Special Purpose Vehicles

Catherine Feechan is a director, Davidson Chalmers Stewart (Picture: Paul Bock)

Purchasers who are agreeing heads of terms to buy a property will often be given an option to buy a Special Purpose Vehicle (SPV) instead, a company that owns just the property to be acquired.

A tried and tested structure, an SPV is a simple way to ring-fence assets by having a limited company own and manage properties, and it offers potential tax advantages and mitigates some ownership risks. When a property SPV is sold, contracts relating to the property don’t need to be transferred to the buyer as the SPV remains the contracting party, which makes life simpler. As the SPV is a clean company with only the property to be purchased as its single asset, it can also be attractive to lenders in transactions where finance is required.

There are, however, inherent risks in buying SPVs.

Firstly, it’s important to make sure the SPV only owns the desired property. It’s not uncommon to find SPVs that have been in existence for an extended timeframe have been used for other functions beyond the ownership of the soon-to-be acquired property and contain unwanted assets or liabilities. A thorough due diligence process is essential to avoid any nasty surprises.

Price is another key issue. The initially agreed price for the property can be impacted by the decision to purchase it through an SPV. Other assets and liabilities of the SPV including sums payable under existing contracts, cash deposits, tax refunds and rent arrears, might mean adjustments are required.

The tax position of an SPV, in particular any offshore tax issues, can also present a future risk. If the value of the property has significantly increased since its purchase, a transfer of the asset post-completion could be accompanied by a major tax liability. This can make buying an SPV unsuitable so it’s critical to clarify the tax position early.

When an SPV is sold, its shareholders will typically give warranties and indemnities to the buyer including a warranty confirming the property is the only one owned by the SPV and an indemnity that all of its tax liabilities are fully paid up to date. If such a warranty or indemnity is breached, a claim can be made against the seller for any loss, but this is only worth it if they have the cash to pay.

To give the buyer additional protection in this event, it’s advisable to put in place a guarantor, price retention, or other security measure to ensure any claims will be paid. One option is for the buyer to take out a warranty and indemnity insurance policy to provide cover if there are claims. These can be expensive and time-consuming to put in place so it’s best to determine as early as possible who will pay for a policy and if it’s ultimately needed.

Before a buyer selects an SPV as a preferred option for a purchase, it’s vital they do initial checks to determine how the price might need to be adjusted, whether there are tax issues to be resolved and what additional protections may be needed. Focusing on these issues at the outset will save time and money in the longer term and can prevent deals from stalling at the last minute.

Buying an SPV can provide a clear, simple structure for some deals, but it’s not always the best approach. Buyers must tread carefully so they don’t get more than they bargained for.

Catherine Feechan is a director, Davidson Chalmers Stewart