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Borrowing and joint ownership options in commercial property purchase

Clients looking to purchase a freehold commercial property through a Rowanmoor Pensions SSAS, SIPP or Family Pension Trust (Family SIPP) often have their pension arrangement borrow money to help with the purchase.

Transactions such as these can often appear complex, with several factors to consider. In this article, we give guidance on the steps that can be taken to ensure a smooth transaction, and how our experience in property purchases can assist the investment.

The first stage in all commercial property purchases is for the client to submit a completed property information schedule and, if borrowing is required, a completed borrowing information schedule, which details the loan that has been agreed in principle with the proposed lender, generally a high street bank.

A property can be leased to a connected party, at open market rent in line with pensions regulations, or an unconnected third party, at a rate in line with commercially negotiated terms. Valuations must be carried out by an independent, Royal Institute of Chartered Surveyors (RICS) qualified surveyor. Whilst the client’s bank will have a panel of surveyors, in order to avoid having two separate valuations, the member/trustee should ensure that the surveyor is on the bank’s panel, and that the surveyor then provides a report addressed to the trustees and to the bank, or separate reports addressed to the two parties. Whilst this may seem excessive, it is extremely important as the trustees require a statement of confirmation, in the valuation report, that they can rely on its contents. Without this, for example, if a surveyor has negligently undervalued a property, which results in a loss to the client’s pension arrangement, the trustees may find it more difficult to take legal action against the surveyor.

For all properties built prior to 1999 an asbestos survey will be required. This survey confirms whether there are materials containing asbestos at the property. If asbestos is found, this may not preclude the property from being a suitable investment so long as a suitable Asbestos Management Plan is put in place. If no management plan exists then on completion of the lease, the ingoing tenant will need to put one in place, based upon the findings of the survey and we will require a copy of this plan. Naturally we would also need a copy of the plan as and when it is amended or updated.

We request an energy performance certificate, for all purchases, as the trustees need one for legal purposes, before granting a new lease. The Vendor should be supplying this as part of their sale documentation.

Depending upon the age and construction of the property, the energy efficiency rating will vary. In 2018, statutory changes come into effect, which mean that properties with EPC ratings of F and G must be upgraded. If the property has a rating such as this, the buyer must obtain estimates for the works required to make the property more energy efficient, and should include this in budgeting for overall costs for the purchase.

Once we are in receipt of, and have approved the valuation, we send instructions to the solicitors to act for the trustees. For our SIPP we will appoint our retained solicitor. The solicitors are instructed to carry out full legal due diligence on the property, including providing an environmental desktop search for approval, a full report on title, as well as providing draft documentation for review.

We will also issue instructions to the lender, setting out what we understand to be the agreed terms as stated on the borrowing information schedule, submitted by the client. Purchases with borrowing usually take longer than transactions without. The bank will have numerous requirements not only for us, but also for the solicitors to deal with. We will confirm specific requirements for the documentation, including our standard limitation of liability clause. The lender will then need to send us any account opening paperwork and mandates, as well as a loan agreement, and they will also instruct our retained solicitors to act on their behalf, with the legal charge being sent to them for review before being sent to the trustees for signature.

If the purchase is a SIPP or Family Pension Trust transaction, the property will be insured through the Rowanmoor Pensions Property Insurance policy, facilitated by Lockton LLP. The cover is based upon the information provided by the client within the property information schedule, and also on the valuation, which includes an insurance reinstatement figure.

It should also be investigated whether the property in question is VAT registered. VAT is an extremely complex area and clients need to take specialist VAT advice, regarding whether to register their pension arrangement for VAT in order to be able to reclaim the VAT paid out. The client needs to provide written authorisation for us to deal with the appointed specialist, give instructions on what information we are able to provide on request and advise if the specialist is authorised to instruct VAT related payments from the scheme or SIPP bank account. The client also signs our VAT indemnity which acknowledges that they indemnify the Rowanmoor Group in respect of any liability with regard to VAT.

If it transpires that there are insufficient funds to buy the property outright we may be asked to consider the possibility of the transaction becoming a joint purchase; with the client’s Limited company, the client themselves, or a third party, also owning a share in the property. When borrowing is involved, this is probably one of the most complex types of joint purchase situations that can occur, because there is a need to safeguard each joint owner’s share in the property, and also a need to ring-fence any liabilities in respect of borrowing taken out. Nonetheless, we are able to facilitate these scenarios through close liaison between our property experts and the bank.

HMRC has no objection to joint ownership provided:

To help safeguard the value of the investment, a joint ownership agreement must be drawn up between the parties at the time of the purchase, setting out each party’s respective liabilities in relation to ownership of the property and also entitlements to income, share of net proceeds of sale, etc. Such agreement normally gives either owner first refusal to buy the other party’s share of the property if it comes up for sale, at an open market value.

Where one or both parties borrow and that borrowing is to be secured against the property being acquired, it is necessary for all parties to be named in any security documentation, which will need to be reviewed and approved by us. It will also be necessary for the lender’s security documentation to be varied to effectively ring-fence each party’s liability to their respective share of the property and so that the bank cannot use the other owner’s share of the property to pay off the borrowing. Banks can be unreceptive to this type of arrangement but with close liaison between our property specialists, retained solicitors and the bank, we have managed to put in place several of these arrangements to the satisfaction of all the parties concerned.

This is just one of the complex scenarios we deal with on behalf of our clients. If you are considering property investment through your pension scheme, further information can be found within the property and literature pages of our website including the scenario illustrating this example. Alternatively please call us to discuss your property requirements.

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