Property SPV transaction v direct purchase: the risk profiles are very different

In general, the intention of the parties in a Property SPV purchase is to replicate the commercial position which would apply on a direct purchase of the underlying property. However, it’s important to be aware that the actual risk profile for an Property SPV transaction is very different to that of a direct property purchase. There are two main reasons for this.

First, on a direct property purchase, the purchaser can rely directly on property searches and the process of land registration in order to obtain good title to the property, free of encumbrances. This is not the case on an Property SPV purchase, where searches give only indirect protection.

Second, the purchaser of the shares of a Property SPV will inherit (albeit indirectly) any actual or contingent liabilities and issues relating to the corporate entity itself. In order to assess those liabilities, the purchaser must rely on information provided by the seller. This includes information made available in the due diligence process, backed up by warranties and indemnities. Those warranties and indemnities will be of no value if the seller (or its guarantor) does not have the financial standing to meet possible claims.

The table above summarises some of the differences between direct property purchases and Property SPV purchases, in terms of the risk profile and standard UK market practice.

For more practical guidance on how to manage the sale or purchase of property SPVs, you can download the free guide in the Resources section of our website.