There are attractive returns to be made within the property market, drawing in plenty of would-be investors each year.
With an average return on investment of 7%, according to Seekers, and a wealth of choice in terms of investment options, it’s not surprising the sector is a popular choice for those either looking to build a portfolio for themselves or provide funding to developers.
But it’s a complex legal picture, with multiple regulations and legislations which all impact investors – meaning without proper safeguards and sufficient regard to these complexities, investors can find themselves falling into legal pitfalls incredibly easily.
Carrying out due diligence
As with any large financial commitment, sufficient due diligence must be undertaken in property investment to avoid unexpected costs and exposure to risk.
Financial statements, business plans and legal documentation must be thoroughly reviewed and scrutinised in their entirety, not only to help assess the viability and potential of the investment, but also to identify any likely problems.
Investment will always carry with it an element of risk – as anyone who remembers the house price crash as a result of the 2008 global recession can attest to – but the purpose of due diligence is to identify as many potential issues as feasible, mitigate the risks where possible, and then decide whether the remaining risks outweigh the benefits of that particular investment or not.
It may be tempting to skip through stages of the process in order to reach the end goal, but without carrying out all of the essential evaluations – such as flood risk assessments, particularly in areas prone to flooding – there is a real chance that a return on investment will never be realised, particularly if the investor ends up paying out much more than they expected to fix problems down the line that could have been identified pre exchange and completion.
Without proper research, investment deals can not only prove to be costly, there’s also a real chance of ending up in court, especially if there are planning permission restrictions or existing boundary disputes which have not been uncovered during the assessment stages.
The importance of land use laws
Land use laws define the activities which can be undertaken on a property, and ending up stuck with an investment that can’t be used for its intended purpose is another problem that can arise, unless these laws are fully investigated before the investment is made. Most properties will be allocated as residential use, commercial use, or a mix of the two, and it’s up to a potential investor or their legal representative to seek clarity over this before any changes are made on site.
Local authorities can take legal recourse if they uncover that the land use laws are being contravened, which can include taking the site owner to court where an unlimited fine can be issued, as set down by the Town and Country Planning Act 1990.
Staying up to date with environmental laws
Having a clear understanding of environmental regulations is crucial for property investors too, as non-compliance can lead to fines, reputational damage or legal consequences.
For instance, property investors need valid Energy Performance Certificates (EPCs), which assess a property’s energy efficiency and provide an indication of how much it will cost to heat and power the property, as well as how much CO2 it emits. Given the Government’s commitment to improving residential energy efficiency and promoting cleaner energy through the Warm Homes Plan, it’s crucial that investors comply and obtain an EPC when buying or leasing residential or commercial properties. Failing to do so could reduce the value of the property, something investors need to avoid if the process is to be worth their while.
It’s also important to consider contaminated land laws, which compel investors to identify and remedy pollution sources which could potential prove harmful to the environment or to people’s health.
Keeping an eye on legal changes is crucial for investors wanting to bulletproof their investments. By not keeping up to date with the latest developments, costly, needless oversights can be made.
A worthwhile process
While taking the time to bulletproof a property investment can prove a lengthy process, it does substantially reduce the risk associated with such a large financial commitment. By ensuring clear contracts are drawn up, sufficient due diligence is undertaken, and all relevant laws and regulations are complied with from the offset, individuals can get the most out of their investment while avoiding potential pitfalls.
Thorough planning and preparation puts any property investor in a much stronger position to assess the risks and benefits of any potential deal, steering clear of the costs, legal penalties and reputational damage which can easily arise if a deal is rushed into without consideration of the complex web of property laws and regulations in the UK.
Julia Barnes is director of Mayfair-based boutique commercial law firm, Barnes Law
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