A seller’s guide to preparing for a corporate wrapped property sale
If you are looking to sell a UK property which is owned by a company formed especially for that purpose, otherwise known as a special purpose vehicle (SPV), you may decide to sell the shares in the SPV instead of the SPV selling the property. The sale of an SPV is more complex and time consuming than selling a property and so, by preparing your SPV for sale, you may be able to reduce the time spent completing the transaction. This guide sets out some of the key steps to take, and issues to consider, in order to prepare your SPV for sale.
APPOINTMENT OF ESTATE AGENT
The seller (i.e. the owner of shares in the SPV) should bear the cost of the estate agent’s fees so you should ensure that the letter of appointment of the estate agent is addressed to the seller (not the SPV). The buyer will not want the SPV which it is acquiring to be responsible for the agent’s fees.
If the estate agent is appointed at a time when you are unsure as to whether you will sell the property or sell the shares in the SPV then you should request two letters of appointment; one for the SPV to sell the property and one for the seller to sell the SPV.
Once you have decided to proceed with the sale of the SPV then the appointment of the estate agent for the sale of the property by the SPV should be terminated by formal notice in writing. Ideally, the agent should confirm that they are not owed any money by, and will not bring any claims against, the SPV.
APPOINT A TAX ADVISER
Take advice on whether or not to sell the property or sell the shares in the SPV. A tax adviser will be able to advise you on the merits of each option.
STAMP DUTY SAVING
The sale of an SPV is typically more risky and time consuming for a seller than the sale of the property itself and so, if you go down this route, consider renegotiating the purchase price so that you share in any stamp duty saving made by the buyer purchasing the SPV.
Make sure the SPV’s statutory registers (e.g. register of members, register of directors etc.) are up to date and contain no inaccuracies.
If the SPV is offshore then you will need to obtain the equivalent in the relevant jurisdiction, usually from the registered agent in the jurisdiction who is responsible for managing the SPV’s statutory requirements.
PUBLIC RECORDS AND FILINGS
Check that the SPV’s public records and filings are up to date and contain no inaccuracies. If offshore, ask the registered agent to do this.
The buyer will want to see the SPV’s accounts (usually for the past 3 years). This is in order for it to carry out due diligence and verify the total assets and liabilities of the SPV. The SPV may have liabilities such as professional advisers fees and costs associated with the property such as insurance, ATED, utility bills and bank loans.
If more than 3 months have passed since the last annual accounts of the SPV were prepared then you should consider preparing management accounts. The buyer will want to see the recent financial position of the SPV and thus is likely to request management accounts.
If the SPV has loans in place or there is a legal charge (mortgage) in place over the property then you should speak to the lender in advance of selling the SPV in order to obtain its agreement in principle to the sale. The terms of the loan will usually contain restrictions on a change of control of the SPV and so, assuming the loan can only be repaid out of the proceeds of the sale of the SPV, the lender will need to agree to the sale taking place. The lender will also need to be involved in completion of the sale in order to ensure that necessary steps are taken to ensure that the lender is repaid. The lender will usually expect you to pay its fees for dealing with the repayment of the loan and release of security and this should be factored into your transaction costs.
If there are outstanding loans to the SPV (e.g. from you, other shareholders or third parties) do not simply have the loans waived or written off without speaking to a tax adviser first as there may be adverse tax consequences for the SPV which may discourage or prevent a buyer from acquiring the shares in the SPV.
The buyer will want to carry out due diligence on the SPV and so, in addition to the accounts and management accounts referred to above, the buyer will request various documents relating to the SPV. You can save time by starting to gather these documents together in advance. The type of documents you will need to gather will include the following:
(i) Constitutional documents and other company documents:
– memorandum and articles of association;
– all company registers (if any) (e.g. register of directors, register of members, register of allotments, register of transfers and register of charges);
– share certificate(s) for the share(s) in the SPV;
– minutes of shareholder meetings (or any written resolutions) during the past 6 years;
– minutes of board meetings (or any written resolutions) during the past 6 years;
– a copy of any shareholders’ agreement;
– copies of any share options, loan notes or warrants;
– if the SPV is offshore, a certificate of good standing.
(ii) Finance documents including:
– details of the SPV’s bank accounts and copies of any bank mandates;
– details of all overdraft, loan and credit facilities of the SPV (whether with a bank or private lending) and copies of related documents;
– details of any security over the property (e.g. mortgage/legal charge) or SPV (e.g. debenture or charge over shares);
– details of any borrowing made by the SPV to third parties (including its directors).
(iii) Tax returns for the past 6 years
(iv) Property documents including:
– Title documents;
– Any tenancy agreements granted by the SPV in respect of the property;
– Details of any contracts entered into by the SPV such as:
– buildings insurance;
– property maintenance;
– utility bills;
– swimming pool maintenance;
– HVAC systems maintenance; and
– gardening and landscaping.
(v) A list of assets of the SPV
(vi) Details of any ongoing or threatened litigation or other disputes
(vii) Details of any employees of the SPV
(viii) Details of any other contracts or financial arrangements entered into by the SPV in the last 6 years
The terms of the agreement for sale will be contained in the Share Purchase Agreement or “SPA”. This is typically prepared by the buyer’s solicitors and will contain bespoke warranties and indemnities from the seller, the extent of which will depend upon what is revealed by the due diligence that the buyer has carried out (see above). This document is usually heavily negotiated; the buyer will want the protection it feels it requires, and the seller will want to limit its ongoing liability as much as possible.
EXCHANGE AND COMPLETION
If there is a split exchange (when the contract is entered into) and completion (when the buyer takes title to the shares). The buyer will require provisions in the SPA restricting what the SPV can do between exchange and completion. The buyer will also want the warranty protections updated so that the seller will give them at completion as well as exchange. This can be the subject of considerable negotiation.
A share sale transaction carries with it a degree of complexity and risk which makes it a far less straightforward transaction than a property sale. The tax savings will usually dictate the decision but the complexity, risks and delay as a result of negotiation and the associated professional fees should not be underestimated and should be factored into the decision making process. It is better to agree the approach up front before heading down either route.