The revolution starts here?

Introducing the Property Standardisation Group's form of offer to sell an investment property, which borrows from English practice

20th October 2008 | Iain Macniven

At a time when there appear to be certain tensions between the Scottish Government and Westminster, this may not be an opportune moment to suggest that the English may be right about something for a change, but that in a sense is the starting point for the latest offering from the Property Standardisation Group – a form of offer to sell an investment property (i.e. one that is subject to one or more leases). This follows on from the PSG offer to sell with vacant possession which was launched towards the end of 2007. While this article deals with various of the provisions in the new precedent and our thinking behind certain provisions, it is worthwhile spending a little time initially exploring the concept of an offer to sell as opposed to an offer to purchase.

The procedure in England, as many practitioners will know, is different from that in Scotland. The parties’ solicitors deal with enquiries before contract and then settle the form of a sale contract which is prepared by the seller’s solicitors. It appears to the PSG both as a group and also as practitioners in the field that there is considerable merit in that approach, particularly in the field of commercial property, the area which concerns the PSG.

It is clear that competitive bids for residential property can most easily be dealt with by way of purchase offers, and the same doubtless applies in the case of commercial property in an open bidding process. There have been instances of commercial properties being offered on the basis, effectively, of “heads of terms offers” from purchasers, with the successful bidder being presented with a sale contract by the seller’s solicitor, but that is not the norm.

Removing the blindfold

In the context of commercial property generally, though, by far the bulk of activity is by way of agreed deals rather than competitive bids. In that situation, in the view of the PSG there is a very compelling argument to the effect that the seller should prepare and issue the sale contract. While there may be instances where the seller’s solicitor knows little about the property, that may well be the exception rather than the rule, so that in the vast majority of cases the seller’s solicitor will be familiar with the property and title deeds etc, and indeed in a strong market – admittedly not the market we are currently in – that solicitor may well have acted in the purchase of the property not that long before it is then sold on. Members of the PSG have certainly encountered this over the last year or two in relation to very substantial developments (such as shopping centres or other similar multi-let developments) which were traded on fairly quickly and where it made eminent sense for the seller’s solicitor to put together the package for the prospective purchaser. A number of these very large scale deals were done in a very short period of time in consequence.

The current Scottish system of proceeding by way of purchase offers is a bit like playing darts while wearing a blindfold. The purchaser’s solicitor will be armed with some information including a postal address of the property, price, entry date and preconditions etc, but perhaps little else. He or she will then pull from the drawer a standard form of offer which contains every possible clause that might be of the slightest relevance. The offer that is submitted will contain a few essential commercial provisions, such as price, but then be enveloped in a set of further clauses which are effectively “fishing exercises”, set out in the form of warranties to be given by the seller in relation to all aspects

of the property. The expectation however is that the seller will not give any warranty but instead will produce information in response, such as titles, leasehold documents, planning consents, local authority searches and all the rest of the due diligence package. Doesn’t it seem infinitely more sensible, therefore, for that due diligence package to be put together by the seller’s solicitor and presented along with a bespoke draft offer to sell, tailored specifically to the property and its peculiarities?

That, in essence, is the revolution which the PSG wishes to foment, and complementary to this process is the deployment by the purchaser’s solicitor, at the beginning of the transaction, of the due diligence questionnaire, one of the PSG’s first projects, designed to help both parties to the transaction ensure that all aspects of the purchaser’s due diligence requirements are processed thoroughly and effectively.

What the documents do

Having set the scene for such sedition, let me say a little bit about the documentation that the Group has produced. As well as the draft offer to sell, guidance notes and draft optional clauses (being clauses which may be of occasional use to practitioners but will not be sufficiently typically used to merit their being included in the draft offer itself) are now available on the PSG website (www.psglegal.co.uk).

There are some points to note particularly in relation to the draft offer to sell:

The offer deals with payment of the price, apportionments, penal interest and cancellation of the sale. The lead is taken here from the PSG form of offer to sell with vacant possession and, in particular, picks up the heads of claim which the seller may seek to enforce against the purchaser, against the background of the debate in the profession on that subject as canvassed in “Conveyancing – What happened in 2007?” and elsewhere. An issue that arises in the context of investment sales obviously is whether the seller is entitled to both interest and rent, and that is addressed in the offer.

There are various permutations of the relatively complex VAT provisions provided in the offer, according to what is appropriate in the circumstances. The matter of the Capital Goods Scheme is also addressed.

Typical issues in this type of contract in relation to treatment of arrears of rent, methodology of dealing with service charge, and dealing with ongoing management matters including outstanding rent reviews and the like are dealt with in detail.

There is a series of lease confirmations given by the seller which are regarded as a fair balance between the interests of the two parties, on the basis that the seller will have produced a due diligence package for examination by the purchaser’s solicitor and acknowledging that the value of the asset is the benefit of the leases.

Drafting has been produced to deal with assignation of any relevant service contracts, guarantees and rent deposits.

Time for change?

This is a very brief canter through the principal provisions, which will of course require to be referred to for more detail. Other provisions in the investment offer will be familiar to those who have used the PSG form of offer to sell with vacant possession, and the guidance notes which accompany the investment offer provide the user with a detailed commentary on all of the provisions in the offer.

I would like to commend to the profession the approach being taken by the PSG and hope at the very least it will provoke some debate about ways of doing things differently that can help us all to cut down unnecessary time on extraneous or irrelevant matters and allow transactions to proceed more quickly for the benefit both of clients and lawyers. That is, of course, the raison d’être of the PSG.

As ever, the PSG records its thanks to its consultee firms, listed on the PSG website, who have provided invaluable comments and suggestions on the discussion drafts which were circulated by the PSG in the summer.