DIY War Stories in Commercial Property
One thing that commercial property solicitors, accountants and other professionals have in common with highly skilled tradespersons, such as electricians, decorators, car mechanics and plumbers is that we are sometimes, but hopefully not too often, approached by clients who have tried to carry out work themselves which was best left to a properly qualified person, resulting in the client getting themselves into “a right old pickle”.
In other words, having tried to do the work themselves to avoid incurring professional fees, they then come to us and ask us to sort out the resultant mess.
We are always happy to help, but in a lot of cases it will cost more to put things right, if indeed that is possible, than it would have done to instruct us in the first place. This is not because we are vindictive people or are offended that an enterprising client has done the work themselves instead of coming to us. It is more a case, unfortunately, of having to spend an inordinate amount of time trying to remedy a difficult situation.
So, what can go wrong if you decide to do the work yourself? Here are just 5 examples (warning: the law and procedures have had to be simplified for the purposes of this article and in some cases there will be more involved than what appears below):
1. Failing to file a Land Transaction Return or pay the Stamp Duty Land Tax within the 14 day period allowed. In some cases, this has come to light years after the deadline for filing the return or paying the tax. The potential penalty where the return is filed more than a year late can be an amount equal to the SDLT, meaning the client may have to pay double the amount that would have been payable had the return been filed on time. On top of this, there is also interest currently at 7.75% per annum. We have made successful mitigation representations in the past to HMRC, however you should be aware that HMRC has strict criteria as to what it will consider as a reasonable excuse.
2. Using a commercial lease prepared by a lawyer for a previous transaction, but the client adapting that document itself for use on future lettings within the same building. Although the document was fine for the letting in respect of which it was drafted, it may not reflect what the parties to the subsequent transactions have agreed in principle or be suitable for use in connection for the premises being let. This may only come to light when a client wants to sell or mortgage their building. Sometimes, it is possible to sort these problems out by re-drafting all of the DIY leases, but this can only be done where the landlord client is on exceptionally good terms with their tenants. An alternative would be to apply to the Court for rectification of the leases, but this could be expensive and would cause delay, and success could not be guaranteed.
3. Attempting to create a lease which excludes the security of tenure provisions of the Landlord and Tenant Act 1954, but not following the procedures properly, with the result that the tenants have security of tenure and so:
3.1. Can remain in their premises following the expiry of their lease;
3.2. Request a new lease (on terms (including the amount of rent) determined by the court if they cannot be agreed);
3.3. Could be entitled to potentially substantial compensation from the landlord if at any future date the landlord requires the premises in order to redevelop the site.
4. On taking a mortgage from a company in order to secure a loan, failing to register the mortgage at Companies House within the 21 day time limit. This means that the lender will not be able to register the mortgage at the Land Registry, the security will become void against any liquidator, administrator or creditor of the company and the money secured by the mortgage will immediately become payable (section 859H(4), Companies Act 2006). This issue can sometimes be resolved by applying for an order from the court permitting the mortgage to be filed with Companies House out of time or else, which requires the cooperation of both parties, re-executing the mortgage deed and then registering it at Companies House within 21 days.
5. Normally, property transactions are exempt from VAT. However, owners of commercial premises can choose to make their property subject to VAT. If they do so, then tenants would have to pay VAT on rent and other taxable supplies made by the landlord and any purchaser of the property may have to pay VAT on the purchase price. By way of an exception, if someone buys a property that has been elected for VAT, but which is subject to occupational tenancies, then the purchaser will not have to pay VAT on the purchase price if the transaction qualifies as the “transfer of a going concern”. The sale will only qualify as the transfer of a going concern if the purchaser is registered for VAT and notifies HMRC that it has itself elected the property for VAT within the time limit for doing so. However, sometimes purchasers fail to comply with those requirements. This would normally come to light on a VAT inspection. The result could be that (because the transaction did not satisfy HMRC’s requirements for treating it as the transfer of a going concern) an unexpected, unnecessary and potentially significant VAT liability arises, as VAT would be payable by the purchaser on the purchase price for the building and the Seller would be liable to account for that VAT to HMRC. A disaster can sometimes be averted if the purchaser is VAT registered and there is enough output tax to mop up this liability.