Case Study – Self-Invested Personal Pension (SIPP) – Purchase of a Commercial Property and a Lease to a Commercial Tenant

Introduction:

In this case study, we look at one of our individual clients, utilising the capital in their Self-Invested Personal Pension (SIPP) for the purchase of a commercial property and a simultaneous lease to a commercial tenant. The client’s objective was to maximise an investment strategy to provide both capital growth and a steady income stream.

Background:

Our client had been saving in their SIPP for many years, building up a capital balance to purchase a commercial property. Our client had a keen interest in commercial real estate and sought to diversify their pension portfolio beyond traditional investment instruments. By using their SIPP to purchase a commercial property they could advertise and source an independent third-party tenant to Lease the property over a long term with the rental income going back into the SIPP.

Lee Gaddes, Property Solicitor, was instructed to work through the legal aspects of this transaction, ensuring that the Pension Trustee’s rights and interests were protected throughout process. Lee carried out the required the due diligence for the commercial conveyancing purchase and drafting/finalising the Commercial Lease.

Purchasing a commercial property through a SIPP requires a process to be followed to ensure compliance with pension regulations and Land and Property Law. Here is an overview of the key legal aspects of this transaction:

1. Preliminary Legal Considerations:

• SIPP Regulations and Compliance:
  • Ensure compliance with regulations provided by the Financial Conduct Authority (FCA) and other relevant authorities governing SIPP investments.
  • Confirm that the SIPP structure aligns with legal requirements and adheres to pension and tax legislation.
• Property Ownership Structure:
  • Evaluate the most suitable legal structure for property ownership within the SIPP, considering options such as direct ownership, special purpose vehicle (SPV), or a SIPP-owned limited company.

2. Due Diligence on the Commercial Property:

• Title and Ownership Verification:
  • Conduct a thorough investigation to verify the title of the commercial property, confirming ownership and identifying any potential encumbrances or legal issues.
• Planning and Land Use:
  • Review local planning regulations to ensure the property has planning for commercial use. Confirm compliance with planning permissions and obtain necessary approvals. Carry out all necessary searches.
• Environmental Due Diligence:
  • Assess potential environmental risks associated with the property. Conduct an environmental survey and investigations to identify any contamination or hazardous materials.
• Building Compliance and Condition:
  • Confirm that the commercial property complies with building regulations. Assess the overall condition of the property through structural surveys and inspections.
• Leasehold Investigation (if applicable):
  • If the property is leasehold, review the lease agreement thoroughly. Ensure compliance with lease terms and assess any potential restrictions or obligations.

3. Due Diligence on the Commercial Tenant:

• Tenant Financial Stability:
  • Evaluate the financial stability of the commercial tenant through credit checks and financial statements to ensure they can meet lease obligations.
• Lease Agreement Review:
  • Review the Heads of Terms agreement carefully, ensuring it covers all relevant terms, conditions, and responsibilities of both the landlord (SIPP) and the tenant.
• Tenant’s Business Viability:
  • Assess the tenant’s business model and viability to ensure it aligns with the long-term sustainability of the commercial property investment. Obtaining appropriate trade references.

4. Legal Documentation and Contractual Agreements:

• SIPP Trust Deed and Rules:
  • Ensure the SIPP trust deed and rules are drafted accurately, reflecting the investment strategy, property ownership structure, and compliance with regulations.
• Purchase Agreement:
  • Review the purchase agreement, including all relevant terms, conditions, and warranties related to the acquisition of the commercial property.
• Lease Agreement:
  • Carefully draft the lease agreement to protect the interests of the SIPP, covering rental terms, responsibilities, and potential contingencies. Ensuring it accurately reflects the agreed Heads of Terms
• Tenant Guarantees and Indemnities:
  • Consider including tenant guarantees and indemnities to mitigate risks associated with tenant default or breaches of lease terms.

5. Completion and Post-Completion Obligations:

• Completion Process:
  • Oversee the completion of the property purchase, ensuring all legal requirements are met, funds are transferred appropriately, and necessary documentation is executed.
• Post-Completion Compliance:
  • Ensuring that all legal requirements are met, and necessary documents are filed with HMRC SDLT, Land Registry, and the Pension Trustees.

Conclusion:

Engaging legal professionals with expertise in a personal pension purchase and commercial real estate transactions is crucial throughout the entire process. It requires a comprehensive legal process and due diligence. By adhering to regulatory requirements, conducting thorough property and tenant assessments, and carefully drafting legal documentation, investors can mitigate risks and ensure a sound and compliant investment within the Self-Invested Personal Pension framework.