Why are commercial property transactions taking so long?
Commercial property solicitors have seen a significant rise in transactions over the last 12 – 18 months. There certainly seems to be an increased confidence in sellers, purchasers, lenders, landlords and tenants, although prices/rents are still some way off those seen before the most recent recession.
The question, therefore, is why transactions are taking so long, given the apparent increase in confidence. Solicitors are, of course, often blamed for the delays but is that really fair?
We have certainly noticed that since the commercial property market picked up again, it can take a long time to receive replies from other solicitors. Having discussed this with other firms and with recruitment consultants, it appears to be a direct result of the recession – many commercial property solicitors were laid off in the recession as there simply was not enough commercial property work. As a result, there is now a significant gap in solicitors of a certain level of qualification (not enough qualified into commercial property and some qualified solicitors moved into other areas) and so many firms have found it difficult to recruit again. As a result, not all firms have enough people to actually do the work within a reasonable time. This situation is not restricted to solicitors – builders and surveyors have also reported the same problem.
However, in our experience, there are also a number of other reasons why transactions are seen to take a long time, much of which has to do with perception and expectations. Once a buyer/tenant has been found for a property, the sale is often seen as having been “done”. However, from a solicitor’s point of view, that is just the start of the transaction. Searches need to be carried out, documents need to be negotiated and reports need to be drafted. All these take time and not all are in the solicitor’s control. Clients sometimes take a “commercial view” to get a deal across the line quicker but if a lender is involved, it is very unlikely to do so. In any event, when a client is purchasing a property or taking a lease, we would always recommend that a full investigation of the title is carried out, all searches submitted and the documents properly negotiated, so that the client purchases the property or takes the lease in full knowledge of all matters relating to it. Time spent before completion can save a lot of heartache after!
Whenever a client is purchasing or leasing a property, we always recommend that searches are carried out. However, they are costly and can cause delays. Sometimes a client will instruct us not to carry searches (perhaps because they are renewing an existing lease, where they have been in occupation for a long time) but it is always necessary to point out that they will still buy the property or take the lease subject to any matters that would have been revealed by searches, whether or not they are actually carried out.
The local authority search is usually the one that takes the longest and, depending on the location of the property, can take anywhere from three to eight weeks to be carried out. There is very little we as solicitors can do to speed up receipt of a local authority search, as it is down to the local authority to carry out the search and unfortunately, chasing them does not usually have any effect.
Delays also often occur before the search can actually be carried out. We cannot usually submit searches until a suitable plan has been provided by the seller/landlord’s solicitor. Delay in providing the plan is sometimes down to the other solicitor but it may also be due to their client not providing them with the property documents. In addition, most solicitors will require their purchaser/tenant client to provide money on account of the searches, before they are submitted. Again, delay in providing that money will mean a consequent delay in submitting the searches and therefore in receiving the results.
Heads of terms
As we have discussed in previous blogs, the more details on the heads of terms, the quicker the negotiation process is likely to be. If the heads of terms are drawn up in a hurry and are sparse on detail, the transaction is likely to take to longer to complete as the solicitors will need to agree the points of principle and take instructions from the client.
If the agents are able to obtain agreement from both sides on some of the finer points of the transaction, that can save a lot of time and legal fees negotiating them. The solicitors will still need to agree the wording used but it is usually the principle behind the points that takes the longest time. For example, if a purchase is conditional on obtaining planning permission: who is to apply for it and when?; what conditions will/will not be acceptable if conditional planning permission is granted?; is there a requirement to appeal a planning decision?; what is the long-stop date? In our experience, both sides are more likely to be willing to agree points at the heads of terms stage, rather than further down the line.
Although it is usual for heads of terms to have been agreed first, we are sometimes instructed to act for a client where the essential terms of the deal have only been very loosely agreed and one or either party has not consulted a surveyor. In those circumstances, we often find ourselves having to repeatedly go back to our client for instructions on various points of principle, which obviously causes a delay in the negotiations.
Although lenders certainly now seem more willing to lend money, they are understandably cautious after the recent recession and their conditions for lending are a lot more stringent than in the past. When we send a report to the lender on the issues affecting a property, we are finding that it usually takes a long time before they will make a decision and when they do, it is often subject to further investigations being carried out and/or conditions being met. This obviously causes a delay in the transaction.
For further information please contact Victoria Sandberg.
Please note the contents of this note are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.