An alternative to acquiring the direct title to a piece of real estate can be to acquire the corporate vehicle (Target) that owns the property. In its simplest terms, this may be done by way of the acquisition of the share capital of an English private limited company, an offshore company or a holding company whose subsidiary owns the real estate in question. By purchasing the shares of the Target, the ownership of the real estate does not change. This can be advantageous when the real estate in question is leasehold property because (unless there are change of control provisions in the relevant lease) landlord’s consent will not be required.
Share purchase agreement
Rather than entering into a standard property contract, the parties will enter into a share purchase agreement. The share purchase agreement will be governed by English law, even where the Target is an overseas company holding real estate in England and Wales (although local counsel will be required to opine on certain aspects of the transaction in this instance). Before entering into the formal share purchase agreement, the parties may enter into non-binding heads of terms. The heads of terms may include binding provisions relating to exclusivity and the payment of non-refundable deposits. Unless there is a specific requirement for consent from a third party such as a landlord or regulator, most transactions will be exchanged and completed simultaneously. If a split exchange and completion is required, it is likely that the seller will require the buyer to pay a deposit on exchange that is liable to be forfeited by the buyer in the event that the buyer fails to proceed to completion at the required time. The share purchase agreement will have built into it provisions regarding the conduct of the Target’s business during the period between exchange and completion and may give the buyer the ability to terminate the agreement if the seller materially breaches those obligations.
Due diligence
A significant difference to a pure property transaction is that by acquiring ownership of the Target, the buyer also inherits all of the Target’s liabilities and history, including tax. As such, in addition to the usual property due diligence that is carried out (including regarding any occupants who will generally retain their right to remain at the property despite the sale), the buyer will need to undertake full legal due diligence on the Target, including financial and tax, so that it can understand exactly what it is buying.
Stamp duty and ATED
Stamp Duty payable on the acquisition of shares in a UK company is 0.5% of the purchase price which is lower than the Stamp Duty Land Tax (SDLT) which is payable when the real estate asset itself is purchased – the top rate of SDLT is currently 15% for residential property and 5% for commercial property. Where the transaction is to be structured as a share purchase, in the event that the Target is leveraged with bank debt and/or shareholder loans, the share purchase agreement may be structured so that the debt is discharged by the buyer at completion, with the headline purchase price being reduced by the amount of the debt and thus reducing the level of Stamp Duty to be paid. The consideration may also be subject to a net asset adjustment based on completion accounts, with the adjustments replicating the accruals seen in pure property transactions such as rental receipts and service charge apportionments.
A buyer should also bear in mind that the Target may be liable to pay Annual Tax on Enveloped Dwellings (ATED). ATED is an annual tax charge payable by companies that wholly or partly own UK residential property valued over £500,000. Relief from ATED is generally available where the property is let on commercial basis to someone who is unconnected with the company. However, the company will still be required to make annual ATED filings.
A share purchase agreement will not be the right option all of the time, but it is an important structure in the list of possibilities to consider.