Alarmed? A Seller Should Be!
Vacant commercial property can pose a real security problem for its owner. Whether the property is awaiting redevelopment or simply a new occupier, there are many risks that the owner is exposed to including vandals causing damage, thieves stripping out valuable commodities and squatters moving in.
Security of vacant commercial property can be expensive and is so lucrative for the security industry that in recent years a whole new sector of “property guardianship” has been born solely out of the need for owners to protect their empty commercial property.
Once the owner of an unoccupied property has agreed a sale and exchanged unconditional contracts, you might expect the seller to be immediately relieved of the expensive responsibility of securing the property; after all the common law provides that risk passes to the buyer on exchange of contracts, unless the contract provides otherwise. This position was implicit in the Standard Commercial Property Conditions (SCPC) (Second Edition) which are often incorporated into a sale contract and is now explicit in the SCPC (Third Edition). Condition 8.1 states that “the property is at the risk of the buyer from the date of the contract”
This position is generally well known and accepted and a buyer will usually insure an empty property from exchange (or from the contract becoming unconditional) so it can call on insurance proceeds to reinstate any damage caused to the property between exchange and completion. On a logical extension of this principle, you might also expect the buyer to have to provide security for a vacant property to protect itself against the likelihood of any damage occurring and, if the buyer fails to do so, it does so at its own risk/ the risk of its own insurer.
However, a seller would be well advised to beware of adopting this approach. In the same way as a prudent seller should be directed to maintain its own insurance policy between exchange and completion, a cautious seller should also be warned to maintain the security of the property too.
Protecting the Buyer’s Equitable Interest between Exchange and Completion
On exchange of unconditional contracts (or a conditional contract becoming unconditional), the buyer acquires an equitable interest in the property, but pending completion, the legal estate remains vested in the seller.
Of course, the seller also maintains an equitable interest in the property and naturally, until completion, the seller should continue to protect its own legal and equitable interest in the property by deploying the necessary security measures.
However, the seller also has a duty to the buyer between exchange and completion, namely to look after the property with the equivalent level of care that would be required of a trustee. This is likely to include securing the property against damage. If the seller fails to provide security, the property is damaged and no insurance proceeds are recoverable, the buyer may have a claim in damages against the seller for breach of its duty of care.
In the case of Davron Estates Ltd v Turnshire Limited (1982 WL 967562) the floorboards of a property were removed between exchange and completion by a squatter. Lord Denning opined:
“Between the contract date and the completion date, the sellers of the property were, so to speak, trustees for the purchasers. It was the seller’s duty to… take reasonable care of it”
Breach of Contractual Obligation to Transfer Property in Same Physical State
A buyer may also have a contractual claim against a seller for breach of the seller’s contractual obligation to transfer the property in the same physical state that it was as at the date of exchange.
SCPC 3.2.1 states “the buyer accepts the property in the physical state it is in at the date of the contract.”
In the Davron Estates case, the contract for sale stated:
“the purchaser shall be deemed to buy with full notice in all respects of the actual state and condition of the property and, save where it is to be constructed or converted by the vendor, shall take the property as it is.”
Lord Denning said:
“in my opinion that referred to the state and condition of the premises at the time of the contract..[the Sellers] ought to have taken some steps – some steps at least – to try and see that the property was in the same state on completion as it was when the contract was signed.”
Breach of Contractual Obligation to Provide Vacant Possession on Completion
The contract is likely to place the seller under an obligation to provide vacant possession of the property on completion. If squatters gain access between exchange and completion and the seller has not been able to secure vacant possession by the contractual completion date, the buyer could refuse to complete and may, ultimately, be able to rescind the contract, with a full refund of the deposit being due to the buyer.
If there will be a long period between exchange of contracts and completion, a seller should seek to agree with the buyer, in advance of exchange, a mechanism for securing the property after exchange.
Typical security measures include:
• securing the perimeter by erecting fencing;
• installing CCTV and alarms;
• strengthening entry points by improving locks and boarding up windows;
• employing a security contractor to carry out regular security inspections or to be permanently based at the property; and/or
• engaging a property guardianship scheme.
If security costs between exchange and completion are likely to escalate, a seller should also seek a contribution from the buyer and that contribution (and when it is to be paid) should be expressly written into the contract.
This article first appeared in Estates Gazette on 28 April 2018.