The process
- Offer and heads of terms. Once a price is agreed, the agents prepare heads of terms setting out the price, the parties, the timetable and any conditions. They are not usually binding, but they guide the solicitors.
- Finance. Line up your funding early. A term lender may take longer than the seller wants to wait, so a bridge is sometimes used to complete first.
- Due diligence. Your solicitor reviews the title, searches, leases and replies to enquiries, while surveyors inspect the building.
- Exchange and completion. Contracts are exchanged with a deposit, then the purchase completes and the funds are released. At auction, exchange happens on the fall of the hammer and completion follows within the period set in the auction conditions.
Surveys and the building
A lender's valuation protects the lender, not you. For anything beyond a simple unit, buyers commonly commission their own building survey, and sometimes specialist reports on asbestos, mechanical and electrical services, environmental risk or contamination.
Check the energy performance certificate. Minimum energy efficiency standards apply to let commercial property in England and Wales, and a poor rating can limit whether the property can be let without improvement works. Lenders take this into account too.
Planning use matters as well. Make sure the current use is lawful for what you or your tenant intend to do, and check any restrictions in the title or planning history.
VAT and transfer of a going concern
Many commercial properties have been opted to tax by the seller, which means VAT is charged on the sale price. If you can recover the VAT, the main issue is cash flow: the VAT must be paid at completion and reclaimed from HMRC afterwards. A VAT bridging loan can cover that gap, and the VAT bridging calculator estimates the cost.
Where a let property is sold with its tenants in place and the buyer will continue the letting business, the sale may be treated as a transfer of a going concern (TOGC), with no VAT charged. TOGC has conditions, including that the buyer opts to tax and notifies HMRC in time where the seller has opted. Getting it wrong can be costly, so take advice from your solicitor or accountant, and see HMRC's guidance on transferring a business as a going concern.
Stamp duty
In England and Northern Ireland, stamp duty land tax on commercial and mixed-use property is charged at non-residential rates, which differ from residential rates. Scotland has land and buildings transaction tax and Wales has land transaction tax, each with their own non-residential rates. Where VAT is charged on the price, the tax is usually worked out on the price including VAT. Check the current rates on GOV.UK or with your solicitor. Our guide to stamp duty and bridging loans covers how tax and finance interact.
Leases and tenants
For a let property, the leases are what you are buying. Your solicitor will review each one, and you should understand:
- The rent, how and when it is reviewed, and whether any rent is in arrears
- When each lease ends and whether the tenant can break it early
- Who is responsible for repairs, insurance and service charges
- Whether the tenant has a right to renew under the Landlord and Tenant Act 1954
- The financial strength of each tenant and any guarantors
Lenders look at the same points. A strong tenant on a long lease usually supports better finance terms than a short lease or an empty unit, because the income is more secure.
Financing the purchase
Most purchases are funded with a commercial mortgage and a deposit. Our guides to getting a commercial mortgage and commercial mortgage deposits explain how lenders assess the case.
Where speed or the condition of the property rules out a term loan at first, a commercial bridging loan can complete the purchase, with a commercial mortgage arranged later. Business owners buying their own premises can see business premises bridging loans, and shops with flats above are covered by semi-commercial bridging. Plan the exit before you buy, using our guide to refinancing a bridging loan onto a mortgage.
Instant Quotes compares bridging lenders rather than commercial mortgages. If you need short-term finance to buy or improve a commercial property first, you can compare bridging lenders on Instant Quotes, or ask us to search the wider market for a term loan.
Common questions
Do I pay VAT when buying commercial property?
You do if the seller has opted to tax and the sale is not a transfer of a going concern. Registered buyers can usually reclaim it, but it must be paid at completion first.
What is a TOGC?
A transfer of a going concern: the sale of a let property as a continuing letting business, which can be outside the scope of VAT if the conditions are met.
Do I need my own survey?
The lender's valuation is for the lender. A building survey of your own, and specialist reports where needed, tells you about the condition and costs you are taking on.
Is stamp duty different on commercial property?
Yes. Non-residential rates apply in England and Northern Ireland, with separate taxes and rates in Scotland and Wales.
This guide is for general information only and should not be treated as legal, tax or financial advice. Lender requirements depend on the property and your circumstances.
