
– Replies to Commercial Property Standard Enquiries (CPSEs).
– Planning and Building Regulations Documentation.
– Asbestos and Environmental Surveys.
– Fire Risk Assessment.
– Energy Performance Certificate.
– Maintenance schedules.
– Any past surveys.
After then, the Heads of Terms should be drafted and exchanged between solicitors. This provides a path towards drawing up the final contract, and eventually, completion.