Buying a distressed property in Scotland

2023 was a year where we saw buyers and sellers of commercial real estate assets not necessarily always aligned on pricing against a backdrop of lending headwinds. As the year drew to a close, visible signs of distress were reported to be emerging in certain corners of the real estate sector which may well bring fruitful opportunities in 2024 for property investors looking to acquire new assets via distressed or enforced sales. But what is a "distressed" property sale and what are the key considerations for buyers looking to acquire these types of assets?

The term "distressed property sale" is often used in Scotland to describe various scenarios which can include:-

• the sale of a property by an insolvency practitioner due to the owner of the property being placed into a formal insolvency process such as administration or liquidation;
• a sale directly by the lender following an enforcement scenario; and
• a consensual sale where the property owner and the lender have agreed that the property requires to be sold in order to avoid a default and enforcement scenario.

Establishing the exact nature and context of the "distressed sale" will be the first step for any potential buyer as this will determine who the contracting parties will be, the paper trail which requires to be audited to confirm that there is a valid title to sell and the level of information which is likely to be available to the buyer as part of the due diligence process.

In most distressed disposals, the property will be "sold as seen" which means that whilst the buyer may be provided with any information which is held by the seller, it is possible that this will be limited, will be provided on a non-reliance basis only and it will be for the buyer to satisfy themselves on any gaps. Whilst in a standard commercial sale, it is the expectation that the seller will provide the buyer with a full due diligence pack for review, quite often the buyer of a distressed asset will need to procure and pay for their own searches and they may require to reconstitute missing title deeds, leases, local authority and other documentation. It is also unlikely that an insolvency practitioner or lender will be in a position to provide any warranties in the sale contract as, from a practical perspective, they will not normally have the same level of information regarding the property as the owner, they may not have been directly involved in the day to day management so will not necessarily have full visibility on all potentially relevant issues and they will not want to risk exposure to a future breach of warranty claim.

If the asset is an investment property then the buyer should seek to establish the rental position under any occupancy agreements as soon as possible. This should include requesting current arrears statements, rental payment histories and confirmation of any rent deposits held. If there are substantial arrears then an early discussion as to whether the rents will be apportioned at completion on the basis of the rents receivable or those which have actually been received is likely to be beneficial to both parties. Similarly, the service charge information should be carefully reviewed to establish where any shortfalls, service charge caps or missing landlord contributions exist and a suitable date for when the final service charge reconciliation will occur should be agreed as an insolvency practitioner or lender may require this to be sooner rather than later to facilitate as clean and swift an exit as possible post-sale.

When acquiring a distressed property, the buyer should be aware that it is likely that the seller will be looking for the buyer to take the property warts and all and the usual sale warranties will not normally be provided. This means that carrying out thorough due diligence will be imperative from the buyer's perspective and maximising information which is available via public sources, such as the Scottish Land Register, Companies House and the local authority planning portal can all assist with that process. Where issues arise as a result of title defects, missing information and/or lack of warranties being provided then title insurance may be a suitable and commercial option which can be explored to still allow matters to progress. So whilst the buyer of a distressed property should be aware that that the disposal process is likely to differ from a standard commercial sale, this does not mean that the acquisition cannot progress - the key issue for a potential buyer is to ensure that their legal, technical and management reporting is thorough and dovetails insofar as possible so that any potential gaps or issues can be identified as early as possible and mitigated accordingly.