Property related delays: Prevention the best cure?
In the past year, Hempsons have acted for a wide range of dental clients on a variety of different transactions. We have acted for sole practitioners retiring and selling their practice, dental corporates buying shares in other dental companies and practitioners starting out on their first venture alone.
For all these clients, and in each of these transactions, the property from which the practice is run is one of the most important elements of the deal. This, unfortunately, means that when issues arise relating to the property, they can cause significant delays to completion.
Many (if not most) property related delays arise when a third-party is involved in the transaction (for instance a third-party landlord, a bank or even a SIPP).
Below, we set out a number of the most common property related issues concerning third parties that have caused (or had potential to cause) delays to transactions we have been involved in over the last year or so.
Most third-party delays are not completely avoidable. However, if the potential issues are raised early on, they can at least be prevented from causing too much of a delay to completion.
Third-party landlords
Issues
Third-party landlords can cause significant delays to a transaction. A seller will usually need the landlord’s consent to assign its lease, or a new lease may need to be negotiated between the landlord and the potential buyer.
A third-party landlord holds a lot of bargaining power – if the landlord refuses to grant a new lease to the buyer, for instance, the sale and purchase of the practice falls through. Whereas the buyer and seller both want to try and get the deal completed as soon (and as smoothly) as possible, a third-party landlord has far less (and often no) incentive to get the deal done.
The third-party landlord might see an opportunity to improve its own position and the ensuing negotiation can leave the buyer having to make some tough decisions about whether or not to proceed. A third-party landlord will also usually expect its legal costs to be covered by the seller and/or buyer.
Solutions
There is little that can be done to reduce a third-party landlord’s bargaining power. However, if negotiations with the landlord start early, it may be possible to reduce or avoid any delays to completion. A buyer should ensure it has references lined up and the seller should consider making the landlord aware of the deal as soon as it can.
This is not always desirable – sometimes a seller may not wish to approach the landlord until after initial due diligence has been carried out by the buyer and the parties are more comfortable that the transaction is likely to proceed to completion. However, this often means that negotiations with the landlord are left a little too late, which can give the landlord even more bargaining power.
Where a third-party landlord is involved in a transaction, we would always recommend that you speak to us at the outset and we can together agree the best way to try and minimise delays as much as possible. A clear plan on tactics will be critical.
Bank funding
Issue
Many buyers will borrow from a bank or lending institution to help fund their purchase. This is normal and often doesn’t cause delays.
However, banks and lending institutions do have strict conditions and usually aren’t very willing to compromise on their requirements. Sometimes, a bank’s funding requirements are not disclosed to the buyer’s lawyers until late on in the transaction, which can cause delays to completion. For instance, if the bank isn’t happy with a term of a lease that has already been agreed, the proposed buyer will be required by the bank to re-negotiate with the landlord. If the bank is not content with the result of a property due diligence search which the buyer was comfortable with, steps will need to be taken to rectify any problems before the bank is willing to lend.
Solutions
This is a prime example of prevention being the best cure.
The bank will usually not have requirements which are unachievable. The issue with bank’s requirements is when they are not raised until late on in a transaction and they don’t align with work that has already been carried out. There’s not much point, for instance, in agreeing to take an assignment of a lease with 7 years of the term remaining only for the bank to later tell you it needs a 15 year lease to be in place.
In the example above, you will have to comply with the bank’s requirement for a 15 year lease, but if that requirement is raised early in the transaction, delays can be minimised, work doesn’t need to be duplicated and legal costs are not increased.
You can’t avoid the bank’s requirements, but you can prevent them from causing delays.
Existing borrowing and pension funds
Issues
A seller may have an existing mortgage or business loan in respect of which a bank or lender has taken a legal charge over the practice’s property. The legal charge will need to be paid off on completion. The buyer’s solicitor will want to see confirmation from the bank that the sale proceeds are enough for the seller to repay the lending and sell the property free from the charge.
The seller may have transferred the practice premises to a pension fund or SIPP. The SIPP will, in effect, take the place of a third-party landlord (or third-party seller). The seller will therefore need to obtain the consent or approval of the SIPP (and its lawyers) before the transaction can complete.
Redeeming a legal charge or obtaining consent from a SIPP should, in theory, be fairly straightforward.
If the borrower pays off the loan, the bank should apply to the Land Registry to remove the legal charge from the property title.
As a SIPP ultimately holds the property on trust for the seller, in theory there shouldn’t be too much delay caused by the SIPP or its lawyers.
However, often there are different departments that the seller needs to go through and both banks and pension funds can sometimes take a number of weeks to process a request.
We acted in a matter this year in which the seller’s business loan was originally borrowed from a bank (“Bank A”). The legal charge had Bank A’s details on it. Bank A later merged with another bank (“Bank B”). After this merger, the registered proprietor of the legal charge was changed at the Land Registry to Bank B.
Bank A then later split from Bank B. The proprietor of the legal charge remained registered at the Land Registry as Bank B, but the legal charge itself had Bank A’s details on it.
This lead to a great deal of discussion between the banks and the Land Registry as to which of the banks had the requisite authority to remove the legal charge from the property title register.
Thankfully, the matter was raised and the banks were engaged early in the transaction and so completion was not significantly pushed back as a result of this particular third-party delay.
Solutions
It probably won’t come as too much of a surprise that our suggestion for avoiding issues here is to again be proactive.
You are unlikely to be able to avoid all delays but the earlier you make contact with the bank or your SIPP, the more likely you are to have everything agreed in advance of completion.
If you have a relationship manager at your bank, ask for a redemption figure to be lined up early and make your relationship manager aware of the proposed completion date. As the seller, you can deal with the bank yourself, but we at Hempsons will often deal with this for you (if you provide us with consent to speak to the bank on your behalf).
Conclusion – avoiding third-party property related delays
It is not always possible to avoid delays to transactions, especially when a third-party is involved. The best way of minimising delays is to be proactive and to approach third parties well in advance of completion.
We are aware that, during the early stages of a sale or purchase of a dental practice, it is easy for the third-party elements of a transaction to be seen as secondary whilst you focus on the deal you are striking with the buyer or seller.
However, through early discussion with us, we will be able to ensure that third parties who need to be contacted are contacted early on and the potential for delay is minimised.
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New NHS dental contract – what to expect, Building a fortress – how robust record keeping can protect you against GDC complaints, Protection and promotion of your brand, Update – Tax changes to termination payments.