Purchase & sale Flashcards
What are the four methods of sale?
- Private treaty
- Informal tender
- Formal tender
- Auction
What factors do you consider when choosing a method of sale?
- Client objectives
- Public accountability
- Current and likely future market conditions
- Likely level of demand for the property (target market)
- Timing requirements
What is private treaty?
Parties are free to negotiate privately, in their own time, without commitment in the open market
What are the advantages of private treaty?
- Flexibility
- Parties control the process
- Vendor under no obligation to sell
- Confidential
What are the disadvantages of private treaty?
- Gazumping or gazundering
- Late decisions not to buy
- Associated abortive costs
What is informal tender?
Best bids method, used when there is a good level of interest in the property
Used to bring negotiations to a conclusion
Is informal tender binding?
No - either party can withdraw any point up to contract
Where should ‘best bids’ be opened?
In front of the client or line manager
What is a request for proposals letter?
Vendor agent invitation in writing for interested parties to submit best offers
What is included in a request for bids letter?
- Timeframe for receipt of offers
- Solicitors details
- Finance arrangements
- Conditions / approvals
- Offers of variable nature will not be consider (more than highest offer received)
- Vendor is under no obligations to accept the highest, best or any bid
What is formal tender?
Sealed bids method, used by statutory body to give control and transparency of marketing process
High level of public accountability
Only one chance to bid, cannot increase offers - highest bid typically selected (unless stated otherwise)
Contracts can exchange after bids are received
What are the advantages of auctions?
- Quick process
- Certainty of sale (assuming reserve price achieved)
- Useful for unusual property that is hard to value accurately
- Used for property that is likely to generate a lot of interest
What are the disadvantages of auctions?
- Cost of promotion and publicity
- Lack of confidentiality of price achieved
- Vendor cannot choose purchaser
- Intensive nature of short marketing period
What is the procedure for an auction?
- Terms agreed in advance
- Conflict / AML checks
- Clarify auctioneers rights (bid refusal, bidding increments, accept proxy, contract signing on behalf of vendor)
- Due diligence, relevant documentation made available
- Reserve price agreed with vendor
- Contracts exchange at fall of the gavel
- Particulars prepared in accordance with Misreps / CPR
What actions are required by purchasers before an auction?
- View property and consider structural survey
- Take proper legal advice / complete DD
- Read Notice to Prospective Buyers
- Arrange deposit of 10% / insurance for exchange
- Provide ID for AML procedures
What are the types of agency?
- Sole agency – only one agent
- Joint agency – two or more joint agents sharing a fee on a pre-agreed basis
- Multiple agency – any number of agents but only the successful agent gets a fee
What is a typical sales instruction timeline?
- Receive instructions / check competence and independence
- AML checks (Money Laundering Regulations 2017) / Terms of Engagements (s.18 EAA 1979)
- Gather information / due diligence / inspection
- Financial analysis / market research / marketing report with recommendations
- Client approval of brochure (Misreps 1967 / CPR 2008) / conduct agreed campaign
- Negotiate the sale / draft Heads of Terms / instruct solicitors
- Liaise with vendor solicitors for CPSEs / assist with any queries
- Issue invoice upon completion / retain file
What do you include in terms of engagement for investment agency instructions?
- Agency basis (sole/joint agency)
- Agency rights (sole selling or sole agency rights)
- Proposed fee
- Marketing costs and disbursements
- Confirmation of no conflicts of interest / personal interests
- Money Laundering Regulation requirements
- Timescale for the payment of fees and disbursements
- Details of firms complaints handling procedure
What if a client changes their mind after signing terms?
Statutory cooling off period of 14 days (Consumer Rights Act 2015)
What are sole selling rights?
An agreement whereby the agent would be owed a fee even if they were not involved in introducing the buyer
What is a ‘ready able and willing purchasers’ clause?
Defined by Estate Agents Act 1979 - ensures abortive fees can be charged by the agent if a client pulls out of a transaction even if a purchaser is ready and able to proceed
What happens if you fail to complete a transaction?
- Vendor can serve Notice to Complete – gives deadline to purchasers
- If deadline not met, vendor can rescind the contract
- Deposit can be retained by the vendor
What are some types of purchase vehicles?
- SPV
- Offshore unit trust (JPUTS)
- REITs
- Joint venture
What is the Misrepresentations Act 1967?
Covers misrepresentations and false statements made during pre-contractual enquiries which may lead to a sale/purchase
What are the types of misrepresentation?
- Fraudulent
- Negligent
- Innocent
What RICS guidance is there on conflicts of interest in investment agency?
RICS Conflicts of Interest Professional Statement – UK Commercial Property Market Investment Agency 2017
What does RICS Conflicts of Interest Professional Statement – UK Commercial Property Market Investment Agency 2017 cover?
- Dual agency
- Multiple introductions
- Incremental advice
What are some UK legislations you follow in investment agency?
- Estate Agents Act 1979 – covers sale or purchase or freehold/leasehold property with a capital value (S.18 – terms of business / S.21 – declaration of personal interests)
- Consumer Protection Regulations 2008 – covers entire agency sales and letting process
- Business Protection Regulations 2008 – mirrors CPRs covering business to business activities
- Bribery Act 2010 – aims to reduce bribery in the UK and abroad
- Equality Act 2010 – provides protection against discrimination and inequality
- Proceeds of a Crime Act 2002 – provides powers for enforcement authority to recover proceeds of criminal activity
- Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2019 – due diligence checks must be carried out on both parties to a sale
- Town & Planning (Control of Advertisement) Regulations 2007 – relates to marketing signage
- Estate Agents Regulations 1991 – service to be provided and remuneration must be provided in writing
What RICS guidance do you follow during investment agency work?
- RICS UK Commercial Estate Agency Professional Statement 2016 – 12 core principles of estate agency
- RICS Global Real Estate Agency and Brokerage Professional Statement 2016 – cover the above, but globally
- RICS Global Professional Statement on Conflicts of Interest 2017 – covers the global ‘informed consent’ process
- RICS Professional Statement: Countering bribery and corruption, money laundering and terrorist financing 2019 – as described
When would you not recommend the highest bid is accepted?
- Red flag
- Conditions less desirable (timeframe)
What do you include in marketing materials?
Property information
Misreps disclaimer
What part of Estate Agents Act 1979 covers conflicts?
Section 21 - agent must not enter into negotiations regarding a property in which he or a connected person has a personal interest (unless disclosed to all parties)
What are the 6 principles of the Bribery Act 2010?
- Proportionality
- Top level commitment
- Risk assessment
- Communication
- Due diligence
- Monitoring and reviewing
Who polices the Bribery Act 2010?
Serious Fraud Office
What is the penalty for a breach of the Bribery Act?
Up to 10 years imprisonment / unlimited fines
Can you accept hospitality?
Only if proportional to the work undertaken - it must be stated in my firms gifts register also
What are dilapidations negotiations?
Take place at lease expiry to bring property back to its condition at the start of the lease, assuming there is a repairing liability
How do you determine whether a tenant has a repairing responsibility?
Read the lease!
How can a tenant bring property back to its original condition at the end of a lease?
- Tenant can do agreed works
2. Tenant can pay sum to the landlord to undertake the works (Breach + Loss + Evidence = Recovery)
How can landlords begin a dilapidations claim or negotiation?
Serve 146 notice in accordance with 1925 Law and Property Act
This is a notice to forfeit the lease, and prompts tenants into action
What are dilapidations claims limited to?
Cost of the works, or the diminution in value of the reversionary interest (as per s.18 if Landlord and Tenant Act 1927) - i.e. the difference in value of the property upon possession had the covenants to repair and decorate not been undertaken
What are the types of schedules of dilapidations?
- Interim schedule - served during the lease with at least 3 years remaining
- Terminal schedule - served in last 3 years of lease
- Final schedule - served at or after lease expiry/break clause date
What is the format of a dilapidations schedule?
- Outline repairing obligations
- State remedy and cost of the breach
- Loss of rent over period to do works
- Fees + VAT for the claim for surveyors / lawyers
- Negotiations conducted on without prejudice basis until agreement reached
- If agreement not reached, landlord’s surveyor may prepare Scott Schedule for Court / ADR
What RICS guidance is there on dilapidations?
RICS Guidance Note on Dilapidations 2016
What reasons might a dilapidations claim not be agreed or agreed in full at lease expiry?
- Lease is not on full repairing terms
- Reinstatement not required by landlord
- Schedule of condition limits repairing liability
- Building to be demolished / substantially refurbished after lease expiry
- Use of diminution in value cap
- Tenant gone into administration
- Landlord and tenant agree to roll over the claim until end of next lease granted
Who is responsible for insurance of a commercial property?
Responsibility of landlord to arrange and re-charge tenant
What does commercial property insurance typically cover?
Reinstatement of the building for range of insurance perils (firm, storm, floor, theft, terrorism, loss of rent and service charge, etc)
How is building reinstatement valued for insurance purposes?
Measured on GIA basis, with reference to BCIS
What actions might you take for empty buildings?
- Building insurance
- Maintain fabric of the building
- Obtain EPC
- Clear the building, remove combustible material
- Regular inspections
- Health and safety / fire risk assessment
- Inform local rating authority for payment of empty rates
- Arrange security
- Decommission services / isolate power supplies
- Seal letterbox to prevent arson
- Planned maintenance including servicing plant
- Drain water / set frost controls
- Maintain asbestos register
- Agree disposal strategy and marketing initiatives
What are service charges?
Charges to tenants of multi tenanted properties of costs incurred by a landlord to manage and maintain the property
Is there any legislation on commercial service charges?
No - only for residential
How can tenant negotiate service charges?
- Service charge caps
- Fixed increases
- Index linked increase (RPI / CPI)
Who is liable for service charges during void periods?
The landlord
What are typical service charge arrangements?
- Service charge budget agreed with tenant
- Quarterly billings based on this estimate
- Annual accounts prepared at year end
- Balancing payment made at year end upon presentation of audited accounts
- Sweeping up clauses for unexpected costs
- Payments reserved as rent in the lease
What’s included in service charge?
- Electricity supply
- Water supply
- Repair and maintenance of common parts
- Regulatory compliance (emergency equipment)
What RICS guidance is there on service charges?
RICS Professional Statement - Service Charges in Commercial Property 2018
What are the methods of apportionment for service charge?
- Floor area
- Fixed percentages
- Rateable value
- Weighted floor area
What is a sinking fund?
Fund formed by periodically setting aside money for replacement of a wasting asset (e.g. plant)
What is a reserve fund?
Fund formed to meet the anticipated future costs of maintenance and upkeep in order to avoid fluctuations in service charge
What RICS guidance cover investment agency work?
RICS UK Commercial Estate Agency Professional Statement 2016
What are some of the core principles of RICS UK Commercial Estate Agency Professional Statement 2016?
- Act in an honest, fair, transparent and professional manner
- Ensure clients are provided with terms of engagement that are fair, clear, and detail CHP
- Do utmost to avoid conflicts, and deal with them openly and fairly when they do arise
- All advertising and marketing material is honest and truthful
- Hold appropriate PII cover
What key areas of estate agency does RICS UK Commercial Estate Agency Professional Statement 2016 cover?
- Acting ethically
- Securing instructions
- Marketing the property
- Implementing the disposal
- Acquisition of property
What is the key legislation for estate agency?
Estate Agents Act 1979
What does Estate Agents Act 1979 apply to?
Disposal or acquisition of freehold or leasehold property with a capital value (land as well as buildings)
What are the key principles of the Estate Agents Act 1979?
- Clarity as to the terms of the agency (Section 18)
- Honesty and accuracy
- Agreement and liability for costs
- Openness regarding personal interests (Section 21)
- Absence of discrimination
- Legal obligation to tell the client about offers received
- Keep clients’ money separate
What are the most important points of the Estate Agents Act 1979?
- Specify costs/fees in terms (s.18)
- Itemise all payments
- Specify agency basis/rights
- Advise clients of any services available (e.g. financial advice)
- Disclose personal interests (s.21)
- No misrepresentation
- Follow RICS rules on handling client money
- Report offers promptly to client
What are some penalties of the Estate Agents Act 1979?
- Negative licensing (removed or not granted)
- Prohibition order (stops agent practicing)
- Warning order (written warning)
Who policies the Estate Agents Act 1979?
National Trading Standards Estate & Letting Agency Team (NTSEAT)
What is a cooling off period?
14 day period after terms are signed that client can change their mind (Consumer Rights Act 2015)
Do you provide advice on VAT?
I always recommend clients seek specialist advice on VAT matters
Why might a landlord elect a property for VAT?
To recover VAT on costs expended
Which occupiers cannot register for VAT?
- Financial institutions
- Charities
- Medical practitioners
What happens when a property is elected for VAT?
Rent and service charge is charged subject to VAT
What is Transfer of Going Concern (TOGC)?
Status of a purchase not treated as a supply of goods and services for VAT purposes
What can a sale gain TOGC status?
When it is sold whilst let to a tenant
What are capital allowances?
Tax relief on capital expenditure for the construction or purchase of commercial property or business assets
Can generate substantial tax saving on value of plant and machinery (e.g. air conditioning)
Allowances can be offset against taxable profit
What does the Land Registration Act 2002 cover?
Provides a framework for electronic property conveyancing, allowing formal documents to be executed electronically
When must leases be registered with the Land Registry?
New leases granted for term over 7 years or existing leases sold or assigned with 7 years left to run (registered with compliant lease plan)
When is the Land Registry aiming to achieve comprehensive registration of all property and land?
2030
Under the Land Registration Act 2002, what must be included in on a freehold title plan?
- Drawn to a metric scale (normally 1:100 or 1:200)
- Have a scale measurement bar
- Have a scale noted on the plan
- Include a 1:1250 scale location map (for urban areas)
- Full address including post code
- A north point
- Demise in red outlined on the inside edge of the property
