Due diligence when buying a property SPV

Buying the shares in a property SPV rather than purchasing the property directly can offer significant advantages, particularly when investors are looking to reduce SDLT exposure or retain existing leases, contracts, and management arrangements.

However, an SPV acquisition carries additional risks because the buyer is acquiring the company itself rather than simply the underlying property. That distinction is important.

The buyer is taking ownership of the SPV’s assets, liabilities, historic obligations, financing arrangements, tax position, and contractual relationships. Problems within the company may not become obvious until after completion.

For investors, thorough due diligence is one of the most important parts of the transaction.

Why is due diligence more important in an SPV acquisition?

A standard property purchase is usually focused primarily on the property itself. An SPV acquisition is different because the buyer needs to investigate both the company and the underlying property.

The transaction may involve reviewing:

• Corporate records.
• Existing debts and liabilities.
• Historic tax compliance.
• Shareholder arrangements.
• Banking and finance documentation.
• Property title and leases.
• Existing contracts.
• Historic disputes or litigation.

A buyer may inherit liabilities or problems that are not immediately visible from the property transaction alone.

For that reason, due diligence in SPV transactions is often significantly broader than in a conventional acquisition.

What corporate due diligence should be carried out?

The scope of the investigation will depend on the structure of the transaction and the history of the SPV itself.

Corporate due diligence commonly includes reviewing:

• Company accounts and financial records.
• Existing borrowing and lender security.
• Shareholder loans and intercompany balances.
• Companies House filings.
• Corporation Tax, VAT, and ATED compliance where relevant.
• Existing charges or debentures.
• Director records and corporate governance.
• Outstanding disputes or litigation.
• Insolvency risks or county court judgments.
• Insurance arrangements.

Buyers will also want to understand whether the SPV has undertaken activities beyond simply holding the property.

Historic tax planning can become particularly important. If aggressive tax arrangements were used previously, HMRC may still have powers to investigate or challenge the position after the acquisition, as HMRC’s powers to investigate tax affairs extend to six years before the company’s last accounts date. 

What property due diligence is required?

Even though the transaction is structured as a share purchase, the underlying property still requires full investigation.

This commonly includes:

• Title investigations.
• Lease reviews.
• Rights of way and restrictive covenants.
• Planning permissions and building regulations.
• Search results.
• Tenancy arrangements.
• Deposit protection compliance.
• Rent arrears.
• Service contracts and management agreements.
• Environmental considerations.
• Structural surveys and repair obligations.

The condition of the property and the quality of the title can still affect lender appetite, future refinancing, and the long-term value of the investment.

What liabilities can buyers inherit?

One of the biggest risks in an SPV acquisition is inheriting liabilities which only emerge after completion.

Potential liabilities may include:

• Historic tax exposure.
• Undisclosed borrowing.
• Existing charges or lender security.
• Shareholder disputes.
• Lease breaches.
• Planning breaches.
• Tenant disputes.
• Regulatory non-compliance.
• Unpaid contractors or suppliers.
• Defective corporate records.

This is one reason why SPV transactions often involve extensive disclosure exercises and heavily negotiated warranties and indemnities.

What role do heads of terms, warranties, and indemnities play?

Before detailed due diligence begins, buyers and sellers will often agree to heads of terms that set out the broad commercial framework for the transaction.

This may address matters such as:

• Purchase price.
• Existing debt treatment.
• Cash extraction before completion.
• Timetables and exclusivity.
• Responsibility for historic liabilities.

It is important to note that ordinarily, heads of terms are not legally binding, but serve as a useful template to draft the share purchase agreement from and give all parties an understanding of the terms of the transaction.

Once negotiations progress, the share purchase agreement will usually include warranties and indemnities designed to allocate risk between the parties.

These protections may relate to:

• Tax liabilities.
• Corporate compliance.
• Existing disputes.
• Accuracy of financial information.
• Property-related issues.
• Undisclosed liabilities.
• Historic regulatory breaches.

The drafting and scope of these protections can significantly affect the buyer’s position after completion.

What funding issues can arise in SPV acquisitions?

Funding an SPV acquisition can sometimes be more complicated than financing a standard property purchase.

Some lenders may:

• Restrict lending on share purchases.
• Require additional due diligence.
• Insist on refinancing arrangements.
• Require personal guarantees.
• Require debentures or additional security.
• Impose conditions concerning shareholder structures.

Funding discussions should usually begin early in the transaction process to reduce the risk of delays later.

What issues do investors commonly overlook?

Buyers sometimes focus heavily on SDLT savings without fully considering the wider risks associated with acquiring a company structure.

Commonly overlooked issues include:

• Historic liabilities within the SPV.
• Problems refinancing after acquisition.
• Existing lender restrictions.
• Weak corporate records.
• Leasehold restrictions.
• Historic tax issues.
• Undisclosed disputes.
• Informal shareholder arrangements.
• Planning or compliance issues affecting the property.

In many cases, these issues only emerge through detailed due diligence and disclosure investigations.

Advice on SPV acquisitions and due diligence

SPV acquisitions can offer significant commercial and tax advantages, but buyers should ensure both the company and the underlying property are investigated carefully before committing to the transaction.

Dylan Leet, partner and head of real estate finance, says: 

“Buying a property through an SPV structure can create significant commercial advantages, but investors sometimes underestimate how different these transactions are from a standard property acquisition. The buyer is acquiring the company itself, not just the underlying asset, so issues involving historic liabilities, lender security, tax compliance, and shareholder arrangements all need careful investigation before completion.”

Our solicitors advise investors, landlords, developers, and corporate buyers on SPV transactions, due diligence investigations, share purchase agreements, refinancing arrangements, and investment property acquisitions.

Get in touch to discuss your proposed SPV acquisition with our real estate finance team.