As the build to rent (BTR) market matures, the secondary market in trading stabilised assets will grow. A vendor will want to go to the market with a clear view on how they want to structure the sale – a share or land transaction. The decision may put off certain categories of purchaser.
Irrespective of structure, being sale ready will be really important for vendors wanting high speed transactions with less opportunities for the purchaser to chip the price.
Share or land transaction?
This decision will be driven by various factors, but is likely only relevant if the asset is held in a separate vehicle. If it is then tax considerations will come to the fore and the parties might seek to prevent stamp duty land tax arising on the sale of the property by instead selling the shares in the property holding company (with the SDLT saving often shared between vendor and purchaser). The VAT structuring of the development phase may also point towards a share transaction.
From a legal perspective the decision dictates the type of documentation that will be used. Share and land sale documentation have some similarities, but are fundamentally different transactions. For instance share sales normally contain warranties from the vendor in a way that land sales do not – the approach being very much "buyer beware".
In a share sale the purchaser acquires the property company and everything in it, known and unknown, so generally speaking any contracts which the company is party to will automatically come with it unless terminated prior to completion. That can be advantageous in that it provides a purchaser with a fully operational asset with everything in place to continue the business. But some purchasers will want to impose their own operational structure immediately meaning a route will be needed to end existing arrangements.
Land sales can be delayed by title requirements. In particular, the need to obtain any consents, e.g. from a landlord, holder of an overage, etc. A share sale avoids these difficulties as the owner of the land does not change.
Many aspects of the two transaction forms are very similar as the underlying asset in both cases is the same. The due diligence work needed on the title, tenancies, etc will be largely the same.
Getting sale ready
Vendors should not underestimate the importance of ensuring that they are fully sale ready. Preparation is the key!
This is not the place to provide a checklist, but the following are some of the less usual areas that will require early thought in order to avoid delays:
- On substantial BTR assets it is likely that certain individuals commit a large part of their working day specifically to that asset. So early consideration should be given to the impact of TUPE and transferring employees.
- Up to date information about the tenants and the tenancies will need to be collated and made available to potential purchasers in a way that complies with data protection requirements. The same applies in relation to any other let parts of the asset, such as commercial units, parking spaces, etc.
- Where is your data? A lot of it might be in the hands of others (e.g. managing agents, contractors, etc). You will need to make sure this is available in transmissible form so it can be moved to a purchaser.
- BTR buildings are normally heavily branded. Will the purchaser be maintaining the same brand or will the vendor wish to remove all branding from the building prior to completion? The branding will extend much further than a simple sign board and can be built into the fabric of the building, e.g. branded glass.
- Existing finance will almost certainly be repaid as part of the transaction so early and constant liaison with the funder and their team will be important to ensure a smooth transaction.
- Consents! These can take many forms, from landlords and overages to contractors and investors.
- If the asset is relatively new (and by that really, we mean anything built within the last decade or so) then the purchaser is going to want the benefit of a robust and institutional package of construction documents so that it has remedies against the designers and contractors who had a hand in the development should any defects manifest down the line.
- If the new rules relating to higher risk buildings apply to the asset, then this is worth careful examination. There is no market standard approach yet for dealing with the issue, so it is likely lots of questions will be asked by the purchaser's team as the purchaser will, among other things, want to see that the building has been registered and that they will, post-acquisition, be in a position to comply with any "in-occupation" obligations.
- If you are intending to sell the shares in the property holding company you should ensure the company's records, filings and accounts are in good order. A vendor will also need to consider whether they are prepared to stand behind the warranties and indemnities in the share purchase agreement, or whether a warranty and indemnity insurance policy is required to achieve a "clean exit".
- Obtain an early copy of the set of questions that your solicitors want answered. Gathering some of the information can take time as lots of people need to be consulted.
Conclusion
The market leading Trowers & Hamlins' Real Estate team is very familiar with transacting on thousands of tenanted residential units simultaneously and works regularly with the major agencies.
Please get in touch if we can help you prepare for your BTR sale.
