Introduction to property transactions - Differences between ...

Learning Outcomes

This article outlines the differences between residential and commercial property transactions, including:

• Statutory and practice frameworks shaping residential and commercial transactions (Law of Property Act 1925, Land Registration Act 2002, Landlord and Tenant Act 1954, Town and Country Planning Act 1990)
• Roles of the Standard Conditions of Sale (Fifth Edition) and Standard Commercial Property Conditions (Third Edition), including default positions on risk, VAT, remedies for delay, and deposits
• Pre-contract processes and documentation: protocol-driven residential packs (TA forms, searches) versus heads of terms and CPSE enquiries in commercial matters
• Scope and purpose of due diligence and searches in both contexts, including environmental, planning, mining, flood, highways, company and bankruptcy checks, and their criticality in commercial transactions
• Client protections: consumer protection duties and reliance on fairness in residential transactions contrasted with caveat emptor and negotiated allocation of risk in commercial deals
• Leasehold issues and business security of tenure under the Landlord and Tenant Act 1954, including contracted-out tenancies and Section 25/Section 26 procedures
• Taxation differences: SDLT/LTT, VAT, and option to tax in commercial deals; lease NPV concepts and filing deadlines in England and Wales
• Completion mechanics and undertakings, including OS1/OS2 priority searches, the Law Society’s Code for Completion by Post, and the Completion Information and Undertakings form
• Structured client advice and risk management tailored to residential consumers and commercial counterparties, including lender interactions and certificates of title

SQE1 Syllabus

For SQE1, you are required to understand the distinctions between residential and commercial property transactions and their practical implications for conveyancing and client advice, with a focus on the following syllabus points:

• The legal frameworks governing residential and commercial transactions
• The typical conveyancing processes for each type of transaction
• Key differences in contract terms, due diligence, searches, and remedies
• Client protections: consumer law, misrepresentation, and caveat emptor
• Leasehold issues and business security of tenure (LTA 1954)
• Taxation differences: SDLT/LTT, VAT and option to tax, lease NPV
• Practical aspects: standard forms, undertakings, priority searches, completion logistics

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Name two key legal protections that apply to residential buyers but not to commercial buyers.
2. Which statute provides security of tenure for business tenants in commercial leases?
3. What is the main difference in the use of standard contract terms between residential and commercial sales?
4. True or false? SDLT and VAT apply in exactly the same way to residential and commercial property purchases.

Introduction

When acting in property transactions, it is essential to distinguish between residential and commercial transactions. Each type is governed by different legal frameworks, procedures, and client expectations. Understanding these differences is essential for providing accurate legal advice and for SQE1 assessment.

Key Term: residential property transaction
A transaction involving property used or intended to be used as a private dwelling.

Key Term: commercial property transaction
A transaction involving property used for business, investment, or non-residential purposes.

Residential practice is highly structured and consumer-facing, often protocol-driven with standardised forms and searches. Commercial practice is more bespoke and negotiated, with a premium on tailored risk allocation, wider due diligence, and complex funding and taxation considerations. The overarching principle of caveat emptor applies to both, but consumer protection overlays and standard terms in residential conveyancing materially change the balance of risk and remedies.

Legal Frameworks

Residential transactions are primarily governed by the Law of Property Act 1925 and the Land Registration Act 2002 (including the protection of registrable interests and the narrowed list of overriding interests). They also sit within consumer protection legislation such as the Consumer Protection from Unfair Trading Regulations 2008 (CPRs) and the Consumer Rights Act 2015 (CRA) where a trader is dealing with a consumer. The Law Society Conveyancing Protocol and standard TA forms shape the process and disclosures.

Commercial transactions involve a wider range of statutes and practice sources, typically including:

• Landlord and Tenant Act 1954 (security of tenure for business tenants)
• Town and Country Planning Act 1990 (planning control, enforcement)
• Environmental Protection Act 1990 (contaminated land)
• VAT legislation (Value Added Tax Act 1994) and HMRC guidance (for “option to tax” and TOGC)
• RICS Code for Leasing Business Premises (professional statement for lease negotiations)

Contracts are often bespoke, and statutory consumer protections are limited or inapplicable where parties act in the course of business. As a result, risk allocation occurs primarily through negotiated terms and robust due diligence rather than reliance on statutory safety nets.

Contract Terms and Documentation

Key Term: Standard Conditions of Sale
A set of pre-drafted contract terms commonly used in residential sales to ensure consistency and consumer protection.

Key Term: Standard Commercial Property Conditions
A set of pre-drafted contract terms designed for commercial property transactions, allowing for greater flexibility and negotiation.

Residential contracts typically incorporate the Standard Conditions of Sale (SCS), providing a uniform approach to issues like deposit holding, passing of risk, misdescription remedies, and completion logistics. For example:

• Risk usually passes to the buyer on exchange (subject to special conditions).
• Deposits are commonly held by the seller’s solicitor as stakeholder (safer for the buyer).
• Remedies for delay and misdescription are standardised (damages only for material differences; rescission restricted to fraud or substantial difference in quality, quantity, or tenure).

Commercial contracts usually adopt the Standard Commercial Property Conditions (SCPC) or are drafted from scratch, with terms negotiated to reflect commercial interests and bespoke risk allocation. Key differences under the SCPC include:

• Default VAT handling is buyer-payable if applicable; drafting must address VAT clearly.
• Compensation for delay is structured differently (often placing more liability on the buyer for delayed completion).
• Notice to complete timing rules vary compared to the SCS.

In practice, commercial parties negotiate special conditions more extensively (e.g., conditions precedent, reversionary titles, licensing, service charge apportionments, rent reviews, and allocation of environmental risk).

Conveyancing Process

Residential Transactions

The process is highly standardised:

• Seller’s solicitor prepares a contract pack (including title documents and property information forms).
• Buyer’s solicitor conducts standard searches and raises pre-contract enquiries.
• Contracts are exchanged using standard formulae.
• Completion and post-completion steps (SDLT, registration) follow a predictable pattern.

Consumer protection is a key feature, with statutory rights and remedies available for misrepresentation and unfair contract terms.

Core mechanics also include:

• Use of the Law Society Conveyancing Protocol for residential practice.
• Typical exchange by telephone using Formulae A/B/C and deposit handling as stakeholder unless otherwise agreed.
• Pre-completion priority search at HM Land Registry (OS1/OS2) to secure a 30-working-day window to register the buyer’s title and the lender’s charge.

Key Term: OS1/OS2 search
HM Land Registry pre-completion searches granting a 30-working-day priority period for applications to register a transfer (OS1 for whole; OS2 for part).

Key Term: Law Society’s Code for Completion by Post
A practice code under which the seller’s solicitor completes as unpaid agent, undertakes prompt dispatch of completion documents, and sets out completion logistics.

Key Term: Completion Information and Undertakings
A standard form raised pre-completion by the buyer’s solicitor seeking practical completion details and key undertakings (including redemption of existing mortgages and evidence of discharge such as DS1).

Commercial Transactions

The process is more flexible and tailored:

• Heads of terms are negotiated to outline the main deal points.
• Due diligence is more extensive, covering title, planning, environmental, and occupational issues.
• Contracts are often conditional (e.g., on planning or finance).
• Terms such as rent review, break clauses, and repairing obligations are heavily negotiated.
• Completion and post-completion steps may involve complex funding and notification requirements.

Statutory protections are limited, and parties are expected to protect their own interests through negotiation and contract drafting. Lender involvement may require a detailed certificate of title and specific undertakings before drawdown.

Commercial conveyancing frequently uses:

• Exchange without a gap to completion where feasible, or simultaneous exchange & completion for straightforward asset purchases.
• Specific lender requirements and certificates of title (often in City of London Law Society format) covering title, occupational arrangements, and compliance with due diligence outputs.
• Detailed completion undertakings, including redemption of existing charges, service of notices to superior landlords (for lease transactions), and delivery of ancillary documents.

Due Diligence and Searches

Key Term: due diligence
The process of investigating legal, financial, and practical risks before entering into a property transaction.

Residential due diligence focuses on standard searches (local authority, drainage, environmental) and property information forms. The process is designed to be accessible to non-specialists.

Key search topics (residential and commercial as appropriate):

• Local land charges and CON29 enquiries (planning consents, enforcement notices, Article 4 directions, highways adoption status, new road/rail proposals, contaminated land notices)
• Drainage and water (adoption and connection)
• Environmental (desktop report and, where indicated, intrusive surveys)
• Chancel liability (especially in unregistered titles or where prior transfers pre-date October 2013)
• Flood risk (river/coastal/surface water)
• Mining (coal and other minerals where relevant)
• Index map search (SIM) where unregistered elements are present

Commercial due diligence is broader and deeper, often including:

Key Term: Commercial Property Standard Enquiries (CPSE)
Standardised enquiries for commercial transactions, covering title, occupation, service charges, disputes, planning, environmental matters, and VAT status.

• CPSE responses reviewed against occupational realities and service charge budgets
• Planning history and compliance (including conditions and enforcement risk)
• Environmental liability and remediation (allocation via indemnities or insurance)
• Detailed title review (easements, covenants, overage, rentcharges, rights reserved)
• Company search for corporate sellers or buyers (solvency and charges)
• Bankruptcy search (K16) for individual buyers/borrowers where a mortgage is involved

Pre-completion updates are critical:

• OS1/OS2 priority searches in registered land
• K15 Land Charges searches in unregistered land (seller and sometimes buyer/borrower)
• Bankruptcy and company searches close to completion to satisfy lender requirements

Key Term: Law Society’s Code for Completion by Post
See above; sets the standard for document dispatch and the seller’s solicitor’s undertakings on completion.

Key Term: Completion Information and Undertakings
See above; secures practical arrangements (keys, funds, bank details) and redemption undertakings.

Client Protections and Risk

Key Term: consumer protection
Statutory measures designed to protect individuals acting outside their business from unfair practices or terms.

Residential buyers benefit from statutory consumer protection, including the Consumer Protection from Unfair Trading Regulations 2008 and the Consumer Rights Act 2015. These provide remedies for misleading actions/omissions and regulate unfair terms where there is a trader–consumer relationship. The seller’s solicitor should ensure accurate disclosures through TA forms and warn clients that misleading answers can give rise to rescission or damages.

In both SCS and SCPC, remedies for misdescription are structured:

• Damages are available for material differences affecting value.
• Rescission is limited to cases of fraud/recklessness or substantial difference in quality, quantity, or tenure.

Commercial buyers and tenants are generally not protected by consumer law. The principle of caveat emptor applies, and parties are expected to rely on their own legal advice and negotiate appropriate contractual protections. CPSE replies will often be qualified; warranties or indemnities are negotiated where reliance is needed. Allocation of environmental, planning, service charge, and latent defect risk is a central theme of drafting.

Leasehold and Security of Tenure

Key Term: security of tenure
The statutory right of a business tenant to remain in occupation and renew a lease under the Landlord and Tenant Act 1954.

Residential leases are usually long-term, with statutory rights for lease extension and enfranchisement in some cases.

Commercial leases are typically shorter, with heavily negotiated terms. Business tenants may have security of tenure under Part II of the Landlord and Tenant Act 1954 unless the lease is “contracted out.” Key points:

• Contracting out requires the landlord’s warning notice and the tenant’s declaration before lease grant, with express reference in the lease.
• Renewal procedures use Section 25 notices (landlord’s notice to terminate or propose terms) or Section 26 requests (tenant’s request for a new lease), each within 6–12 months of the proposed date.
• Compensation can be payable to tenants on certain no-fault grounds of opposition.
• Interim rent may be set during continuation under the Act.
• Where contracted-out, the tenant has no statutory right to renew; the parties rely on the express lease terms and any break options.

Terms commonly negotiated in commercial leases include rent review mechanics (often upwards-only, open market), alterations (absolute vs qualified vs fully qualified covenants), alienation (assignment, underletting, sharing occupation), user clauses, repair obligations (FRI vs schedule of condition), insurance and rent suspension for insured risks, and re-instatement or termination rights where destruction occurs.

Taxation and Finance

Key Term: Stamp Duty Land Tax (SDLT)
A tax payable on the purchase of property or land in England and Northern Ireland, with different rates for residential and commercial property.

Key Term: Value Added Tax (VAT)
A tax that may be chargeable on commercial property transactions, depending on the property's status and the seller's VAT election.

Residential transactions are usually funded by regulated mortgages, with SDLT calculated at residential rates and reliefs available for first-time buyers in England. In Wales, Land Transaction Tax (LTT) applies, with different thresholds and a 30-day filing deadline (compared to 14 days for SDLT).

Commercial transactions may involve complex funding (corporate loans, investment vehicles), and SDLT/LTT are calculated at non-residential rates. VAT may be chargeable on commercial property, affecting cash flow and transaction structure. Key points:

• New commercial buildings (usually within 3 years of completion) are standard-rated for VAT.
• Old commercial properties are exempt unless the seller has exercised an option to tax.

Key Term: option to tax
An election by a VAT-registered person to treat supplies relating to a property as taxable, allowing recovery of input VAT but requiring VAT to be charged on rents and sales.

VAT-sensitive tenants (e.g., banks, insurers) may prefer no VAT on rent due to irrecoverability. Contract terms must deal expressly with VAT—under the SCPC, VAT is typically payable in addition to the price unless disapplied by special conditions. In some acquisitions of let properties where the buyer continues the letting business and both parties meet HMRC conditions, a transfer of a going concern (TOGC) may remove VAT from the purchase, but drafting and pre-completion steps must align with HMRC requirements.

Lease grants in England can attract SDLT on both any premium and the NPV of rent; LTT applies differently to lease rent in Wales. Accurate calculations and timely returns are essential.

Practical Implications for Solicitors

• Residential clients require clear explanations, risk warnings, and consumer-focused advice. Ensure accurate TA responses, adequate insurance from exchange, and proper use of stakeholder deposit arrangements.
• Commercial clients expect tailored advice, risk analysis, and negotiation of bespoke terms. Emphasise CPSE handling, environmental and planning risk, lease mechanics, VAT strategy (including options to tax and TOGC), and lender requirements.
• Lender interactions often require certificates of title and specific undertakings (e.g., redemption of existing charges). Prepare for OS1/OS2 priority searches, Code for Completion by Post adoption, and the Completion Information and Undertakings form.
• Recognise differences in remedies and defaults under SCS vs SCPC, especially around delay, risk, and VAT; draft special conditions carefully where default positions are not acceptable to your client.

Worked Example 1.1

Scenario:
You are instructed on the sale of a residential house and a commercial office building. The residential buyer is a first-time purchaser; the commercial buyer is a company acquiring the office for investment.

Question:
What are two key differences in your approach to the two transactions?

Answer:
For the residential sale, you will use the Standard Conditions of Sale, provide consumer protection advice, and rely on standard forms and searches. For the commercial sale, you will negotiate bespoke contract terms, conduct more extensive due diligence (including occupational leases and planning), and advise the company on SDLT and VAT implications.

Worked Example 1.2

Scenario:
A business tenant occupies a shop under a commercial lease. The lease is silent on renewal rights.

Question:
Does the tenant have a statutory right to renew the lease?

Answer:
Yes, unless the lease has been "contracted out" of the Landlord and Tenant Act 1954, the tenant has security of tenure and can apply for a new lease at the end of the term.

Worked Example 1.3

Scenario:
A landlord sells a 2-year-old warehouse and has opted to tax. The buyer is a VAT-sensitive insurer. The contract incorporates the SCPC without special VAT conditions.

Question:
What VAT and drafting issues arise?

Answer:
A new commercial building is standard-rated, and the landlord’s option to tax means VAT will be charged on the price and future rent unless disapplied (e.g., via TOGC where conditions are met). Under the SCPC, VAT is payable in addition to the price by default. If the buyer is VAT-sensitive, negotiate special conditions either to confirm a TOGC or to disapply SCPC VAT provisions (if applicable) to avoid an unexpected VAT cost.

Worked Example 1.4

Scenario:
You act for a buyer of unregistered freehold land with a short gap between exchange and completion. The lender requires assurance of priority and solvency checks.

Question:
Which pre-completion searches and steps ensure protection?

Answer:
Undertake a K15 Land Charges search against the seller for a 15-working-day priority period, and a bankruptcy-only search (K16) against the borrower. If any registered elements exist, perform OS1/OS2 searches to secure a 30-working-day priority window. Obtain the seller’s undertakings on redemption using the Completion Information and Undertakings form and adopt the Code for Completion by Post.

Worked Example 1.5

Scenario:
A commercial purchaser faces seller delay at completion. The contract incorporates SCPC Part 1 without special conditions.

Question:
How do remedies differ from residential standard conditions?

Answer:
Under the SCPC, compensation for delay is structured differently (often focusing on buyer delay), and notice-to-complete timing rules vary. The buyer may claim damages at common law for breach, but should consider serving a notice to complete to make time of the essence. Compare to SCS where compensation and notice mechanics are more buyer-friendly and deposit stakeholder arrangements are typical.

Exam Warning

In commercial transactions, there is no statutory right to withdraw after exchange or to claim for misrepresentation unless the contract provides for it. Always check the contract terms and advise clients accordingly.

Commercial contracts also differ on VAT and delay remedies; do not assume residential defaults apply. For business lease renewals, confirm whether the tenancy is contracted out and whether the warning notice and declaration were properly completed—an invalid contracting-out process can upend renewal advice.

Revision Tip

For SQE1, memorise the main statutes and standard forms used in residential and commercial transactions, and be able to explain the practical implications of key differences.

Also ensure familiarity with:

• SCS vs SCPC default rules (risk, deposits, delay remedies, VAT)
• CPSE scope and typical risk issues in commercial due diligence
• OS1/OS2 priority searches, K15/K16 searches, and the Code for Completion by Post
• LTA 1954 renewal procedures (Sections 25 and 26) and contracting-out formalities
• VAT option to tax and lease NPV concepts in SDLT/LTT

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• Legal frameworks: LPA 1925, LRA 2002, CPRs 2008/CRA 2015 (residential) and LTA 1954, TCPA 1990, EPA 1990 (commercial)
• Contract structures: SCS vs SCPC—risk, VAT, deposit arrangements, remedies for delay and misdescription
• Residential process: protocol-driven packs, TA forms, standard searches; consumer protections and stakeholder deposits
• Commercial process: heads of terms, CPSE, conditional contracts, lender certificates of title
• Due diligence: local, drainage, environmental, chancel, flood, mining, highways; OS1/OS2 and K15/K16 pre-completion searches
• Completion logistics: Code for Completion by Post and Completion Information and Undertakings
• Leasehold distinctions: residential long leases vs business security of tenure and contracting out under LTA 1954
• Taxation and finance: SDLT/LTT differences, VAT and option to tax, lease NPV for SDLT in England
• Practical client advice: tailored risk allocation, negotiation of special conditions, and lender requirements

Key Terms and Concepts

• residential property transaction
• commercial property transaction
• Standard Conditions of Sale
• Standard Commercial Property Conditions
• due diligence
• consumer protection
• security of tenure
• Stamp Duty Land Tax (SDLT)
• Value Added Tax (VAT)
• Commercial Property Standard Enquiries (CPSE)
• option to tax
• Law Society’s Code for Completion by Post
• OS1/OS2 search
• Completion Information and Undertakings