Commercial Property Essentials: Buying A Commercial Unit Within A Larger Building

To kick off the new year we have prepared a series of articles on key considerations in commercial property transactions called "Commercial Property Essentials". The aim of this series is to provide a high-level overview of certain key terms which can be referenced at the beginning of transactions.

In this article we will set out the key matters which should be considered by a prospective buyer when acquiring a commercial unit within a larger building (i.e. an office within a block of offices or a retail unit within a shopping centre).

As a starting point, when buying a commercial unit, most commercial terms will be negotiated and agreed between agents for the seller and buyer and recorded in a document called the Heads of Terms (also referred to as HOTs for short). The HOTs are sent to the respective solicitors who use them to draft, review and negotiate the legal documentation. The majority of the list below would be covered off in typical HOTs. This is not a comprehensive list and key matters can vary depending on the property in question and type of transaction, it is always important to obtain specific legal advice.

VAT

It should be clear from the outset of a transaction what the agreed purchase price is and whether there are any VAT (Value Added Tax) implications arising from the transaction.

The sale of a second-hand commercial property (which was completed more than 5 years prior to the current sale and was not developed for VAT purposes within the last 5 years) will typically be exempt from VAT. However, a VAT-exempt sale can lead to a potential repayment of VAT previously recovered by the seller under the Capital Goods Scheme (CGS).

The CGS is a mechanism for regulating the amount of VAT reclaimed over the VAT-life of a capital good (typically 20 years). For VAT purposes a capital good is a developed property and VAT could be reclaimed on development of the property if the property is then put to a VATable use. Where a seller has reclaimed VAT on a capital good, such as carrying out development works, and is selling on a property during the VAT-life of that capital good, the buyer can be required to take on that CGS. If the buyer does not take on the CGS and the VAT life is ongoing then the seller who reclaimed the VAT can be required to repay to Revenue some of the VAT relief originally reclaimed.

In such circumstances a CGS record will be provided by the seller to the buyer which sets out the VAT history of the property which the buyer is deemed to inherit, and on the basis that the buyer will continue a VATable use of the property post-acquisition, the inherited VAT should not be a cost for the buyer but does need to be monitored over the VAT life of the property. The buyer is not required to make any additional returns to Revenue by simply inheriting the CGS record but must continue to monitor it.

For illustrative purposes the situation could arise where A intends to sell their commercial unit to B, 6 years ago they carried out major fit out works to the unit which constitutes development and a capital good, A reclaimed VAT from Revenue on the costs of that development and generated a CGS. B intends acquire the unit and continue to use the unit for the same VATable use as A was using the unit for. A will provide B with the CGS record for the development 6 years ago and provided there are no gaps in the documentation B may be able to take on the CGS with no adverse implications to themselves other than a monitoring responsibility.

The seller will also provide replies to Pre Contract VAT Enquiries which will need to be reviewed to ensure there are no additional tax implications for the buyer. You will need to obtain independent tax advice for this and it will need to be factored into costings for the transaction.

Identity of the Property

If you are buying a commercial unit within a larger building, you will typically acquire a long leasehold interest and own the internal, non-structural, parts of the unit only. Your solicitor will review the description of the property in detail and the seller should also provide plans showing the property clearly marked.

If the unit being purchased is within a larger building you will need to understand whether the owners and occupiers of the unit have access rights to all communal areas within the building. If the unit is located on, for example the third floor, you may have a right to only use the elevator and emergency stairs from the ground floor entrance to the unit itself. In case of emergencies there can sometimes be additional rights to go through other parts of the building for emergency escape routes.

Your solicitor will also review the title documentation to ensure the unit is adequately serviced and has the benefit of any necessary rights or easements for the running of utilities to and from the unit.

Service Charge, Repair and Maintenance

If the owner of the unit does not own the structure of the building or the carpark around it, then these areas will be maintained and managed by the owner of the building itself or an appointed managing agent (in some circumstances the car park may be owned by an entirely different entity but that is unusual). The costs borne while maintaining the building (and car park as applicable) will be recouped from owners and occupiers of the building through service charges.

It is important to understand the service charge regime, what is covered, how the costs are split between the owners/occupiers and when payments are due. The services covered should be interrogated in detail as they will be an additional ongoing financial obligation through the term of your ownership.

The lease the unit is being purchased under should contain a clear definition of what costs are recoverable through the service charge. Typically, recoverable costs include maintenance and repair of common areas, cleaning, lighting, heating of common areas, management fees, security and contributions to a sinking fund. The services covered are often set out in a schedule to the lease.

It is also important to consider what should not be included in the service charge, this is anything which the unit (or the common areas which the owners and occupiers of the unit have access to) will not derive any benefit from, examples would be rental collection costs or landlord costs if they occupy a different part of the building. An example which may come up is if you are acquiring a ground floor unit and there is an elevator in the building, if all common areas which you will use are also located on the ground floor there is a good argument that you should not be required to contribute to the maintenance costs of that elevator.

How service charge apportionment between the various owners and occupiers of a building can vary, there is usually a formula specified in the lease. Common methods of apportionment include by floor area or by reference to a fixed percentage set out in the lease, in some leases it will be less clear and on the basis of what the building owner deems "fair and reasonable". You should satisfy yourself that the apportionment basis is fair and reflects your actual use and benefit from the services provided.

In addition to the service charge you may be required to contribute to a sinking fund to cover anticipated major expenditure such as a roof replacement. Contributions are typically collected annually and held by the building owner / management company until needed. A critical issue is whether the sinking fund is held separately in a designated account, or simply paid into the building owner's general accounts. If the fund is not held separately, it may be at risk in the event of the building owner's insolvency. In such circumstances, the sinking fund could be treated as an asset of the building owner and be available to its creditors, meaning you would lose the benefit of your accumulated contributions and potentially face demands for further contributions when major works are required.

Best practice is for the sinking fund to be held in a separately designated trust account or escrow arrangement, with restrictions on the building owner's ability to access the funds other than for their intended purpose.

Parking

If you are buying office space or a retail unit in a building which is surrounded by a private car park it can be easy to assume car parking forms part of the deal. It is important to double check this as car parks can be set up in a number of different ways. The unit may have specified allocated car parking spots, typically these would be licensed to the owners or occupiers of the unit at an annual licence fee rather than sold to the owner / occupier. There may be unallocated parking which the owner / occupier of the unit is entitled to use free of charge or no right to park cars may be included at all.

In many multi-letting buildings, parking areas are subject to a separate service charge distinct from the main building service charge. This car park service charge typically covers maintenance, cleaning, lighting, security, repairs to the parking surface and associated management costs. The position in relation to parking will be documented in the lease which your solicitor will review.

You should review the lease to understand whether a separate car park service charge applies, how it is calculated and whether the cost is fixed or variable. You should also check whether there are any limitations on how the landlord / management company could increase the car park service costs or whether they are limited to reasonable and vouched costs.

Even where parking spaces are allocated, enforcement can be problematic if other occupiers or visitors use spaces without authority. You should establish what measures are in place to regulate parking and prevent unauthorised use, this will ensure you are getting value for these spaces. Does the building operate a barrier system? Is there on-site security or patrols to monitor compliance? Bear in mind that these additional protections will also increase the costs of the licence fee for the space and / or the car park service charge.

Insurance

The insurance provisions can have significant financial implications, particularly if the property suffers damage or destruction. The owner of the overall building will typically insure the building and recoup the costs of that from owners/occupiers, this may be through the service charges but it may be a standalone cost.

While the building will be insured it is important to understand what risks are excluded from the building insurance, standard commercial property policies exclude or limit cover for:

• Terrorism
• Damage caused by an occupier's own negligence or wilful acts
• Flooding (in high risk areas)
• Subsidence
• Loss of rent beyond a specified period (commonly 3 years)

In the event of insured damage occurring, the lease under which you acquired the unit will typically require the building owner to reinstate the building using insurance proceeds. You should check what happens if there is a shortfall between the insurance proceeds and the actual cost of reinstatement – is the building owner required to make up that shortfall or will they look to the unit owners and occupiers?

Commercial Rates

Commercial rates are additional taxes on commercial properties which are paid to local authorities. Due to a change in the law in 2023 the commercial rates for any commercial property being sold must be fully discharged up to the date of the sale prior to the sale, this means the buyer cannot simply hold back an amount from the purchase price to cover any arrears in commercial rates.

On completion of the purchase of the unit the buyer must file a notification with the local authority within 10 working days of completion notifying the local authority of the change of owner (a Section 11 Notification). To file this notification you will need the tax number of the buyer and a designated point of contact within the buyer for the local authority to reach out to if necessary.

Is a tenant in situ?

If you are acquiring a unit that is currently let to a tenant, additional considerations arise, particularly in relation to the security of tenure provisions under the Landlord and Tenant Act 1980.

Under the Landlord and Tenant Act 1980, business tenants have a statutory right to remain in occupation at the end of their contractual lease term and to request a new lease on similar terms if they have been in continuous occupation of a property for 5 years or more. A deed of renunciation can be obtained from an occupational tenant at the start of their occupation of a property or at any time thereafter which renounces their statutory right to such a new lease. If you are acquiring a unit with a tenant in occupation you would ideally see that the tenant has already signed such a deed of renunciation.

If the existing tenant's lease is protected by the 1980 Act (because no deed of renunciation was signed), you will acquire the property subject to the tenant's continuation rights. This means:

• The tenant can remain in occupation indefinitely, even after the contractual expiry date
• You cannot recover possession without establishing one of the limited statutory grounds (such as redevelopment, own occupation, or tenant breach)
• The tenant can apply to the court for a new lease, and you will generally be obliged to grant one unless you can prove a statutory ground for opposition
• The terms of any new lease (including rent) will be determined by the court if you cannot reach agreement with the tenant

If there is a tenant in occupation, then, before exchanging contracts, you should:

• Establish whether a deed of renunciation has been executed by the tenant (having received their own independent legal advice)
• If no deed of renunciation has been signed and the lease is protected, assess whether this aligns with your investment strategy and exit plans. If not, consider whether the purchase price reflects the restricted nature of your interest.
• Review the current rent against market levels. If the tenant has a right to renew, what rent are they likely to achieve on renewal? This will affect your investment return.
• Check the remaining lease term and any break rights. When can the tenant serve notice to renew? Do you have any break rights that would allow you to serve notice to terminate?
• Consider whether it may be possible to negotiate with the tenant to renew the lease on agreed terms (including excluding security of tenure for the new lease) as a condition of your acquisition. This would give you certainty and control over the tenant's occupation going forward.

Your solicitor can advise on the specific position and the commercial implications for your acquisition. Given the complexity and potential long-term impact, this should be addressed as a priority during your due diligence investigations.

Planning and Building Regulation Compliance

Planning and Building Regulation compliance will need to be reviewed, your solicitor can carry out a table top review of the documentation available and flag in gaps in the compliance documentation.

You should also engage a surveyor, engineer or architect to review the unit and wider building in person and highlight any potential areas of concern. In commercial property transactions the buyer takes the property as is under the principal of "caveat emptor" (meaning "buyer beware"), to ensure the buyer is aware of any issues with the condition of the property which would reasonably be expected to be evident on inspection of the property, it is essential that a survey be carried out by an appropriate professional.

BER Certificates

It is a legal requirement that any building (or part of such) being sold in Ireland has a valid BER certificate and advisory report (there are some exemptions to this). Typically, the agent for the seller will provide this early in the transaction, sometimes with promotional material for the unit. If there is no BER certificate available and no exemption applies the seller will need to obtain one in advance of completion.

Stamp Duty

Remember an additional cost on completion of the acquisition will be stamp duty which is owed to Revenue within 30 days of completion, in practice Revenue will not charge interest or late filing fees until 44 days after completion. At the date of writing, stamp duty on commercial property is at a rate of 7.5% of the purchase price.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.