Commercial property issues to consider when selling a business

If you are selling your business, the buyer will want to know all about any commercial property the business owns or occupies.  The issues will be similar to those that would come up if you were simply selling the property, but there are some key differences of approach when it is part of a business sale.  If you get your commercial property lawyer involved early in the transaction, you should be able to avoid the deal being derailed by last minute property issues.

Anyone who buys your business wants to know they will be able to carry on trading from day one, and that there are no problems with using the premises. Commercial property also brings liabilities, so your buyer will want to be clear about what those are before they take on the business.

In this blog we outline the key areas to consider with your commercial property solicitor.

Be prepared

Business sales tend to move faster than pure property sales, so you will want to make sure the property side does not hold things up.  The more you can prepare in advance, the better.  Your buyer will be carrying out due diligence on the whole of the business, not just the property, which means that the process often looks a bit different to a standard property sale.

The first issue is how important the property is to the business, because that will determine how much time the buyer allows to investigate it.  They may want to look into every detail, in which case their solicitor will probably raise the usual extensive list of precontract enquiries.  However, it is quite common on a business sale for the buyer to ask for a ‘certificate of title’ from you as seller rather than doing a full investigation.  This means your solicitor will produce a certificate, typically at least 80 pages long, making a standard set of statements about the property and qualifying them where necessary by disclosing relevant information.  This requires you and your solicitor to pull out the relevant information and get all the necessary searches in advance.  This saves time for the buyer by passing that work back to you and it can be a very efficient process if your solicitor is already familiar with the property.

Disclosure and warranties

There are two key aspects of selling your business which you would not usually see if you were just selling the property.  The first is that the sale agreement will set out a series of warranties from you as seller, which confirm that all the statements about the business and its assets are true.  If they later turn out to be untrue, the buyer may have a right to sue you.  The warranties are closely linked with the other key aspect, which is the idea of disclosure. 

The warranties will set out the ideal position for the buyer, assuming that there are no problems with the business, its commercial property and any other assets.  If, in reality, there are some issues and the warranty statements are not entirely true, you will disclose all the relevant facts and documents.  The aim of the warranties is to flush out any problems with the property (for example disputes about boundaries or access) and end up with a set of statements the buyer can rely on.  The aim of disclosure is to qualify those statements by making the buyer aware of any issues, so they are buying with full knowledge and cannot sue you later.

Disclosure is usually achieved in two ways:

• by handing over copies of all relevant documents, either physically or by putting them into an online data room; and
• by listing them and including details in a document called the disclosure letter.

If you want to make sure commercial property issues do not delay the sale, you should be discussing what you need to disclose and how you plan to do it with your solicitor as early as possible.  It can take some time to gather documents and make them available to the buyer and, depending how much you disclose, it will take the buyer and their solicitor time to review everything.

Something your solicitor will need to negotiate with the buyer’s solicitor is the scope of your warranties.  The more you can limit this, the less likely it is that you will face a claim from the buyer in the future. There are three main ways you might do this:

• Limiting the length of time during which the buyer can bring a claim.  Typically, someone selling their business would expect to be liable for statements in the sale agreement for no more than 18 months to 2 years and this is set out in the sale agreement.
• Agreeing financial limits on the amount the buyer can claim.  It is common to see a minimum level of claim, below which the buyer absorbs any loss, and a cap on the seller’s maximum liability.  The actual figures will depend on the value of the business and the property and anything that has been disclosed, so this is something you and your solicitor will need to negotiate with the buyer.
• Limiting the scope of your warranties if you have limited knowledge yourself.  For example, if you have recently moved into the property being sold, your solicitor may be able to negotiate a clause limiting your warranties to the information you received from your seller rather than any wider knowledge an occupier might be expected to have.

Confidentiality

It is important to consider how open you want to be with your employees, suppliers, competitors and neighbours while you are negotiating the sale of your business.  You may want to keep it confidential, in which case it may be more difficult to gather information about the property without alerting people to the fact that a sale may be happening.  Your solicitor will need to deal with this at the outset, including imposing confidentiality obligations on the buyer and their professional advisors and possibly limiting the scope of their investigations.

Past liabilities

A final point to bear in mind is that anyone who buys a business takes on any historic liabilities with it.  Where commercial property is concerned, the buyer will want to know not just about the property you currently occupy but also any you have occupied in the past.  In particular, they will ask about any previous leases and whether the business has any possible liability under guarantees given in relation to later tenants.  The other key risk area for the buyer is environmental liability, so you and your solicitor should be prepared for questions on this.

How we can help

If you are able to anticipate the questions your buyer will ask and be ready with all the information you will need to disclose, you should be able to avoid any issues with the commercial property holding up the sale of your business.  Our expert commercial property lawyers can help you prepare for your sale as well as negotiating the best deal you can achieve.  For further information, please contact a legal advisor in our commercial property team at one of our offices – York, Selby, Malton or Pickering.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.