The benefits, the risks and the key due diligence checks for commercial buyers.
Commercial property sometimes sits inside a SPV – a limited company set up to hold the asset. Instead of purchasing the property by way of a direct conveyance, in an SPV acquisition, the buyer acquires the shares in company that holds the property.
Acquisitions of this nature, inter alia, have tax advantages, but done badly, it can leave a buyer inheriting liabilities they did not factor in when the purchase price was agreed between the parties. This article explains the benefits and risks of SPV acquisitions.
What changes when you buy an SPV rather than the property itself
In a direct property purchase, you buy the property asset and investigate the property related risks through title reviews, searches and surveys. In an SPV purchase, you buy the company that owns the property. This means that you will inherit what sits inside the company, and so, in order to understand what potentially liabilities the SPV has, diligence will need to be conducted on not only the underlying property but the associated assets too.
Potential benefits of buying the SPV
Potential stamp duty savings
A common driver is tax. A share purchase requires payment of stamp duty on shares rather than stamp duty land tax on a property acquisition, the later of which is taxed at a higher rate.
Landlords cannot claim mortgage interest tax relief when property is owned personally but landlords who own a property and declare rental income through a SPV are still able to reclaim tax on their mortgage interest payments.
That said, the headline saving may not be the whole story. If the transaction requires the buyer to fund the purchase price by way of part cash / part debt, the mechanics relating to the debt should be reviewed from a tax / accounting perspective to ensure the intended stamp duty efficiencies hold in practice.
Associated assets stay where they are
Any associated assets such as leases and contracts connected to the property automatically pass to the buyer as they are already held in the SPV. A share purchase can therefore eliminate the need to assign or novate those arrangements and therefore limit the amount of paperwork that needs to be signed on completion.
The acquisition of a portfolio property assets can be done in one hit
If multiple properties sit in the SPV, a share purchase can provide a single acquisition route rather than multiple individual property conveyancers having to be done. This can also be attractive from an operational continuity perspective – simplifying banking, accounting, and ongoing management.
Financing and lending
Lenders often favour SPVs because their purpose (holding property) is straightforward. This can make financing more straightforward and sometimes improve borrowing options.
Investment facilitation
Subject to appropriate controls, capital can be raised by issuing new shares to third party investors. The structure of the SPV allows for risk, return and profit rights for both the SPV’s founder shareholders and the investor to be clearly defined. such as distinct rights attaching to differing classes of shares so distribution of profits.
For investors, an SPV is attractive because it ring‑fences the property from their other assets, clearly defining risks and returns.
The key risks, and why diligence is broader than a normal property deal
The central risk is simple: when you buy the shares, you buy the company “warts and all”. At completion, and subject to paying stamp duty on the shares, the buyer owns the SPV and inherits its actual and contingent liabilities including historic debts, tax issues, or legal claims (if any). This also means you have the administrative burden of being responsible / accounting expense of ongoing compliance in respect of the SPV such as annual accounts filings at Companies House.
Step 1. Diligence on the underlying property
Even though you are not buying the property title directly, you still need to undertake the core property diligence: title review, property searches, building survey, and standard property enquiries. The aim remains the same, confirming good and marketable title to the property and identifying risks that go to the heart of value and future use.
Step 2. Diligence on the SPV’s wider activity
You also need to investigate the corporate history and undertake other legal, tax and commercial diligence on the SPV itself. The SPV might be more than just a holding vehicle. You will want to understand what it has done since incorporation to understand the risks and liabilities associated with acquiring the SPV above and beyond acquiring the property itself.
Protecting the buyer: warranties and indemnities
Once the risks are uncovered, the share purchase agreement set out the contractual protections given by the seller.
Warranties are assurances the seller gives about the SPV such as title related matters, the standard of the accounts and tax compliance. A key benefit is that warranties often flush out issues through the disclosure process and can provide a route to claim damages if the position is wrong.
Indemnities are used for specific known risks identified in diligence or disclosures. If drafted well, they can allow recovery on a pound for pound basis for the relevant liability such as a known environmental issue or a certain pre-sale tax risk or liability.
In practice, sellers usually negotiate their limitations on any potential claims, including financial thresholds such as a de minims to exclude smaller claims, time limits, and overall caps on liability that are often linked to the purchase price. These areas are heavily negotiated by the parties and if done effectively, the sale contract allocates risk fairly and ensures that the seller will take on residual risks after the sale for an appropriate period of time.
Purchase price adjustments: cash, debt and working capital matter
Another practical difference from a direct property purchase is how the price is determined. The commercially agreed price for the SPV’s shares may need to be adjusted to reflect the SPV’s net asset value, plus cash, minus debt, and plus or minus a working capital adjustment.
This becomes especially important in the context of the underlying property being developed, debt may have been secured against both the property and the shares of the SPV. Debt owed by the SPV to the seller, the seller’s connected parties, or third party lenders is often repaid as part of the completion mechanics with related security released when the relevant loans are repaid.
The definitions of “cash”, “debt” and “working capital” need to be adequately defined to ensure the relevant upward or downward adjustments are made to the purchase price / the value of invoices (other assets) are apportioned on an accrual basis.
Be aware of the seller’s financial covenant
Even a well drafted contract is only as good as the party standing behind it. If a buyer needs to enforce a damages claim or recover under an indemnity claim, the seller’s financial strength matters. A key question is whether the seller has assets beyond the shares in the SPV being sold. Explore whether an individual or entity of substance connected to the seller should stand behind the seller’s covenants.
Download the infographic – Buying a SPV that holds commercial property
How Moore Barlow supports SPV acquisitions
SPV property transactions sit at the intersection of corporate, property, tax and finance. Our Corporate and Real Estate teams can support with acquisitions of SPV, working alongside your tax and accounting advisers to stress test the stamp duty and other efficiencies, and to ensure any issues identified in the diligence and disclosure process are fairly allocated in terms of risk.
