From a buyer’s perspective, buying the shares in a property Special Purpose Vehicle (SPV) can seem attractive because of the possible savings in transaction taxes, including SDLT.
However, based on experience, SPV transactions often end up as direct property purchases (or abort altogether) because of complications which emerge during the due diligence process.
This article explains some of the key legal differences between property SPV transactions and direct asset purchases. It also sets out eight key questions to ask at the outset in order to reduce the risk of the transaction aborting because of the SPV structure, and it gives some tips for avoiding delays if you do decide to go ahead.
Key differences in the legal risk profile
Whenever a property SPV purchase is under way, the standard refrain tends to be “this is a property deal – don’t overcomplicate things.” A very good thought, but in fact the legal risk profile of a straight property transaction is very different compared to that of an SPV purchase. There are two main reasons for this.
Firstly, on a direct property purchase, the buyer can rely on property searches and the process of land registration in order to get good title to the property, free of encumbrances. Not so on an SPV purchase.
Secondly, when you buy the shares of an SPV, you also inherit any other liabilities and issues relating to the corporate entity itself. In order to ‘prove a negative’ (in other words, satisfy yourself that there are no hidden liabilities), you must rely on what the seller gives you: information provided in the due diligence process, backed up by warranties and indemnities. Those warranties and indemnities are useless if the seller does not have the financial standing to meet possible claims.
Usually, the intention of the parties in an SPV transaction is to achieve the same commercial position as if the transaction had been structured as a property sale. This typically means dealing with property-related issues through replies to enquiries and the buyer’s own investigations, and dealing with any other issues separately in the corporate documentation. However, there are important differences, and the following table summarises some of the differences in risk profile and market practice involved.
8 key questions to ask from the outset
From a buyer’s perspective, there are a number of key questions to ask at the beginning of the SPV purchase process, before embarking on detailed negotiations.
- When was the SPV incorporated? Generally speaking, the older it is, the more likely it is to have some issues.
- Was any tax planning undertaken when the property was originally brought into the SPV? Any such planning should be a red flag for prospective SPV buyers, because of the need to understand whether a tax liability may be triggered by the purchase or by post-transaction restructuring.
- Who or what exactly is the seller? (Meaning the person or legal entity which actually holds the shares in the SPV.) Often this is not clear at the beginning, but it’s important to know who you are dealing with. A delay in answering this question often means that the seller is not well prepared for a sale.
- What is the seller’s covenant strength, and can you enforce any claims effectively? This can rule out SPV purchases where the seller is a trust (and unable to give warranties), or is in jurisdictions where legal recourse is unreliable. (Warranty and indemnity insurance may be available, but in practice the parties are often unwilling to foot the bill for that.)
- Is there more than one seller? Multiple sellers means more complexity in negotiations, because of possible differences of opinion on matters such as joint and several liability.
- Is the SPV tax resident offshore? If so, maintaining that tax residence requires a certain amount of discipline – and there’s a risk that it may be compromised by sloppy management before, during or after the transaction.
- Is there debt secured on the property? If so, obviously the lender will need to be involved in the completion mechanics so that the charge can be released. By no means insuperable, but it just adds another layer of complexity, cost and potential delay.
- What are the buyer’s plans for the property and the SPV? If the SPV needs to be unwound and the property extracted, then the costs involved can outweigh any savings in transactional taxes.
Based on the answers to those questions, you will be able to form a view as to whether you are willing to go ahead with the deal in the form of an SPV purchase.
Tips for completing the purchase smoothly
If you do decide to proceed with the transaction in the form of an SPV purchase, then there are a number of things you can do to minimise delays. Here’s a list of some of the key things.
- Assemble your professional team early on, and make sure that they are communicating with each other. This includes advisers dealing with property issues, corporate structure, tax and banking.
- Make sure that the agreed heads of terms cover not just the property basics of the property, the title and the price, but also the identity of the warrantors / covenantors, caps on liability and limitation periods for claims. If you are going to disagree on those points, it’s far better to flush that out earlier rather than later.
- Monitor how long it takes to get full responses to corporate and tax due diligence questionnaires. The speed of response is a litmus test as to how well the structure has been managed. Poor management = more risk = high likelihood of abortive costs.
- Understand the target SPV’s balance sheet. Work with the seller to put together a pro forma balance sheet showing the anticipated position at completion. This is particularly important if the property / properties have occupational leases, because rental apportionments will be reflected as accruals / prepayments in the balance sheet.
- Ensure that KYC information is provided to the SPV’s bank(s) early on, so that you can get control over the relevant bank accounts on completion.
- If you are using bank debt to buy the SPV, bottom out the conditions precedent (including reports, opinions and valuations) as early on as you possibly can, and work out the funds flow in advance (including what solicitors’ undertakings need to be given by whom to whom). These are classic causes of time-wasting and delay.
LCN Legal is a UK law firm which specialises in corporate and investment structures. We work alongside tax, accounting and other professionals to design and implement structures for our clients.
If you would like help with a property SPV transaction, please call us on +44 20 3286 8868 or email us at email@example.com. We will be very happy to arrange a free, no-obligation consultation with one of our specialists.