Author: David Evans, Senior Associate, Real Estate, London
Negotiating the purchase of a property while simultaneously negotiating the sale of the same property can be difficult, especially where the sub-sale element is confidential. But a sub-sale can be a very attractive way to structure a transaction for a middle man. Provided substantial performance or completion of the contracts to purchase and sell the property occur more or less simultaneously, the middle man will not be liable for SDLT on the purchase (subject to satisfying the conditions in the pre-completion transactions rules) and can potentially walk away from the transaction with a profit and limited residual liability in respect of the property. It can be a useful tool for developers who are keen to develop but not hold a long-term interest in the property – a developer middle man could sub-sell property but at the same time agree with the ultimate purchaser to develop the property on their behalf. However, careful consideration should be given to how the due diligence process is managed and what is included in the sale contract.
Managing due diligence
Ideally, the due diligence processes for the purchase and the sale should be run in tandem. If the purchase is more advanced than the sale, there may be limited opportunity for the ultimate purchaser to raise enquiries of the middle man (who will in turn raise them with the seller).
A middle man may intend to acquire the property only if they are sure that the sub-sale will proceed, so they may not wish to carry out extensive due diligence. This is understandable but not without risk. In this case, the middle man's solicitor can act as a conduit and pass the sale pack through to the ultimate purchaser's solicitors, raising additional enquiries on their behalf.
As it has never owned or occupied the property, a middle man may be minded to refuse to provide CPSE replies to the ultimate purchaser. This is unlikely to be acceptable. Instead, CPSE replies should be given but they should be heavily caveated, and there should be an acknowledgment in the contract that the middle man's knowledge of the property is limited to what it has been told by the seller.
The sale contract
A middle man will want to ensure that he has no residual liability once the property has been sub-sold, so obligations under the purchase contract should be back-to-backed in the sale contract as far as possible. However, there are a few areas where the sale contract will need to differ from the purchase contract:
- Confidentiality – Usually, the seller will not be aware of the sub-sale so strong non-disclosure obligations on both parties are needed, and a clause preventing the ultimate purchaser from noting its interest against the title to the property.
- Conditionality – The sale must be conditional on completion of the purchase.
- Enforcement – Given the conditionality, the ultimate purchaser may seek to place obligations on the middle man to enforce and not vary or waive the provisions of the purchase contract without its consent. If the middle man agrees, they should seek a full indemnity from the ultimate purchaser.
- Insurance – The risk of double insurance means that it is unlikely that insurance clauses can be replicated from the purchase contract. A middle man should therefore require the seller to continue to insure until completion in the purchase contract and this should be noted in the sale contract.
- Notice to complete – A middle man needs an express contractual right to serve a notice to complete on the ultimate purchaser even if the purchase contract has not completed, otherwise the ultimate purchaser could argue that the middle man is not "ready, willing and able to complete" and therefore that any such notice is not valid.
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