Property  

The risks of commercial property investment

  • Identify the risks attached to investing in commercial property
  • Describe the ways in which an investor should seek legal advice
  • Identify the risks when it comes to buying an off-plan property
CPD
Approx.30min
  • That the management company had not generated enough income to pay all of the rent, service charge and additional rents under the sub-leases (although that may not have come as a surprise to investors given that two “additional rent” payments had been missed);
  • That the investors would have to fund payment of the rent and service charge payable under their own leases (and then seek to recover those payments from the administrators) to prevent those leases from being determined by their landlord;
  • That to enable the administrators, to remain in office and continue the administration, the investors would have to waive their right to receive “additional rent” on a daily basis until all other necessary expenses of the administration had been paid. Therefore, even to the extent that rents were being generated by occupational lettings, those rents would first be used to pay rent, service charge and administration expenses.

At best, those tenants 'lucky' enough to have completed their leases have some form of asset. 

Given that the company responsible for generating the return in their investment is in administration, the value of that asset must be of dubious value as the success of the scheme relied on the completion and letting of all of the rooms in the project, not just the room an investor owns. 

Those buyers who have exchanged contracts but who have not completed face a more uncertain future, they may lose their deposits or, even worse, be forced by whoever has the benefit of the agreements to grant those leases to complete the grant of leases which have drastically decreased in value.

In principle, such a scheme is not an unattractive investment if, and whenever, the scheme becomes viable the returns on let rooms might be expected to be between 5-7 per cent. 

Risks

However, it is essential that the investor (not unusually, in this case, a great number of the tenants were based overseas) understands the product, the process by which it would be realised and the risk associated with it. 

Some of that can be dealt with by in-depth research but a lot will fall to the investor's lawyer to deal with.

The package of legal documentation which would be needed to document the sale of one of the rooms in the Stoke development would be fairly extensive. 

Instructing a partner or a senior associate in a firm of solicitors with appropriate expertise in development conveyancing (especially involving leasehold structures) to advise on such a transaction might easily involve legal fees of £5,000 plus VAT and disbursements. 

Given the, relatively, low buy-in cost for the units being sold in the scheme (thought  to be around £70,000) it is understandable, the reluctance of would-be investors to take legal advice at that cost and to seek a lower quote or, possibly, not take legal advice at all. 

However, engagement of a lawyer, and the right lawyer, is a key part of a successful investment in a property scheme of this complexity.

There are a number of reasons why this is the case with instructing a solicitor:

  • Perhaps a little cynically, all solicitors licensed to practice must have a minimum level of professional indemnity insurance. The current level of compulsory insurance cover would have been ample to cover claims by investors who instructed solicitors whose advice fell short of what would have been lawfully required;
  • The standards which a solicitor must meet in a property transaction in order to have satisfied the duty of care owed to a client are high and, not meeting those standards would lead to the client having a good claim for negligence against his or her solicitor;
  • Litigation funding and other fee payment arrangements (such as 'no win no fee') means that potential claimants will find it easier to bring a claim now than might have been the case in the past. That is particularly the case where there is a potential for group litigation by a number of claimants whose claims rest on broadly the same facts (as might indeed become the case with the Stoke development);
  • More positively, a good and experienced solicitor should be capable of identifying and advising on the potential risks of the scheme and, most importantly, be capable of advising the client not to proceed with the investment or, at least, not on the terms offered;
  • In plainer terms, in what other circumstances would a consumer consider spending a material amount of money on buying a product without seeking some appropriate advice or assistance? 

Ultimately, however, the fate of the Stoke development seems to prove the old adage that "If it is too good to be true, it probably is".   

Peter Robinson is joint head of property at Hunters Law 

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. Pick the odd one out. How can an investor mstart to mitigate risk when investing in commercial property? The need to understand:

  2. Buying a property off plan is high risk because:

  3. True or false, The greater the number of individual units that need to be constructed or refurbished to make the development viable, the lower the risk.

  4. Taking legal advice from a solicitor in the case of the Q Studios development could have protected investors because:

  5. True or false, the standards which a solicitor must meet in a property transaction in order to have satisfied the duty of care owed to a client are high.

  6. What is driving the increase in the number of private individual investors looking to invest in commercial property?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • Identify the risks attached to investing in commercial property
  • Describe the ways in which an investor should seek legal advice
  • Identify the risks when it comes to buying an off-plan property

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