Buying the shares in a property SPV (Special Purpose Vehicle) can appear to be attractive because of the possible savings in transaction taxes. It may also be an appropriate approach when dealing with the purchase of a portfolio of properties.
In general, the intention of the parties in a property SPV purchase is to replicate the commercial position which would apply on a direct purchase of the underlying property. 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 through due diligence and the corporate documentation.
However, the actual risk profile for a UK property SPV transaction will necessarily be very different compared to that of a direct property purchase. There are two main reasons for this.
- Firstly, on a direct property purchase, the buyer can rely directly on property searches and the process of land registration in order to obtain good title to the property, free of encumbrances. This is not the case on an SPV purchase, where searches give only indirect protection.
- Secondly, the purchaser of the shares of an SPV will inherit (albeit indirectly) any actual or contingent liabilities and issues relating to the corporate entity itself. In order to assess those liabilities, the purchaser must rely on information provided by the seller. This includes information made available in the due diligence process, backed up by warranties and indemnities. Those warranties and indemnities will be of no value if the seller (or its guarantor) does not have the financial standing to meet possible claims.
In addition to the commercial and legal issues outlined in this article, buying the shares in a property SPV will of course raise additional tax considerations. For an overview of the potential tax risks, click on this link: Tax pitfalls when buying property SPVs
The following table summarises some of the differences between direct property purchases and SPV purchases, in terms of the legal and commercial risk profile and standard UK market practice.