News and Events

Buying a Commercial Property at Auction?

View profile for Bejul Lakhani-Lever
  • Posted
  • Author

Purchasing a property at auction is an appealing prospect for potential buyers in that valuable investments can be obtained on favourable financial terms. Therefore, to ensure that this is the case, potential buyers are advised to give consideration to the following:

1. Tenure

The majority of properties are either freehold or leasehold. Both types of properties can be subject to restrictions, adverse matters and so on, but often the obligations arising from acquiring a leasehold property can extend further; this is not an issue but something to be aware of when assessing if the buyer can achieve its objective.

2. Restrictions

Titles to properties, be it freehold or leasehold, often, but not always, contain restrictions. Buyers are advised to consider whether the restrictions could impede their intended use of the property and question how easy it would be to obtain consent or release under the restriction. The purchase is fruitless if the restrictions cannot be removed or consent will not be available. Dependant on the wording of the restriction, consent maybe at the absolute discretion of the beneficiary of the restriction. If a release or consent is required there will undoubtedly be a fee attached to it.

3. Securing Finance

If a potential buyer wishes to purchase a property with the benefit of bank finance, it is important to check the security potential of the property. It is recommended that valuations and structural assessments are made before the auction. Buyers are advised to enlist the help of a surveyor or at minimum make an inspection of the property with a builder. Any valuations obtained from a suitably qualified person, will be an indicator of what a lender may lend against a property.

In addition, if the property is leasehold, a further question arises as to whether the unexpired term of the lease is mortgageable. Most lenders require a minimum unexpired term of 65/70 years. Therefore, a term of say 45 years may not be acceptable. Eventually a buyer will want to realise it’s investment and therefore it should consider how easy it would be to extend the term and the costs implications attached to it.

4. Planning and Building Regulations

Any potential investor will have an idea as to their intended use of the property- be that  it may wish to change the use or continue with the existing use. In any event, the correct planning permission ought to be in place or enquiries made with the local authority as to whether an application would be resisted.

If the property does not have the correct planning permission, owners could face potential enforcement action from the local authority. Buyers are advised to consider the requirements for planning and options to consider if the property does not have the correct planning.

A further point to consider where alterations have taken place is that does the property have the benefit of the building regulations approvals? Without planning and building regulations, not only does the buyer face potential enforcement action, a lender will also be reluctant to lend and it may be difficult to realise the investment in  the future at least until all contraventions have been rectified.

Again, if the property has restrictions in respect of obtaining planning permission for a new use not only will the local authority’s consent be required but also the beneficiary of the restriction, be they landlord under a leasehold title or a neighbour under a freehold title.

5. Adverse matters

Properties can be subject to matters benefiting a neighbouring or nearby property. For example, this could include: a right of way over your potential investment; obligations to contribute to joint repairs and obligations not to do something. It is important to be aware of such matters when considering a purchase both in terms of cost and responsibility.

6. Statutory requirements

Buyers are advised to consider the implications of any statutory requirements and existing contraventions. In addition to planning and building regulations as discussed above, there are other matters which should be considered, for example, environmental liability and asbestos management. EPC ratings should not be below level E. From 1 April 2018, landlords of commercial premises are not be able to grant new leases of commercial properties which fall below the minimum ‘E’ standard. This extends to lease extensions and renewals. Furthermore, from 1 April 2023, landlords cannot continue to let commercial properties which fall below the minimum ‘E’ rating.

7. Realisability

Eventually, a potential buyer will wish to sell the property. The question of future realisability is often forgotten at the time of purchase, however it should be at the forefront of a buyer’s mind. If you cannot realise the investment then the initial purchase is pointless. The factors outlined above will undoubtedly affect the value, marketability and future realisability of the property.

Our advice to any potential buyer is to give a great deal of consideration to the legal pack and practical implications of it. We at Brethertons LLP have a wide range of experience in dealing with residential and commercial auction purchases. If buyers find themselves tempted with an attractive investment, we would be more than happy to assist.

If appropriate checks are not carried out before the auction, the buyer could find itself in a very unfavourable position.