A sub-sale (as opposed to an assignment of a contract) is where a seller contracts to sell land to an intermediate buyer who simultaneously (on the day of purchase) sells it on to the ultimate buyer.
This article focuses on some of the points that a lender in particular will consider important but in any sub-sale transaction there are like to be many more elements that need to be considered, including tax, insurance, TUPE and potentially landlord and tenant issues.
In a market where there are opportunities for those who are commercially creative, sub-sales are not unusual. They do however present their own intricacies, risks and potential stumbling blocks.
These sometimes only manifest themselves once a lender has become involved and what might be considered a ‘commercial risk’ by a buyer is often an unacceptable risk to their lender. Indeed, some lenders do not like the sub-sale structure and will not lend against it.
Set out below are some of the points that a lender will focus on but which the intermediate and ultimate buyers should also consider.
- A HEALTH WARNING – COMPLETION NOTICES: Whilst not really an issue for the lender we highlight one major area which, if tackled correctly, may save an intermediate buyer (and their greying solicitor) a few sleepless nights, is the notice to complete provisions in the head contract. Check these before drafting the intermediate contract. An intermediate buyer does not want to be in a situation where it has missed the completion date, the head seller has served notice to complete and they find that the ultimate buyer is not contractually bound to complete until after that date. It happens……
- Due diligence / Representations: Under a standard sale and purchase agreement the buyer has a direct contractual relationship with its seller. If the seller has made a misrepresentation (even an innocent one) or there is a breach of the contract terms then the intermediate buyer will have a direct contractual right of remedy against its seller and can either rescind the contract and / or recover damages in lieu of rescission. However, in a sub-sale, where there is no direct relationship between the head seller and ultimate buyer, consideration should be given as to how an ultimate buyer (and its lender) can enforce a misrepresentation against the seller. There are ways.
- Head Contract: An ultimate buyer who feels they are getting a good commercial deal, may not feel that they should be overly concerned with the terms of the head contract between the head seller and intermediate buyer. Actually, the terms of head contract and their interaction with the intermediate contract couldn’t be more important. The ultimate buyer and its lender will, amongst other things, need to consider and check that:
a) the intermediate seller has an interest in the land and will have a power of sale;
b) there are no unusual or onerous conditions in the head contract;
c) the original purchase price is not at a level which might be seen as a potential sale at undervalue;
d) relevant service contracts can be novated; and
e) notice to complete provisions are appropriately drafted (not really a concern for a lender but of vital importance to the intermediate seller should it find itself in a notice to complete period – see the health warning above!)
However, it is not unusual for the head contract to include confidentiality clauses or for important information to be redacted. This is unlikely to be acceptable to a lender, who will generally require full transparency.
- Development land: If this is a purchase of development land, with the benefit of planning, then one would generally require reliance on professional reports and/or a licence to use architect’s plans without payment. A lender will almost certainly want to see this in place on completion. There is often no obligation on the head seller to procure this for the ultimate buyer. This could prove problematic.
- Undertakings/discharge of security: A seller will often have to discharge mortgages and deal with any restrictions on title immediately following the sub-sale. However, there is no contractual relationship between the head seller and ultimate buyer so how does a buyer ensure that the seller discharges its security and complies with completion requirements? The answer is generally by way of inter-related undertakings but this may not be possible if, as often happens, the seller is not aware of the sub-sale and unwilling to co-operate.
- Jurisdiction of the head seller: If the head seller is located in a different jurisdiction to the UK then a legal opinion should be requested confirming, amongst other things, that the head seller has authority to sell the property. The letter should be addressed to both the intermediate buyer and ultimate buyer but this could also prove an issue, as there is unlikely to be an obligation on the head seller to procure that it is addressed to the ultimate buyer – the ultimate buyer may feel it can take a view but any lender will want to ensure that its borrower can seek reliance it.
Sub-sales are often the result of stakeholders working closely together on complicated projects to take advantage of planning opportunities. They do however have their legal complications, which if not considered carefully at the stage of entering into the sale contract can cause complications when leading to completion. If you do find yourself in a sub-sale transaction and require experienced advice, or if you are a lender who needs to mitigate risk, we at Brecher can provide expert advice and support.
Contact Robert Willox for further information.
This article is for general purpose and guidance only and does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. No part of this article may be used, reproduced, stored or transmitted in any form, or by any means without the prior permission of Brecher LLP.