Articles and Publications
Property Aspects of Buying a Care Home
18/Sep/2006
When clients are considering buying a care home they often find the number of different areas that need to be looked at overwhelming These include the corporate aspect, employment issues, property and tax not to mention the actual viability of the care home business being bought.
Clients often see the business as their main concern with the property taking a secondary role. It should be remembered, however, that without a property the business cannot operate and often the viability of the business is down to its location. This article looks at the searches undertaken and key issues to be considered when purchasing a property.
Searches
Solicitors undertake various searches in respect of the property with different authorities. Investing a substantial amount of money in a business is a serious decision. The more information you have before making the decision to go ahead, the more likely it is that your decision will be the right one. So what is the point of these searches and what are we looking for?
Local Authority
We obtain the results of a search at the Local Land Charges Register and results of standard enquiries at the Local Authority. This search reveals, amongst other things, whether the road which borders the property is adopted and maintainable by the local authority, if there are alterations planned to the public road and if there are any enforcement notices on the property (which would include any breaches of environmental health or planning law). This search also helps to confirm what use of the property is authorised from a planning perspective.
It should be noted, however, that this search only relates to the particular property searched and therefore if you have concerns about proposals for development of adjoining or other land in the neighbourhood a further search would be required.
Drainage Search
This shows the route of the local water company’s drains. It does not show any private drains but will confirm whether the property is connected to the mains for water and sewerage and whether payment is by reference to a meter or rateable value. If the drainage is not connected, further enquiries must be made on the provision of a cesspit or septic tank and the maintenance of this.
If you are thinking of changing the use or size of a property you need to think if there will be increased demand for water and drainage and if the current pipes could cope.
Coal Search
This reveals any likely problems from past or present underground coal working and critically highlights if there are any mine shafts in the area. Ground influence has normally stopped following any past movement and, given the state of the coal industry, whilst coal may exist in the area it is unlikely to be worked again in the foreseeable future. If a mine shaft is revealed there will be a need for further investigation as to the possibility of subsidence. A check should also be made as to how the mine shaft was filled and whether a guarantee was given by the contractor that did the work.
Environmental Search
We are all becoming increasingly aware of environmental issues and the impact we have on the environment. This in turn has led to changes in the law. Local authorities are now obliged to compile records of contaminated land and take action against polluters to have land cleaned up.
An environmental search shows the present industrial use in the area and previous industrial uses of the property. In particular it should reveal if the property might be classed as contaminated. With the environmental law presently in place the polluter pays for any pollution, but in the absence of locating such a person the occupier or owner of the property may have to pay for the clean up of the property. It is often difficult to get any environmental warranties from a seller, therefore it is crucial that if the results of this search show contamination issues a full ground investigation with boreholes is made. A ground investigation report would also be required if land is going to be built upon.
Land Registry Search
Searches are conducted at the Land Registry to check the seller’s title to the property. Most properties are now registered at the Land Registry. The title is checked carefully for all rights, reservations and restrictive covenants that are in place. Rights are often granted to use services including drainage, electricity or other services over neighbouring land with rights reserved to go on neighbouring land to maintain the supplies. Please remember though, that these rights may be mirrored in the adjoining property with the owners of the neighbouring property also able to enter your land for maintenance purposes. Care should be taken to ensure that in doing such maintenance each owner is required to make good any damage caused.
Covenants often can restrict the use of the property and are registered against a title when an owner sells off part of the land. They are often put in place to ensure that the use of neighbouring property does not conflict with the use of the land retained by the original owners. This really is beyond the scope of this article but a review of title is absolutely critical as restrictive covenants can specifically forbid business use or significantly limit the ability to extend or alter the property.
Looking at rights and reservations in a title is even more important in instances where development land is being bought for a new home to be constructed. Rights must be in place to connect into services unless the property is already connected to mains services and no improvements to this connection are required.
Chancel Repair Search
In medieval times land owners were required to contribute taxes to the local church. It is not commonly known that in some areas an obligation to contribute to church repairs still exists and therefore this search is becoming increasingly important. Under the Land Registration Act 2002 overriding interests may exist which are not noted against the title. These may state that the landowner must contribute towards the cost of the repair of the chancel in a local Church (this is the altar and area for the choir).
The church authorities now have until 2013 to register such obligations on the title to the property for the obligation to remain effective. At the moment a chancel check search is available at a cost of only £11.75. This will reveal either that there is no liability or there is potential liability. Insurance must then be considered. If a mortgage is required insurance will need to be taken out to the full value of the property. If there is no mortgage required the Buyer has complete freedom as to whether to undertake such searches or not. Full chancel searches can be undertaken at a cost of just over £100.00. It is sometimes the case that insurance can be taken out following a chancel check search for less than the cost of a full search. In these circumstances the level of risk is not quantifiable. It is unclear as to whether the church is looking at registering these liabilities and, whilst it is rare to hear of people being asked to contribute to such repairs, it has been known to happen.
Leasehold Property
The freehold title of a property should also be reviewed to the same standard where a leasehold property is being purchased as the lease is always subject to any conditions that exist on a freehold title.
Looking at the leasehold property, it may be that the owner of the business only holds a leasehold interest in the property which is being transferred when the business is bought. Alternatively, if the freehold is owned by the seller of the care home the seller may only wish to provide a leasehold interest to the buyer (sometimes retaining the freehold in a pension fund or just for investment). The terms of a lease are critical and below are some of the important things to look for:-
1.Area of the property being let
Is it the full area of the nursing home and grounds? If not, is access fully permitted to the property over any common parts which need to be shared between the property and any retained land?
2.Rent
Surveyor’s advice should be taken to see whether the rent is the market rent for the area and fair in all the circumstances.
3.The length of the lease
Again, surveyor’s advice should be taken as to whether the length of the lease is standard. The client should consider whether the length of the term is sufficient or too long for its long term plans. Do you intend to grow the business in the future resulting in a move to new premises and therefore do not wish to be tied in to an extended lease term?
The way round this is often to agree a break clause (ie a right to end the lease on a given date). However, the terms of such a break should be looked at particularly carefully as they are often conditional on all conditions in the lease having been complied with. Leases contain requirements to redecorate and, arguably, if a second coat of paint has not been applied or there is some rubbish in the property a requirement may have been broken and therefore the landlord could refuse to let you break the lease. If a break is missed the lease will not end and the liability will continue until the end of the term.
4.Right to renew
It is also important to look at whether the lease is said to be inside or outside the provisions of the Landlord and Tenant Act 1954. It is beneficial to have the lease inside the Act as this means that at the end of the term the tenant has, in most cases, an automatic right to renew it on similar terms as the current lease subject to a rent review. If the lease is outside the Act this should be reflected in a lower rent.
5.Repairing obligations
Some leases state that the tenant must put and keep the property in a good state of repair. This means that a tenant may be required to put the property into a condition which is significantly better than that which exists when the lease is entered into. When acting for a tenant one should always look to limit this obligation to state that the tenant should only keep the property in repair.
When first entering the property this may not seem critical, but when a lease term comes to an end a landlord can serve what is known as a Schedule of Dilapidations. In this the landlord's surveyor works out the costs of bringing the property up to the correct condition in accordance with the lease. Tenants are often surprised at the level of such claims and this can cause a great deal of cost at the end of a lease term which has often not been budgeted for.
From a tenant’s point of view it is preferable for the repairing obligation to be worded so that the tenant is not required to put the property into a better condition than exists at the start of the lease and a record of this condition should be kept.
6.Rent review
Rent is often reviewed every three or five years and is often tied in with any break clauses. Again, surveyor’s advice may be taken in relation to rent reviews but these are usually stated to be upwards only, meaning that on each review the rent will either stay as it is or go up when taking into account open market rents in the area.
Agreeing a rent review often involves the landlord’s and tenant’s surveyors negotiating, on behalf of each party, and seeking to agree the open market rent for the property. As solicitors for the tenant, we would look to restrict the definition of open market rent and check that there are no unreasonable provisions which may result in a rent above proper market conditions.
Condition of the Property
Whether the freehold or leasehold of the property is being taken we would always advise that a survey is undertaken. We appreciate that this is difficult when buying a business, particularly a care home as it is not always appropriate for a surveyor to wander round the property when a seller's staff are not aware of any proposed sale. Without such a survey, however, you could buy a property without realising that its roof is in desperate need of repair or there has been subsidence or the electrical wiring is out of date and several thousands of pounds needs to be spent on the property.
Another aspect which is often forgotten is the Asbestos at Work Regulations 2002. These regulations provide that any occupier of a commercial property must ensure that an asbestos survey is undertaken and if any asbestos is located, a management report should be in place for dealing with this. When purchasing the property it is often the case that the seller has not undertaken such a survey and we often seek to agree that one will be undertaken at the seller's cost prior to completion. Agreement must then be reached as to any management of asbestos in the future and whether it should be the landlord or the tenant that deals with this going forward. The time delay and costs involved in asbestos surveys is often overlooked and therefore arranging these matters as early as possible is beneficial to all parties.
Tax Implications
One of the first questions that should be asked when looking to purchase a care home is who should buy the property and who should buy the business. As mentioned already, a seller may look to retain the freehold for their own investment purposes but consideration must be given to the buyer's tax position including corporation tax and stamp duty land tax. If the shares of the company owning the business and property are bought no transfer at the Land Registry takes place and no stamp duty land tax is payable on the transaction.
If, however, directors of the company decide to purchase the property in their individual capacity they will need to pay stamp duty land tax at the following rates: 1% up to a value of £250,000.00, 3% up to a value of £500,000.00 and 4% for a value over £500,000.00. There is no stamp duty land tax payable on properties changing hands for less than £125,000 but once you pass this threshold the tax is payable at the relevant rate on the whole of the sale price. Consideration must also be given as to the division of the purchase price between the business and the property. It is often crucial that your solicitor works closely with your accountant when dealing with such an issue.
Property Warranties
Last month Damian Collinge considered the importance of a seller’s warranties on the sale of a nursing home. These warranties are often limited to state that the buyer is assumed to have carried out all searches which a ‘prudent’ buyer would carry out (basically all those set out above) and therefore if searches are not undertaken and an issue arises which the buyer should have known about prior to completion the seller will avoid any liability.
It has long been thought that property is the most efficient way of investing money and it is therefore crucial that all relevant enquiries are undertaken to protect the value of this asset, after all if the business doesn’t work the property will still be there to be sold.
This article was written by Sarah Temple and first appeared in Nursing and Residential Care, September 2006, Vol 8, No 9.
Clients often see the business as their main concern with the property taking a secondary role. It should be remembered, however, that without a property the business cannot operate and often the viability of the business is down to its location. This article looks at the searches undertaken and key issues to be considered when purchasing a property.
Searches
Solicitors undertake various searches in respect of the property with different authorities. Investing a substantial amount of money in a business is a serious decision. The more information you have before making the decision to go ahead, the more likely it is that your decision will be the right one. So what is the point of these searches and what are we looking for?
Local Authority
We obtain the results of a search at the Local Land Charges Register and results of standard enquiries at the Local Authority. This search reveals, amongst other things, whether the road which borders the property is adopted and maintainable by the local authority, if there are alterations planned to the public road and if there are any enforcement notices on the property (which would include any breaches of environmental health or planning law). This search also helps to confirm what use of the property is authorised from a planning perspective.
It should be noted, however, that this search only relates to the particular property searched and therefore if you have concerns about proposals for development of adjoining or other land in the neighbourhood a further search would be required.
Drainage Search
This shows the route of the local water company’s drains. It does not show any private drains but will confirm whether the property is connected to the mains for water and sewerage and whether payment is by reference to a meter or rateable value. If the drainage is not connected, further enquiries must be made on the provision of a cesspit or septic tank and the maintenance of this.
If you are thinking of changing the use or size of a property you need to think if there will be increased demand for water and drainage and if the current pipes could cope.
Coal Search
This reveals any likely problems from past or present underground coal working and critically highlights if there are any mine shafts in the area. Ground influence has normally stopped following any past movement and, given the state of the coal industry, whilst coal may exist in the area it is unlikely to be worked again in the foreseeable future. If a mine shaft is revealed there will be a need for further investigation as to the possibility of subsidence. A check should also be made as to how the mine shaft was filled and whether a guarantee was given by the contractor that did the work.
Environmental Search
We are all becoming increasingly aware of environmental issues and the impact we have on the environment. This in turn has led to changes in the law. Local authorities are now obliged to compile records of contaminated land and take action against polluters to have land cleaned up.
An environmental search shows the present industrial use in the area and previous industrial uses of the property. In particular it should reveal if the property might be classed as contaminated. With the environmental law presently in place the polluter pays for any pollution, but in the absence of locating such a person the occupier or owner of the property may have to pay for the clean up of the property. It is often difficult to get any environmental warranties from a seller, therefore it is crucial that if the results of this search show contamination issues a full ground investigation with boreholes is made. A ground investigation report would also be required if land is going to be built upon.
Land Registry Search
Searches are conducted at the Land Registry to check the seller’s title to the property. Most properties are now registered at the Land Registry. The title is checked carefully for all rights, reservations and restrictive covenants that are in place. Rights are often granted to use services including drainage, electricity or other services over neighbouring land with rights reserved to go on neighbouring land to maintain the supplies. Please remember though, that these rights may be mirrored in the adjoining property with the owners of the neighbouring property also able to enter your land for maintenance purposes. Care should be taken to ensure that in doing such maintenance each owner is required to make good any damage caused.
Covenants often can restrict the use of the property and are registered against a title when an owner sells off part of the land. They are often put in place to ensure that the use of neighbouring property does not conflict with the use of the land retained by the original owners. This really is beyond the scope of this article but a review of title is absolutely critical as restrictive covenants can specifically forbid business use or significantly limit the ability to extend or alter the property.
Looking at rights and reservations in a title is even more important in instances where development land is being bought for a new home to be constructed. Rights must be in place to connect into services unless the property is already connected to mains services and no improvements to this connection are required.
Chancel Repair Search
In medieval times land owners were required to contribute taxes to the local church. It is not commonly known that in some areas an obligation to contribute to church repairs still exists and therefore this search is becoming increasingly important. Under the Land Registration Act 2002 overriding interests may exist which are not noted against the title. These may state that the landowner must contribute towards the cost of the repair of the chancel in a local Church (this is the altar and area for the choir).
The church authorities now have until 2013 to register such obligations on the title to the property for the obligation to remain effective. At the moment a chancel check search is available at a cost of only £11.75. This will reveal either that there is no liability or there is potential liability. Insurance must then be considered. If a mortgage is required insurance will need to be taken out to the full value of the property. If there is no mortgage required the Buyer has complete freedom as to whether to undertake such searches or not. Full chancel searches can be undertaken at a cost of just over £100.00. It is sometimes the case that insurance can be taken out following a chancel check search for less than the cost of a full search. In these circumstances the level of risk is not quantifiable. It is unclear as to whether the church is looking at registering these liabilities and, whilst it is rare to hear of people being asked to contribute to such repairs, it has been known to happen.
Leasehold Property
The freehold title of a property should also be reviewed to the same standard where a leasehold property is being purchased as the lease is always subject to any conditions that exist on a freehold title.
Looking at the leasehold property, it may be that the owner of the business only holds a leasehold interest in the property which is being transferred when the business is bought. Alternatively, if the freehold is owned by the seller of the care home the seller may only wish to provide a leasehold interest to the buyer (sometimes retaining the freehold in a pension fund or just for investment). The terms of a lease are critical and below are some of the important things to look for:-
1.Area of the property being let
Is it the full area of the nursing home and grounds? If not, is access fully permitted to the property over any common parts which need to be shared between the property and any retained land?
2.Rent
Surveyor’s advice should be taken to see whether the rent is the market rent for the area and fair in all the circumstances.
3.The length of the lease
Again, surveyor’s advice should be taken as to whether the length of the lease is standard. The client should consider whether the length of the term is sufficient or too long for its long term plans. Do you intend to grow the business in the future resulting in a move to new premises and therefore do not wish to be tied in to an extended lease term?
The way round this is often to agree a break clause (ie a right to end the lease on a given date). However, the terms of such a break should be looked at particularly carefully as they are often conditional on all conditions in the lease having been complied with. Leases contain requirements to redecorate and, arguably, if a second coat of paint has not been applied or there is some rubbish in the property a requirement may have been broken and therefore the landlord could refuse to let you break the lease. If a break is missed the lease will not end and the liability will continue until the end of the term.
4.Right to renew
It is also important to look at whether the lease is said to be inside or outside the provisions of the Landlord and Tenant Act 1954. It is beneficial to have the lease inside the Act as this means that at the end of the term the tenant has, in most cases, an automatic right to renew it on similar terms as the current lease subject to a rent review. If the lease is outside the Act this should be reflected in a lower rent.
5.Repairing obligations
Some leases state that the tenant must put and keep the property in a good state of repair. This means that a tenant may be required to put the property into a condition which is significantly better than that which exists when the lease is entered into. When acting for a tenant one should always look to limit this obligation to state that the tenant should only keep the property in repair.
When first entering the property this may not seem critical, but when a lease term comes to an end a landlord can serve what is known as a Schedule of Dilapidations. In this the landlord's surveyor works out the costs of bringing the property up to the correct condition in accordance with the lease. Tenants are often surprised at the level of such claims and this can cause a great deal of cost at the end of a lease term which has often not been budgeted for.
From a tenant’s point of view it is preferable for the repairing obligation to be worded so that the tenant is not required to put the property into a better condition than exists at the start of the lease and a record of this condition should be kept.
6.Rent review
Rent is often reviewed every three or five years and is often tied in with any break clauses. Again, surveyor’s advice may be taken in relation to rent reviews but these are usually stated to be upwards only, meaning that on each review the rent will either stay as it is or go up when taking into account open market rents in the area.
Agreeing a rent review often involves the landlord’s and tenant’s surveyors negotiating, on behalf of each party, and seeking to agree the open market rent for the property. As solicitors for the tenant, we would look to restrict the definition of open market rent and check that there are no unreasonable provisions which may result in a rent above proper market conditions.
Condition of the Property
Whether the freehold or leasehold of the property is being taken we would always advise that a survey is undertaken. We appreciate that this is difficult when buying a business, particularly a care home as it is not always appropriate for a surveyor to wander round the property when a seller's staff are not aware of any proposed sale. Without such a survey, however, you could buy a property without realising that its roof is in desperate need of repair or there has been subsidence or the electrical wiring is out of date and several thousands of pounds needs to be spent on the property.
Another aspect which is often forgotten is the Asbestos at Work Regulations 2002. These regulations provide that any occupier of a commercial property must ensure that an asbestos survey is undertaken and if any asbestos is located, a management report should be in place for dealing with this. When purchasing the property it is often the case that the seller has not undertaken such a survey and we often seek to agree that one will be undertaken at the seller's cost prior to completion. Agreement must then be reached as to any management of asbestos in the future and whether it should be the landlord or the tenant that deals with this going forward. The time delay and costs involved in asbestos surveys is often overlooked and therefore arranging these matters as early as possible is beneficial to all parties.
Tax Implications
One of the first questions that should be asked when looking to purchase a care home is who should buy the property and who should buy the business. As mentioned already, a seller may look to retain the freehold for their own investment purposes but consideration must be given to the buyer's tax position including corporation tax and stamp duty land tax. If the shares of the company owning the business and property are bought no transfer at the Land Registry takes place and no stamp duty land tax is payable on the transaction.
If, however, directors of the company decide to purchase the property in their individual capacity they will need to pay stamp duty land tax at the following rates: 1% up to a value of £250,000.00, 3% up to a value of £500,000.00 and 4% for a value over £500,000.00. There is no stamp duty land tax payable on properties changing hands for less than £125,000 but once you pass this threshold the tax is payable at the relevant rate on the whole of the sale price. Consideration must also be given as to the division of the purchase price between the business and the property. It is often crucial that your solicitor works closely with your accountant when dealing with such an issue.
Property Warranties
Last month Damian Collinge considered the importance of a seller’s warranties on the sale of a nursing home. These warranties are often limited to state that the buyer is assumed to have carried out all searches which a ‘prudent’ buyer would carry out (basically all those set out above) and therefore if searches are not undertaken and an issue arises which the buyer should have known about prior to completion the seller will avoid any liability.
It has long been thought that property is the most efficient way of investing money and it is therefore crucial that all relevant enquiries are undertaken to protect the value of this asset, after all if the business doesn’t work the property will still be there to be sold.
This article was written by Sarah Temple and first appeared in Nursing and Residential Care, September 2006, Vol 8, No 9.
