Share Purchase Agreement: How to Buy a Property With an SPA

Share purchase agreements (SPAs)– alongside limited company setups and special purpose vehicles (SPVs) – may come to the forefront over the coming months. Property investors, and specifically landlords, are set to face hiked tax costs from April.

And while a complicated area, one in which property investors should seek professional guidance before progressing with any plans, it may be possible to limit tax liabilities and other costs with a share purchase agreement.

Although, many may not be aware of exactly what a share purchase agreement is, or how they can be utilised within a property investment strategy.  Indeed, some may be unsure how many lenders would be willing to work with an SPA.

To shed some light, this blog will cover the essentials.

What Is a Share Purchase Agreement?

A share purchase agreement is a document that sets out the terms of a sale of company shares, and the ownership structure. It’s an agreement between a buyer and seller(s) that breaks down how a company’s shares will be moved from seller to buyer, and under what conditions.

An SPA is legally binding. Should the underlying conditions not be met, there could be costly repercussions. It formalises an agreement between the parties involved, makes sure everyone is on the same page, and cuts the chance of disputes arising[1].

Content of a Share Purchase Agreement

While agreements will differ from transaction to transaction, there are a few key elements that will be present in all of them. This, according to LexisNexas[2], can include:

• Consideration
• Adjustment of the purchase price post-completion
• Non-cash consideration
• Deferred payment of the consideration
• Completion
• Simultaneous exchange and completion
• Conditional completion
• Pre-completion undertakings
• Termination provisions

Other key details include details on the identities of the buyers and sellers, a specified sale price, best and reasonable endeavours, various warranties and indemnities, and more[3].

Evidently, a share purchase agreement can be a complicated document. Much is covered within it, and there is likely to be plenty of legal jargon involved that may go over many people’s heads. Thankfully, it is not up to the buyers and sellers to draft a share purchase agreement, or make sure it’s legally sound.

The main parties involved will of course be the buyers and sellers, but there may be other professionals included throughout the process. This may include accountants and financial advisors.

But an SPA is initially drafted by the buyer’s legal team. It’s then negotiated between the buyer’s and seller’s legal teams until everyone is happy to proceed.

How Can a Share Purchase Agreement Be Used to Invest in Property?

Put simply, a share purchase agreement can be used to buy shares in a company that owns property. Once this is done, the underlying property will be owned by the buyer.

Often, share purchase agreements and special purchase vehicles are grouped together in the property market. While they can be used in tandem[4], they are in fact different things.

A special purpose vehicle is a company structure set up for a very specific purpose. In our case, they are used to exclusively invest in, and own BTL properties[5].

A share purchase agreement is a formalised contract. Whereas a special purpose vehicle is a type of company.

Legal Considerations

A share purchase agreement is designed to safeguard buyers and sellers with legislative backing. It allows for a secure transaction process.

While dependent on circumstances, there can be certain risks associated with not having a share purchase agreement in place. For instance, there could be a lack of legal recourse in the event that difficulties emerge post-transaction[6]. They can also be regulatory compliance risks, and financial risks; without a structured agreement buyers may overpay, or sellers may not receive fair compensation.

The binding nature of an SPA – courtesy of the various obligations, warranties, and indemnities involved[7] – can offer much needed legal protection in a challenging market.

Key Considerations for Landlords and Brokers

According to JPP Law[8], there are certain key components of a share purchase agreement that should be focused on during the negotiating stages. They are:

Purchase Price

This is the amount the buyer agrees to pay for the shares. It may be subject to adjustments based on certain conditions.

Representations and Warranties

These are statements made by the seller about the company and its operations. They provide the buyer with assurance about what they are purchasing.

Indemnities

These are provisions that protect the buyer from potential losses arising from breaches of the agreement by the seller.

Conditions Precedent

These are conditions that must be met before the transaction can be completed. They may include regulatory approvals, shareholder approvals, and other necessary consents.

Closing Arrangements

These detail the steps to be taken to complete the transaction, including the payment method and the transfer of share certificates.”

Understanding Terms, Legal Elements, and Market Implications of SPAs

While it will be up to the legal teams involved to ensure everything is accounted for within a share purchase agreement, there are a few key elements that investors should be mindful of.

These include the “purchase price and payment terms”. Buyers and sellers will need to know if the sale will be via an immediate cash injection, a deferred consideration, an issue of shares, via a debt instrument, or some combination of these options.

The legally binding elements of the SPA will be laid out in “warranties and indemnities”. Meanwhile, a “conditions precedent” will set out specific actions that must occur before an agreement is finalised. On the flipside of this is “post-completion restrictions and covenants”.

Also, property investors specifically need to be mindful of how share purchase agreements may fit in with the wider market. Given their complexity and the potential added admin, there may be a reduced pool of lenders in the property market willing to accommodate these agreements.

Fortunately, Market Financial Solutions can work with share purchase agreements across our bridging and BTL product ranges. This is on top of SPVs, LLPs, trusts, and more. As the market calls for more creative solutions from investors needing to stay in the black, we will keep up with them.