BUYING COMMERCIAL ASSETS

james_williams

James Williams is an associate in the Finance and Restructuring team at law firm Eversheds. Comment@haymarket.com

As a general rule, people will try to buy an asset such as a fork-lift truck or a four-post ramp for as low a price as they can while incurring as little risk as possible.

Unfortunately, a lower price usually corresponds with an increase in risk. However, when making a substantial outlay for non-real estate assets – say a vehicle or an item of plant – its quite common for the transaction to proceed without legal advice and with only the most basic due diligence exercise. As can be imagined, transactions involving second hand items are the most troublesome; buyers need to take precautions.

BASICS
It sounds obvious, but being clear what you intend to buy is important. Although not appropriate in all cases, there is no substitute for going to look at the asset(s) yourself at their present location. If possible, serial/model numbers should be recorded and incorporated into the sale contract. You should also note whether the assets are located on the seller’s own premises, or if they are held by a third party. If held by a third party, ask why?

Who are you buying from? Again, it sounds obvious, but it is quite common to see the wrong party recorded in the sale contract. Ask specifically, who/what owns the asset(s) in question. If there are several companies recorded at Companies House with a similar name (all part of the same group), make sure you address this point specifically. It’s common for company names to change overtime or for the trading business to switch from one entity to another, but for standard form sale contracts to remain in the name of the old (possibly dissolved) company. Don’t accept a contract in the name of “XYZ Limited” if the only names appearing at Companies House are “XYZ Trading Limited” and “XYZ Assets Limited” – insist on the proper name being entered in the contract along with the company number (which never changes).

Make it your business to know who the person you are speaking to in relation to the sale is and their job title/role at the seller. Does such a person have authority to bind the seller?

OWNER
It’s worth noting that English law recognises several types of ownership with each being given its own particular set of rights and position in a hierarchy of potential ownership claims.

The pinnacle of the ownership pyramid is the holder of legal title followed by other types of title, such as possessory title (assets in your possession). It is important to understand that while a seller may hold some title to the assets they are selling (such as possessory title) they may not hold the legal title, which may be claimed by a third party.

Extra care should be taken when considering purchasing assets which are commonly subject to hire purchase agreements. Consider a credit search as it may well reveal existing hire purchase agreements.

THIRD PARTY
By far the most common third party rights encountered will be in relation to a lender’s security or an attempt at retention of title by a seller further up in the supply chain.

Most buyers should be familiar, in relation to corporate sellers, with the process of conducting searches of a seller’s charges register at Companies House prior to making a major purchase. Such a search will reveal all registered charges over the seller’s assets, increasingly such searches will reveal the exact terms of the charge documents including the detail of fixed (over a given asset) and floating charges (over company assets as a whole). Advice needs to be taken if there a positive search is returned as buyers may end up paying for an asset where they gain no title.

The same applies where a prior owner claims retention of title over an asset. The law in relation to retention of title clauses can be quite complex and whether one is enforceable or not depends on the type of asset involved, the drafting/incorporation of the clause in question, and the facts surrounding the transfer from the original seller and onwards from the secondary seller.

It is also worth highlighting that other third parties may gain rights over the assets in question, such as a “baliee” – a person with possession of the asset, but not ownership, who can retain possession until paid for their services or storage. So certainly in terms of vehicles, it’s important to understand where the assets are being stored prior to the sale and to obtain confirmation that any third party storage (or repair) costs have been paid.

INSOLVEMENT SELLERS
In certain situations, such as a sale by administrators of a company, it will be almost impossible to obtain warranties as to title and statutory protections will likely be specifically excluded. In such cases it is likely that the buyer will be purchasing the assets at a significant discount and so the risk of non-passage of title is balanced. However, that’s not to say a buyer should enter in to such contracts without a full appreciation of the facts and risks.

This post was written by:

- who has written 102 posts on CAT Magazine.


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