Buying commercial property: the legal steps explained

How a commercial purchase works

Buying a shop, office, warehouse or mixed-use building follows the same broad path as buying a home: agree terms, investigate the property, exchange contracts (the point where the deal becomes legally binding) and complete (when the money is paid and ownership passes). The difference is that a commercial buyer is expected to protect itself. The seller has limited duties to volunteer information, so the investigations are more detailed and the contract more negotiable.

The deal usually begins with heads of terms from the agents, setting out the price, what is included, the timetable and any conditions. Your solicitor then checks the title, orders searches, raises enquiries, negotiates the contract, deals with your lender and reports to you before exchange. Your role is to explain how you will use the property, commission a survey, arrange finance and take tax advice where needed.

This guide describes England and Wales.

Deciding who will buy

Decide early who will own the property, because changing the buyer later can cause delay and tax problems. You might buy in your own name or with others, through a limited company, or through a pension scheme such as a SIPP (self-invested personal pension) or SSAS (small self-administered scheme). Each choice affects tax, borrowing and what happens when you sell, so take advice from an accountant or financial adviser first.

Lenders to companies often ask directors for personal guarantees. An overseas company must register on the Register of Overseas Entities at Companies House before buying. Our guide to buying property through a company has more detail.

Title, searches and enquiries

Your solicitor checks the title at HM Land Registry to confirm the seller owns what it is selling and to find rights and restrictions, such as rights of way, shared drains and covenants (binding promises) limiting how the property is used. The title plan should match what you think you are buying, including parking, yards and access to the road.

Searches for commercial property commonly include:

• A commercial local authority search, covering planning history, roads and local notices
• An environmental search, covering flood risk and past uses that may have left contamination
• A commercial drainage and water search, showing connections to public sewers and water mains
• Others depending on location, such as mining or chancel repair (an old liability to help pay for church repairs)

Your solicitor also sends the seller the Commercial Property Standard Enquiries (CPSE), a widely used set of questions about boundaries, disputes, services, insurance, planning and more. Replies are often brief or qualified, so your own inspection and survey remain essential.

Planning, building regulations and environmental risk

Check that the property has planning permission for its current use and for what you plan to do there. Your solicitor will review planning permissions, building regulations completion certificates for past works and any enforcement notices, though complex questions may need a planning consultant.

Under the contaminated land rules in Part 2A of the Environmental Protection Act 1990, whoever caused or knowingly permitted pollution is primarily responsible for cleaning it up, but if they cannot be found, the current owner or occupier can be liable. If the environmental search raises concerns, such as a former petrol station on the site, your solicitor may recommend a consultant's report before exchange.

Also ask for the asbestos register, fire risk assessment and Energy Performance Certificate (EPC). Most commercial property in England and Wales cannot be let with an EPC rating below E unless an exemption is registered, which matters if you plan to let.

Buying a property with tenants

If the building is let, you are buying the tenants' leases along with it, and the rent may be the reason you are buying. Your solicitor will review each lease and summarise the rent, review dates, break options, repairing and service charge terms, and whether the tenant has security of tenure. Our guide to commercial leases explains these terms.

Ask for a tenancy schedule (a list of tenants and their key terms), rent and service charge accounts, details of arrears and disputes, and any rent deposits, which should pass to you on completion. Rent is apportioned on completion: if a tenant paid the quarter's rent to the seller in advance, you receive the part covering the days after completion. Tenants are then told to pay you.

VAT and capital allowances

Many commercial sellers have made an option to tax, a choice that makes sales and rents of that building subject to VAT, currently 20%. VAT is then added to the price unless an exception applies. If you are registered for VAT and use the building in a business that charges VAT, you can usually reclaim it, but you still need the cash on completion.

The main exception is a transfer of a going concern (TOGC). If you buy a let building and carry on the same letting business, the sale can be treated as the transfer of a business, with no VAT charged. Where the seller has opted to tax, you must be registered for VAT, opt to tax yourself, notify HM Revenue and Customs (HMRC) by the relevant date (usually completion, or earlier if the seller receives a deposit) and confirm to the seller that your option will not be disapplied (switched off by anti-avoidance rules). HMRC's guidance on going concern transfers sets out the conditions, and our VAT guide explains more.

Capital allowances give tax relief on some fixtures, such as heating, lighting and air conditioning. Whether you can claim depends on the seller's past claims and on agreeing a value for the fixtures, usually in a joint election (a formal agreement between buyer and seller notified to HMRC), so raise it early and take specialist advice.

Stamp Duty Land Tax on a commercial purchase

In England and Northern Ireland, commercial and mixed-use property is taxed at the non-residential rates of Stamp Duty Land Tax (SDLT): 0% on the first £150,000, 2% on the part from £150,001 to £250,000 and 5% above £250,000. Where VAT is charged, SDLT is worked out on the VAT-inclusive price.

For example, if you buy a building for £500,000 plus VAT of £100,000:

• SDLT on £600,000 is £0 on the first £150,000, £2,000 on the next £100,000 and £17,500 on the remaining £350,000, a total of £19,500
• If the sale is a TOGC and no VAT is charged, SDLT on £500,000 is £14,500

The £5,000 difference is a real cost even if you reclaim the VAT. The return and payment are due within 14 days of completion, and your solicitor normally files it. Wales has its own tax and bands, and our calculator gives an estimate.

Finance, exchange and completion

Commercial lenders usually instruct their own solicitors, and you normally pay their costs as well as your own. The lender will want a valuation and a report on title from your solicitor confirming the property is good security, and it may set conditions such as guarantees, insurance or information about tenants. Apply early, because one unmet condition can delay completion.

When you are happy with the survey, searches, replies and finance, your solicitor reports to you and sends the contract to sign. On exchange you commonly pay a deposit of 10% of the price and become legally committed; if you then fail to complete, you can lose it. On completion the balance is paid, keys and documents are handed over, and your solicitor pays the SDLT and applies to register you as owner at HM Land Registry.

Checklist before exchange

Before you exchange, make sure you have:

• Agreed heads of terms, including the price, VAT position and timetable
• Decided who will own the property, with tax advice on the structure
• A survey, plus an environmental report if the searches raise concerns
• Read your solicitor's report on the title, searches and replies to enquiries
• Confirmed planning permission for your intended use
• Reviewed the leases and rent position if the property is let
• A finance offer with conditions you can meet
• Arranged insurance from exchange, or agreed who insures until completion
• Budgeted for the deposit, VAT, SDLT, legal fees and the lender's costs

Next steps

Get an instant, itemised commercial purchase quote showing the legal fee, VAT, disbursements and an SDLT estimate. The law firm you are introduced to confirms its fees in writing before you instruct it. If the building combines commercial and residential parts, see mixed-use purchases.