Over the last couple of days, I’ve been supporting a client who is in the early stages of buying an SPV which holds a UK commercial property. We haven’t got stuck into the corporate due diligence yet, but it seems that the price has been agreed, subject to contract.
On paper, property SPV purchases are very attractive - mainly because of the potential saving in SDLT / stamp duty. But the shocking truth is that, in my experience, most of these deals do not proceed to completion. The major stumbling block is often the identity and financial standing of the seller, and its ability to give meaningful warranties. Here’s why this is such an issue.
When you are buying a property asset directly, the buyer is mainly relying on the process of title searches and registration at HM Land Registry to get good title to the property. Title diligence is still important, but the identity of the seller is usually not a major factor.
On the other hand, when you are buying a property SPV, the risk profile is very different. This is because the buyer is ‘inheriting’ any potential liabilities in the SPV, including tax risks and non-property related liabilities. It’s impossible to ‘prove a negative’ from investigations alone, and fundamentally the buyer needs to rely on warranties and indemnities from the seller that any liabilities have been disclosed. Those warranties and indemnities are useless unless the seller has the financial standing to meet any claims which are made. This can rule out transactions where the seller is a trust or an offshore company or a fund or an individual without substantial UK assets.
If you would like to understand more about the dynamics of property SPV purchases, you can read our guide here.