Commercial Property Finance and Transactions

Last updated: 15 August 2018

Estimated reading time: 2 minutes

Our commercial property solicitors can advise on all kinds of tasks connected to the finance and transactions connected to your commercial property. However, here are the questions we get asked the most about commercial property finance and transactions.

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  1. How does a Deed of Priority apply in commercial property transactions?
  2. What is an inter-creditor agreement?
  3. Will you have to pay VAT on commercial property rental?

How does a Deed of Priority apply in commercial property transactions?

A deed of priority allows creditors to agree an order of priority for their security. Such deeds can be used in commercial property to allow lenders to a commercial property owner agree the priority of their security over the property.

Under the law in England and Wales, the charge created earlier in time takes priority. However, the earlier creditor (Lender A) may consent to the borrowing property owner obtaining a second charge with Lender B. Lender B may impose a condition that they have first priority over the commercial property used as security for the charge. Lender A (with the earlier charge) may consent to this by entering a deed of priority, stating Lender B has first priority and Lender A has second priority.

The motives for this may be that the property owner requires short term funds to continue business, and subsequently discharges its first charge. This would be a commercially sensible option for Lender A, considering the alternative would be to allow the property owner to default, in which case the property would need to be repossessed and sold to recover the sums owed. As this may not fully discharge the debt, it would be better to consent to a second lender providing the requisite funds to continue operating.

What is an inter-creditor agreement?

An inter-creditor agreement is similar to a deed of priority in that it specifies the ranking of creditors. However, an inter-creditor agreement is slightly more complicated, as it will regulate payments to different creditors, as well as the ability of creditors to enforce security (before and after payment).

In an inter-creditor agreement, there’s usually no restriction on payment to senior creditors. However, there will be restrictions on payment to junior creditors, such as senior creditors must be paid first.

It’s possible for the inter-creditor agreement to restrict payment of fees to the professional adviser which acts for the senior creditors when there’s an event of default.

Will you have to pay VAT on commercial property rental?

Generally, the sale or leasing of a commercial property is VAT exempt, unless the seller/landlord opts to charge VAT. This is an important financial implication and you should seek to confirm whether VAT is payable as a priority when purchasing a freehold property or taking a lease.

If you’re a VAT registered business, then the charged VAT won’t increase your costs because you can reclaim your VAT. However, if you’re not VAT registered, you may seek to find an alternative commercial property where you won’t have to pay VAT on the rent.

You should note that if the commercial property is new (for example, less than 3 years old), it won’t be exempt from VAT. This means the landlord must charge the standard rate of VAT on the rent.

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