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Why good legal advice is so important if you’re thinking about investing in property

Earlier this year, we examined whether Buy to Let remained a viable investment. While landlords are facing some challenges, primarily changes to the way property income is taxed, strong demand from tenants and anticipated house price rises in 2020 mean plenty of investors will still be considering property this year.

While private investors have traditionally confined their involvement in the property investment market to residential Buy to Let property, higher returns from investing in commercial property are tempting private investors.

However, investment in commercial property has a very different (and generally higher risk profile) than investment in residential property.

So, if you’re thinking of investing in the property market, it’s vital that you get the right advice.

The recent failure of a student housing investment scheme has highlighted the risks of investing in commercial property. Keep reading to find out more about what went wrong in this case and why it’s so important to get a good property lawyer on your side when you’re thinking about Buy to Let.

The Q Studios story

Investing in commercial property can be risky. The failure of a recent student housing investment scheme in Stoke-on-Trent highlights the issues that investors can face.

According to the Land Registry, 196 tenants now seem to hold leases in the Q Studios housing accommodation development. However, the largely completed development has an uncertain future now that the management company has been put into administration.

The scheme seems to have involved the developer selling 250-year leases of individual rooms in blocks of student accommodation for relatively low amounts – reportedly around £70,000.

However, these leases came with relatively high ground rents (£750 per room) subject to RPI indexation at five-yearly intervals throughout the term of the lease.

On the grant of the room lease, the investor then granted a sub-lease of their room to the management company. Under that sub-lease, the management company agreed to pay the investor an ‘additional rent’ (a share of the rent received from letting the room to a student) in order to achieve annual returns of between 8% and 12%.

Also, the management company agreed to pay the ground rent and service charge payable under the investor’s head lease.

The developer then sold the freehold for over £2.8m to a specialist ground rents owner.

To investors, all would have appeared well until October 2018 when quarterly payments due from the sub-tenant company of the ‘additional rent’, were not paid. Following a further missed payment in January 2019, the sub-tenant company was put into administration.

Investors were then made aware that:

  • The management company had not generated enough income to pay all of the rent, service charge and additional rents under the sub-leases
  • They would have to fund payment of the rent and service charge payable under their own leases, and then seek to recover those payments from the administrators
  • They would have to waive their right to receive ‘additional rent’ until all other necessary expenses of the administration had been paid.

How a property lawyer can help you make the right investment decisions

Considering that the units in this development were selling for around £70,000, spending up to £5,000 on instructing a senior associate in a property law firm to advise on the transaction might seem like a waste of money.

However, engagement of the right lawyer is a key part of a successful investment in a property scheme of this complexity. Reasons include:

  • Licenced solicitors must have a minimum level of professional indemnity insurance. This covers claims when solicitors’ advice falls short of what is lawfully required
  • The ‘duty of care’ standards which a solicitor must meet in a property transaction are high. Not meeting those standards would lead to you having a good claim for negligence against your solicitor
  • Fee payment arrangements such as ‘no win no fee’ mean that you will potentially find it easier to bring a claim, particularly in a case where there is a potential for group litigation by a number of claimants whose claims rest on broadly the same facts
  • A good and experienced solicitor should be capable of identifying and advising on the potential risks of the scheme. They should also be capable of advising you not to proceed with the investment or, at least, not on the terms offered.

In simple terms, would you consider spending a significant amount of money on buying a product without the appropriate advice? If not, seeking the help of a good property solicitor is key.

Get in touch

If you are thinking about investing in property, or you want to discuss your investment strategy, please get in touch. Email hello@sovereign-ifa.co.uk or call 01454 416 653.

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