Knowledge

What is an investment property?

An investment property is a property which is occupied by one or more tenants. The property is acquired, not for occupation by the purchaser, but in order to gain a return on the investment via:

• the rental income from the tenants; and
• capital appreciation over time.

Purchasing an investment property can be a complex and complicated undertaking. For that reason, you should always seek professional advice from an experienced surveyor, lawyer, tax adviser and accountant before making an offer to purchase.

We have put together a basic guide to purchasing an investment property to give you an overview of the process and some key issues to consider at the outset.

Heads of terms

Whilst heads of terms will be prepared by the seller's agent, you should always instruct your own agent and lawyer to provide input on the terms at the earliest possible opportunity. It is commonplace for buyers to sign up to terms that are weighted heavily in favour of the seller. Unfortunately, once terms have been agreed, it is very difficult for your professional advisers to negotiate a better position for you in the legal documentation.

Getting the heads of terms right at the outset will help to ensure that you are not signing up to a bad bargain and will smooth the transactional process, saving on time, stress and professional fees. If it is a newly constructed property, a purchaser should have regard to the availability of collateral warranties from the development team at an early stage.

Exclusivity

Heads of terms are generally non-binding and are subject to formal contracts being signed. This means that either party can walk away at any time. In order to avoid the risk of incurring professional fees only to find that a subsequent (higher) offer has been accepted, you should agree a period of exclusivity with the seller.

During the exclusivity period, marketing of the property should cease and full company and property information should be provided to the purchaser to enable due diligence to be undertaken.

Whether an exclusivity period is enforceable will depend on the circumstances in each matter. Exclusivity agreements can be entered into which formalise the exclusivity arrangement between the parties.

Property sale or company sale?

The property may be marketed for sale by way of a typical property transfer/conveyance under which the property is transferred from the ownership of the seller to the buyer. However, if the property is the only asset that is owned by the selling company, there may be a commercial advantage in acquiring the property via a company share sale. Under this arrangement, the buyer acquires the shares in the company which owns the property. The buyer controls the company and therefore acquires rights akin to ownership of the property through the company.

Previously, the purchase of a property by acquiring the shares of the owning company produced a stamp duty saving. However, the Taxation (Enveloped Property Transactions) (Jersey) Law 2022 had the effect of levying a tax on share purchases equivalent to stamp duty. For more information regarding the enveloped property tax, please see our separate briefing here.

The purchase of the owning company might allow the purchaser to take advantage of any capital allowances the company may be entitled to. GST considerations might also impact on the decision whether to purchase the company or the freehold instead.

On the other hand, purchasing a company carries an inherent risk in respect of liability for any current and historic contractual breaches, unpaid debts, tax anomalies, etc., so it is important to mitigate your risk by carrying out comprehensive due diligence and negotiating a robust suite of warranties (which can be supported by warranty and indemnity insurance) in the sale contract.

Finance

If the purchase of property will be funded, in part, by a lender, you should have your funding approved in principle at an early stage. If you will be borrowing from a new lender, the client on-boarding process can be time-consuming.

The lender will undertake due diligence on the property and you will be responsible for all of the lender's costs, including legal and surveyor's fees.

The lender will make a number of deductions from the loan, at the point of drawdown, including the lender's arrangement fee and professional fees. You should ensure that you have sufficient funds in place to meet the balance of the price, plus stamp duty, court fees, legal, surveyor's and accountant's fees.

Due diligence

Your professional advisers will undertake a review of the key details of the property (and the company, if appropriate). Your lawyers will undertake title checks, a boundary check, lease reviews and searches of the public registry. They will also raise enquiries of the seller and the local planning authority, the parish, utilities providers and others.

The basic legal position on a property purchase is "buyer beware". This means that you will be purchasing the property "warts and all" (including all physical defects). It is vital that you instruct experienced professionals to undertake detailed due diligence on your behalf.

Generally speaking, if a defect is discovered after completion, you will have no remedy against the seller.

Survey, valuation and title checks

If you will be borrowing from a lender, they will require a survey and valuation to be carried out. If the survey (or the legal investigation) reveals an issue with the property that would affect its value or marketability, then the lender may reduce the amount that it is willing to lend.

If, for example, your investigations reveal a leaking roof, a construction defect, a problem with the leases, a boundary issue, etc., then you may wish to make a revised offer for the property.

In valuing an investment property, you should consider not just the income from the leases but additional factors such as:

• the length of the term remaining on the leases;
• the likelihood of the tenants renewing;
• whether the property is over or under-rented;
• the covenant strength of each tenant; and
• the prospects for businesses operating in that sector.

You should also consider whether there is an opportunity to review the rent reserved under the leases, secure longer-term income or to develop part of the property in order to add value.

How we can help

Bedell Cristin has acted on many of the largest property deals in Jersey in recent years. We have a team of experienced professionals who are experts in investment property.

We have the benefit of both local knowledge and multi-jurisdictional experience, advising blue chip investors on complex, high value, commercial property deals.

We work in specialist teams, across practice areas, to provide pragmatic, straightforward advice on complicated issues. We see ourselves as commercial advisers to our clients, albeit with a legal specialism.

If you are considering making an investment property acquisition (or disposal), please call our experts for a no-obligation discussion.