Land and share sales: what's the difference?
Published on 16th Feb 2022
What to consider when deciding whether to acquire or dispose of a property
The global pandemic may have temporarily slowed the corporate real estate market but, as confidence grows and activity resumes, the structure of proposed acquisitions will remain as important as ever and a collaborative approach will ensure the best outcome for all parties.
There are a range of legal issues to consider when deciding whether to effect an acquisition or disposal of a property by way of an asset sale and a share sale. An asset sale is a sale of a property by the entity holding the property, which are often held special purchase vehicle (SPV) investment structures. A share sale is a sale by the shareholder(s) of the SPV of the entire issued share capital of the SPV, which allows the purchaser to indirectly acquire the property.
Once the property has been identified, it often is assumed that a land sale is the simplest method; the process is familiar and tax liabilities often quantifiable. However, a share sale can facilitate the same outcome, yet there is often uncertainty about the actual mechanics and how to seek to identify and deal with any unknown issues within the SPV.
Some of the considerations for a land sale and a share sale include the identification of sellers, proposed due diligence and planning and environmental aspects, the continuation of any liabilities and potential tax implications.
Land sale versus share sale considerations
|Consideration||Land sale||Share sale|
|Identity of sellers||The seller and contracting party would be the SPV, in its capacity as the proprietor of the property.||The sellers and the contracting party would be the shareholders of the SPV, in their capacity as the holders of the shares. All shareholders will need to be identified from the register of members of the SPV and should be willing to sell their shares in the SPV.|
|Due diligence and warranties||
This will be focused solely on the property through a title report.
Within this report, the seller's ownership (by reference to the proprietorship register of the official copies (or epitome of title if unregistered), rights/incumbrances relating to the property, search results and planning issues will be reviewed along with a review of the replies to commercial property standard enquiries.
It is this due diligence that will identify potential issues (dependent on scope) relating to the property.
This will include whether any consents are required prior to the transfer; for example, a landlord consent on the assignment of a leasehold interest in a property or deeds of covenant in relation to rights with a third party.
A share sale means not only acquiring the asset, but also all of the SPV's underlying assets and liabilities (whether known or unknown). Broader due diligence will be required to ensure the following, if relevant, are identified and any associated liabilities quantified where possible: (i) establishing the shareholders' identity (as noted above); (ii) the extent of any trading history of the SPV (it is often anticipated that the SPV will be "clean", with the acquisition, development, holding and operation of the property its only activity); (iii) any other assets within the SPV, other than the property (for example, an unrelated property). If there are and the purchaser does not wish to acquire them, they will need to be removed pre-completion, usually at the sellers' expense and risk; (iv) any employees (for example, maintenance staff) and, if so, their position in the context of the sale of the employing SPV; (v) any environmental issues; and (vi) the status of any planning consents.
These items are in addition to the due diligence to be carried out on the property (as noted in respect of a Land Sale).
The sale documentation (a share purchase agreement or SPA) will typically contain a set of warranties (that is, statements of fact) given by the sellers. (Although there may be instances where some shareholders are unable to give warranties due to their lack of knowledge of the business or their covenant strength.) Additional warranties may be sought should areas of concern arise from the due diligence findings. If these are considered material, an indemnity may be included within the SPA. These are all matters of negotiation between the parties.
It is increasingly common for parties to take out warranty and indemnity insurance to cover breaches and claims under the SPA..
|Reports/contracts||Reports commissioned by the SPV, building contracts, maintenance/service contracts and other documents entered into by the SPV will not automatically pass to the purchaser and, therefore, reliance letters and assignments (to the extent they are available) will be required if the purchaser is to rely on them.||Given the owner of the property has not changed and provided the SPV entered into the documents that the purchaser is seeking to rely on, no additional documentation will be required.|
|Residual liabilities/ winding up||The SPV would be disposing of the property only and, therefore, any residual liabilities of the SPV (including under the property sale contract) would remain with the SPV/the shareholder(s) and be required to be dealt with by the shareholder(s) prior to any winding up of the SPV.||As part of the sale, all assets (including the property) and liabilities (known or unknown) of the SPV would remain within the SPV as it is transferred to the purchaser, therefore giving the shareholder(s) a "clean break" (other than in respect of any potential residual liabilities under the warranties, title covenants and any indemnities in the SPA).|
|Environmental||Except for any liabilities under the "contaminated land regime", the purchaser would not automatically acquire environmental liabilities existing as at completion, unless they were specifically included in the property sale contract.||
Any environmental liability held by the SPV, whether related to its period of ownership of the property or otherwise, remains with the SPV. Buying the shares in the SPV would mean acquiring any and all environmental liabilities held by the SPV at completion. This could include, for example, liabilities arising from a breach of environmental law or an environmental claim against the SPV.
The purchaser should broaden the scope and nature of its pre-contract environmental due diligence, and not just consider the state and condition of the property but all other potential environmental risks. Given this increased exposure, purchasers often require more robust contractual protection from the exiting sellers; for example, a bespoke environmental indemnity. Should the sellers have any concern, additional insurance can be purchased to cover any potential exposure.
|Planning||A land sale may be conditional upon satisfactory planning permission being obtained, with associated obligations on both parties to facilitate the application and secure the permission. The parties to the application will be the beneficiaries of any rights to appeal if permission is refused. The owner and any party with an interest in the land will need to be party to any planning agreements required. Careful consideration needs to be given to how the transacting parties deal with the application and planning agreements to comply with conditions precedent. Conditions precedent on planning should always allow for a six-week period for a legal challenge (judicial review) to have expired.||A share sale may also be conditional subject to planning. The parties may be more straightforward on the face of the application and agreements, though a clear understanding of the compliance with conditions precedent is needed between the buyer and the seller.|
The purchase price would be payable to the SPV and then distributed by the SPV to the shareholder(s) (if required).
This may be phased or include overage payments and, if so, security granted over the property to the SPV.
The purchase price would be payable directly to the shareholders. There will be different tax treatments which are considered in the next section. Similar to a land sale, payment of the purchase price can be phased with deferred payments subject to milestones, and security over the property may be offered back to the sellers to secure deferred payments or an overage. These deferred payments would be treated as additional contingent consideration on a share sale (and are likely to have tax consequences).
It is also common to have completion accounts adjustments in an SPA which take account of the extent of any assets and liabilities within the SPV at completion and the purchase price is adjusted accordingly.
The following tax will be payable:
If any element of the consideration is deferred, but that deferred consideration is subject to a maximum amount, then stamp duty is payable following completion of the share sale on that maximum amount. This is the case regardless of how much deferred consideration the purchaser actually pays. This is a difference between the SDLT regime and the rules governing stamp duty on shares.
|Subject to the specific factors relating the purchase this remains optional (as opposed to a simultaneous exchange/completion) and is often used to allow time for the purchaser to gather funds, put other pre-completion issues in place, ensure vacant possession, finalise accounts or secure the relevant planning permission on which the acquisition is conditional.||Similarly, on a share sale, there may be a requirement for conditions to be met prior to completion (for example, planning and third-party consents). Depending on the proposed length of time between the exchange and completion and the risk to the purchaser of new issues arising after it enters into the SPA, there will be additional matters to negotiate in the SPA; for example, the conduct of the SPV between exchange and completion, the repetition of warranties, and the purchaser's ability to terminate the SPA.|
|Post-acquisition||Once the property has been purchased, it can be occupied, operated and/or developed as required subject to any contractual obligations or restrictions on the title.||Depending on the corporate structure of the purchaser and whether it wishes to retain the SPV, the property may need to be transferred out of the SPV into a main operating entity (subject to any need to preserve the SPV structure for tax purposes). The SPV could then be wound up, subject to the directors being satisfied that there were not residual liabilities within it.|
Osborne Clarke comment
There are many factors to consider when deciding whether to buy or sell via a land sale or share sale. It is important to understand the pros and cons of each as this will aid any commercial decisions that need to be made while structuring the purchase of the property.
Parties to the transaction should carefully consider the following practical points:
- Identify who the current "owner" of the property is; an individual or a company to which the shareholders are easily identifiable and communicative.
- Consider the level of due diligence required to identify any potential liabilities associated with the property and/or SPV.
- Consider the use of the property post-acquisition and review what additional consents and/or planning requirements will be required.
- Consider the tax implications. Acquisitions can be structured accordingly so both parties benefit so early engagement with tax advisors will be beneficial for all.
If you have any questions with regards to any of these considerations, please contact our Corporate Real Estate team using the contact details below.