Commercial Property Week 1 - Site acquisitions: Commercial

conveyancing, planning law, VAT and construction projects

The following is a summary of the main issues that should have been included
in your answers – you will need to add more detail than is included below to
pass the examination.

Preparation Task 1
Searches - the usual conveyancing searches should have been carried out
but note in particular:

Local search
 Check planning history (particularly if brownfield site)
 Check development plan - any specific designations for this site?
 Check for any tree preservation orders.
 Check adoption of roads and any road proposals. How is access to the
site to be taken? (Are s38 agreements needed?)
Check with client whether to do any optional Con 29O enquiries. Always do a
common land, town and village green search in commercial property
transactions whether green or brownfield. Also, at the very least suggest that
we do public paths and piplelines.

Drainage and Water search

 Separate search is necessary on form CON 29DW
 Check the existing drainage to see if it is publicly maintained and whether
we can use it / connect into it. (More likely to be existing sewers/drains on
a brownfield site).
 Are any new sewers to be constructed / adopted? (Are s104 agreements
needed?)

Index map search

Important even in registered land to check for ransom strips.

Environmental searches
Definitely needed but see week 2.

Other searches
May be appropriate e.g. mining/brine depending where property is situated. It
also seems that Chancel Repair searches are now being done as a matter of
course in all transactions.
Statutory undertaker searches
Carried out with the local undertakers for gas, electricity, telephone, cable to
establish whether there are any pipes/cables under or near the property and if

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so the location of these – will the client need to move these to carry out its
development? (There are more likely to be existing utilities on brownfield
land). Also check with the Environment Agency for flooding risk and floodplain
maps.

Enquiries
PIF is not used in commercial transactions. Firms are likely to use the
Commercial Property Standard Enquiries (see www.practicallaw.com) or will
raise their own preliminary enquiries. CPSE 1 version 3.8 should be used –
you should have identified a few example of the questions asked.

Vacant possession
Check, for example, that there are no grazing rights/ agricultural tenancies/
sporting rights on a greenfield site or other tenancies/licences to
occupy/squatters on a brownfield site.

Title
In particular check for existing easements and restrictive covenants which
may affect our development.

Survey/Inspection
Particularly important to check for vacant possession and also to check that
there are no rights in the course of being acquired.

Preparation Task 2

You should have covered the following issues:

 Is there an existing planning permission? – check local search/replies to

enquiries. More likely that the property has a planning history if it is a
brownfield site. If there is an existing permission check that your client’s
proposed use falls within it (unlikely in this scenario) and that any
conditions attached to it are acceptable. (Discussion of certificates of
lawful use or development would only be relevant if the proposed use was
the same as the existing use.)
 Is it “development”? (see s55(1)TCPA 1990) – here we will need
permission for building and for changing the use (assuming it has not
been used for retail purposes).
 Is it excluded from the definition of development under s55(2) TCPA? –
No, s55(2) relates to internal works and changes within a use class.
 Is it permitted development under the Town and Country Planning
(General Permitted Development) Order 2015? - Will not be here.
 Conclusion is that planning permission will be required in this scenario.

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2
A suggested summary follows:
 Discussions with local planning officer (as to likelihood of permission
being granted and requirement for s106 Agreement)
 Consider Development Plan (see local search – indicates policies for
certain areas e.g. greenbelt. If development not in accordance with Plan
then unlikely to get planning permission. Note s54A TCPA 1990:
effectively priority is given to Development Plan unless material
considerations dictate otherwise).
 Consult Government circulars and Planning policy guidance
notes/Planning Policy Statements

3
You should have come up with the following 2 main suggestions and
discussed the advantages/disadvantages of each:

 Option agreement
Advantages: allows client flexibility (to decide when to exercise the
option) and gives us time to get planning permission sorted
Disadvantages: we would probably still have to do all usual pre-
contract searches and title investigations now. Seller will probably
want to restrict the option period.

 Conditional Contract
Advantages: have security of knowing that we have the property under
contract (provided it is a condition “subsequent”) but don’t have to
complete if we don’t get planning permission
Disadvantages: must draft the contract clearly so that conditions to be
satisfied are defined with certainty and are workable.

Preparation Task 3
(see VAT flow chart at the end of these notes)

1
Is VAT payable on purchase price of £1,300,000?

 VAT can be charged where there is a supply of goods (e.g. land) or

services (e.g. professional fees) by a taxable person in the course of a
business.
 Whether greenfield or brownfield (so long as the existing building is over 3
years old) this sale is an exempt supply but subject to an “option to tax”
(i.e. exempt supplies can be converted into standard rated (20%) supplies
if the landowner elects/opts to tax or “waive the exemption”).

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 Depends if Mr Johnson is registered for VAT (remember that has to be a
taxable person otherwise will be outside scope of VAT) - check replies to
preliminary enquiries.
 If so, has he elected/opted to tax? - check replies to preliminary enquiries
and make sure that you see his notice to Customs and Excise and their
acknowledgment and check that the election relates to this specific
property.
 If yes, then VAT payable at 20 % but check in contract to see whether the
purchase price is inclusive or exclusive of VAT
 If Mr Johnson is not registered for VAT or if he has not elected then no
VAT payable – but see the contractual position as the risk is the seller
could elect to tax between exchange and completion.

2
How does the draft contract deal with VAT?
 Refer to the Standard Commercial Property Conditions (SCPCs Third
Edition – 2018 Revision).
 SCPC 2 says that the sale is a chargeable supply and so VAT at the
standard rate of 20% will be charged by the seller in addition to the
purchase price which is an additional £260,000.
 If the seller was not charging VAT on this sale then he would have to tick
Condition A1 on the back of the contract. This would confirm that the
seller will not exercise the election to waive the exemption and so the
seller cannot ask the buyer to pay any additional amount for VAT. In other
words, our client could be certain that the maximum payable is £1.3million.
 On our draft contract, the seller has not ticked box A1 so VAT is
chargeable in addition to the purchase price. We should check with the
client to see if the client is aware of this.

How does this differ from the Standard Conditions of Sale (5th edition)?
 See SC 1.4 – this simply says that the purchase price of the property and
contents price are both inclusive of VAT so the Seller cannot charge VAT
on the property. However, other sums are exclusive of VAT and so the
seller can charge VAT on these.

3
Is VAT payable on other costs?
 Construction services (including demolition costs if brownfield site) and
civil engineering works – standard rated
 Professional services (professional team/ solicitors/ agents) – standard
rated

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4
How could our clients recoup any VAT paid?
 Our clients can offset any VAT paid out (input tax) against any VAT it
receives (output tax).
 Our clients intend to lease the retail units. The grant of a lease is an
exempt supply subject to the option to tax (see above). So long as our
client is registered for VAT then it can elect to charge VAT on the rents
(and any service charges) under the leases. Our clients will then only
have to account to Customs and Excise for the balance i.e. the difference
between the VAT paid out and received. The main problem will be
cashflow – our clients will still have to find the VAT to pay out now.

Question 4

1
 No liability in contract as there is no direct contractual relationship with the
tenant. Possible liability under Contracts (Rights of Third Parties) Act 1999
but only if the tenant is specified as a person or class in the relevant
contracts and if Act not excluded from those contracts.
 Liability in tort won’t cover damage to building itself as this is pure
economic loss, would only cover personal injury or damage to other
property. The tenant is unlikely to have close enough proximity for
negligent misstatement.

2
You need to explain the following options and for each identify the pros and
cons.
 A warranty from the main contractor.
 Latent Defects Insurance
 Assignment or trust of Employer’s contractual rights
 Tenant’s repairing obligations. Tenant should try to limit repairing
obligations in lease by excluding liability for inherent or latent design or
construction defects and ensuring landlord responsible (maybe just for first
few years?). This need to be fully explained and explored as well as the
types of clause that can be used.
 Agreement for lease:
If there is an agreement for lease, this may give the tenant the benefit of
the landlord’s defects liability period (in the building contract).

The agreement for lease could oblige the landlord to pursue for the
tenant’s benefit other contractual remedies that the landlord may have
against other members of the professional team but note recent HL case

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 Panatown Ltd –v- Alfred McAlpine Construction Ltd [2000] 4 All ER
97 which said that a third party cannot pursue a claim for this when it
already has a collateral warranty (even if the rights available to it under
the warranty are not exactly the same as the Employer’s rights under the
building contract).
 If you were acting on behalf of a purchaser, buying the completed
development from Gaskell Developments Ltd your answer would be the
same except for the Tenant’s repairing obligations and Agreement for
lease points mentioned above.

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Commercial Property Workshop 1

VAT

Purchase of a Greenfield site (exempt, subject to the option to tax)

No
Is the Seller registered for Outside the scope of
VAT? But see risk below is VAT
does between exchange and
completion

Yes

Has the Seller elected to

charge VAT (“waived the No No VAT to pay
exemption”)? – but note risk
is seller could do so between
(Use Condition A1 in SCPCs
exchange and completion (3rd edition 2018 - Revision))
making the buyer liable for
VAT in addition to the
purchase price

Yes

Supply becomes standard

rated – VAT payable at 20%

(Check notice to HMRC and

acknowledgment (and check that
relates to this specific property))

(Check contract includes SCPCs

(3rd edition 2018 - Revision) (or
similar)).

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