Preparing for Commercial Property Sale: Key Construction Considerations

When preparing a commercial property for sale, as well as the title and lease packs, the seller should also ensure that all other relevant documentation for the property is ready. Here we look at the key considerations when preparing the seller’s construction documents for the sale pack.

Depending on when the seller’s construction works were carried out, there may be documents to be prepared and exhibited to a buyer relative to the original design and construction of the property, and also later refurbishment works or landlord enabling works for any occupational leases. A buyer carrying out due diligence and scrutinising a construction package will want to understand the nature and value of the works carried out at the property; when works were carried out (as this is relevant in considering whether claims for any defective design or workmanship could be time barred); and the contractual rights of recourse, if any, available to the buyer (and potentially also its lender). The focus here being on all works undertaken by the seller as owner and/or as landlord under occupational leases. We differentiate that from tenant fit out or tenant refurbishment works which form part of the occupational lease disclosures.

What is in a construction pack?

A complete and up to date seller construction package is vital to providing an overview of all the key construction parties involved in the seller’s works carried out to the property and the allocation of roles, responsibilities and risks between construction parties. In carrying out due diligence a buyer will also typically look to establish what rights could be provided to a next buyer should they later decide to sell on and dispose of the property, and also what rights could be provided to a lender. These rights are often provided by assigning documents and/or granting collateral warranties.

A construction package will often include:

• building contracts (including all technical annexations);
• consultant appointments (and corresponding novation agreements and consultant collateral warranties, where relevant);
• sub-contractor collateral warranties (for those sub-contractors with responsibility for design and/or material aspects of workmanship);
• collateral warranties in favour of any other third parties (lenders and/or tenants for example – this can be relevant in considering whether limited third party collateral warranties have been exhausted); and
• any relevant technical reports, surveys and/or investigation and related letters of reliance.

Preparing a construction package for sale

Prior to putting a property on the market, it is advisable to conduct a thorough review of construction documentation in place and to be exhibited to a buyer, and in so far as possible address any issues in advance. That will minimise the likelihood of issues arising around the sufficiency of contractual protections for significant works carried out at the property. Such issues could lead to the buyer possibly re-opening discussions on sale price and/or contractual warranties in the sale contract during the transaction process.

The review exercise will be a collaborative effort between the seller, its solicitors and its technical and/or management teams, with a view to:

• ensuring all building contracts, consultant appointments and collateral warranties etc are complete (including technical appendices), fully signed and held by the seller’s solicitors where in hard copy form;
• checking that all certificates of practical completion (and any related snagging lists) and/or notices of making good defects have been issued and copies are available;
• identifying if the construction pack is still ‘live’ (i.e. have claims limitation periods expired?) and if the contractor or any material sub-contractor or any professional consultant is insolvent or dissolved; and
• identifying upfront the package the seller proposes to offer to any buyer and, where relevant, its lender.

In so far as any construction documents require to be corrected, completed or located, this can take time to arrange with third parties and so early engagement is key. Similarly, where any third parties are required to approve or sign documents or provide consent (whether construction parties or the seller’s existing lender, for example), this can take time. In so far as draft documents can be prepared in advance or third parties put on notice of the proposed sale, this can assist in streamlining and accelerating the sale due diligence and completion process.

Key take aways:

As with all aspects of sale preparation, it is key for a seller to both (a) understand the construction documentation in place and what will be relevant to a buyer; and (b) ensure this documentation is as complete and accurate as possible, to facilitate a seamless due diligence and completion process. Failing to do so can result in delays and potentially re-opening the price or contractual warranties.

Also, engagement with third parties is often key to securing completion deliverables and so the earlier a seller can do so the better, particularly when such parties were engaged for works completed several years ago. These early discussions can flush out if there are likely to be difficulties in obtaining any particular completion deliverables; and enables the seller to address such issues at an early stage.