SPVs – Buyer Beware!
Date: 04/03/2025 | Corporate
When agreeing heads of terms to buy a property often there is an option to buy an SPV instead – so should you take it?
Setting up a special purpose vehicle (“SPV”) to hold property is a tried and tested structure and is a simple way to separate assets and simplify the sale process by giving buyers the option either to buy the property itself or the shares in the SPV.
Buying a property SPV does have advantages. If the SPV has entered into contracts in relation to the property, those don’t need to be transferred to the buyer as the SPV remains the contracting party. Where finance is needed, lenders often like SPVs, seeing them as a way to reduce risk – an SPV has no skeletons in its closet, just a clean company with only one asset. This can make it attractive to fund.
But buying an SPV is not without risk, so before you decide to go for that option what do you need to know?
1. Is it really an SPV?
If you buy a company you automatically get all the assets and all the liabilities. If the SPV has been in existence for a while or has done anything except own the property, then you will need to do more due diligence at the outset to make sure you are not taking on more risk than you thought.
2. Price
Quite often parties agree a price for the property by reference to value and only later decide to buy the SPV instead. If you switch to buying an SPV, you need to be sure the price agreed is still correct. What about other assets and liabilities of the SPV – sums payable under existing contracts, cash deposits, tax refunds or rent arrears, how will they be dealt with?
Rather than a fixed price it may be necessary to agree how adjustments to a fixed price will be made and when any balancing payments will fall due. All that needs to be properly reflected in the purchase agreement and often a full set of completion accounts needs to be prepared.
3. Tax
The tax position of the SPV needs to be determined early on.In particular are there any offshore tax issues that pose risks or need to be dealt with, and if the value of the property has increased a lot since it was purchased, a transfer of the asset post completion could lead to a big tax liability. These points should be clarified at the outset and factored in.It may be that the tax issues mean buying an SPV is not the way to go.
4. Warranties
When you buy a Company, its shareholders will usually give warranties and indemnities which confirm things are as the Buyer expects.For example, a warranty might be that the property is the only property owned by the SPV or that all tax has been paid up to date.
If the warranty is breached, a claim can be made against the Seller for any loss but that only provides protection if the Seller actually has the cash to pay you. In fact, the sale proceeds may be paid out swiftly post completion so on that basis you may wish to look for a guarantor or some sort of price retention or other security against claims.
Another option is warranty and indemnity insurance. A Buyer can take out a policy allowing for it to be paid if there is any breach of warranty. These can be expensive and time consuming to put in place so working out who is paying for it and whether it is needed should be done sooner rather than later.
If you decide that buying an SPV may be your preferred option before you spend too much on the transaction, you should:
- check it really is an SPV;
- check for tax issues;
- work out what additional security might be needed; and
- work out how the price might need to be adjusted.
Spending a little time on these key issues at the outset will save time and money in the longer term and can prevent deals stalling at the last minute. Whilst it is tempting to go full steam ahead, discovering well into the deal that tax issues or lack of security mean buying an SPV is too risky is far from ideal.
If you want advice on buying an SPV, please speak to a member of our Corporate Team.
