Vat on Property in Ireland-the Essentials

Vat on property is something that is easy to overlook if you are buying commercial property. It may also apply to residential property, depending on the circumstances, so you need to be careful and obtain expert tax advice if there is any doubt in your mind.

The current situation with regard to VAT and property is the regime in place since 2008.

Since then most property transactions are exempt but there are important exceptions where the option to tax the supply of the property is exercised in certain situations.

When we refer to ‘property’, remember, we are also referring to leasehold property in addition to freehold interests.

Commercial property, new buildings

Vat is chargeable at 13.5% on a new building. A ‘new building’ is

  1. The first supply of a completed property within 5 years of completion
  2. The second and subsequent supply of a property, if the supply is made within five years of completion, and the building has been occupied for less than two years.

Commercial property, second hand buildings

Properties developed after 1st July, 2008 are exempt but the vendor and purchaser can jointly opt to tax.

If this option is not exercised the vendor/developer will face a clawback of a proportion of the vat which he has already reclaimed from Revenue on the acquisition or redevelopment of the property. This clawback will be calculated on the vat life of the property.

Leasehold property

After 1st July, 2008 all lettings are exempt from vat.

The landlord can, however, elect to tax and charge vat on the rent at 21%. If he does not opt to tax he will face a clawback based on the vat he has already claimed on the development and/or acquisition of the property.

This option to tax does not arise if the landlord himself or a person connected to him occupies the building.

Assignments of leases

The assignment of surrender of a long lease will be chargeable to vat if the tenant who is the assignor was entitled to reclaim vat on acquiring the original lease or the development of the property.

Residential property

The first supply of new residential property is liable to vat.

Valuable resource

This page from the Revenue Commissioners is worth reading closely if you are concerned about vat on property. You are strongly advised to obtain tax advice from an accountant or tax consultant if you suspect that the vat position is not clear in either your supply or purchase of property.

“Subject to Contract”-What Does This Mean?

“Subject to Contract” is a phrase you may come across from time to time.

I encounter it most frequently in relation to the purchase and sale of property and in employment law settlement agreements.

What does it mean? Let’s take a look, shall we?

At its simplest it means that an agreement is being negotiated but all the terms have not yet been agreed formally in a contract. All correspondence prior to the formal contract being agreed is “subject to contract” as the correspondence is an attempt to arrive at an agreement between the parties and the proposals in the correspondence or documents will not have legal effect until it is agreed to be binding on the parties.

The words “subject to contract” are said to have suspensive effect because the parties will not be bound until there is some form of formal agreement or contract.

In land deals all correspondence will be marked “subject to contract/contract denied” or “subject to lease/lease denied” until a binding contract comes into existence when both parties sign it.

The bottom line is that no binding contract for the sale or purchase of property comes into existence until signed by both parties.

Up to this point the correspondence and documents which are exchanged between the parties in order to arrive at an agreement are an attempt to agree all terms of the contract and are marked “subject to contract/contract denied” as a consequence.

Precisely the same effect is caused in commercial disputes when correspondence is entered into to settle the issue and some type of formal contract will be entered into at the end of the process.

The most common agreement of this type that I come across is a settlement agreement between employer and employee whereby the employee is leaving the employment.

Other attempts to arrive at a settlement agreements would see all preceding correspondence marked “subject to contract” or “without prejudice”.

Employment settlement agreement

The correspondence, and the agreement itself, will be marked “subject to contract/without prejudice” until both parties sign the agreement. Then, and only then, does it become binding and can be sued upon.

You can learn more about employment settlement agreements here and without prejudice correspondence here.

 

The Formation of the Contract in Purchase or Sale of a Property

In order for any contract to be enforceable you need 5 things:

  1. The parties must have the legal capacity to enter into a contract
  2. They must intend creating legal relations
  3. The contractual terms must be certain
  4. There must be offer and acceptance
  5. There must be consideration.

For the sale of land or real property it was the case that a written note or memorandum was made which was signed by the person to be charged with the contract. Although this requirement was relaxed by reason of the equitable doctrine of part performance.

Doctrine of part performance

This doctrine held that an oral contract for the sale of land, where no note or memorandum existed, could be enforced by the party seeking to enforce the contract has partly performed his actions under the contract and the other party has acquiesced in those acts of part performance.

Land and Conveyancing Law Reform Act 2009

This Act changed the law by repealing the old Statute of Frauds (Ireland) Act, 1695 as follows:

Section 51.— (1) Subject to subsection (2), no action shall be brought to enforce any contract for the sale or other disposition of land unless the agreement on which such action is brought, or some memorandum or note of it, is in writing and signed by the person against whom the action is brought or that person’s authorised agent.

[SF 1695, s. 2]

(2) Subsection (1) does not affect the law relating to part performance or other equitable doctrines.

(3) For the avoidance of doubt, but subject to an express provision in the contract to the contrary, payment of a deposit in money or money’s worth is not necessary for an enforceable contract.

Memorandum/Note of Agreement

The following matters should be included in the memorandum

  1. The parties
  2. The property
  3. The consideration
  4. Any other provisions agreed between the parties

Where the conditions of common law and the Land and Conveyancing Law Reform Act 2009 are satisfied an enforceable contract for the sale of land (real property) comes into being. This type of contract is known as an ‘open contract’ because all the terms of the contract are not set out in the memorandum.

Closed contract

A closed contract, by contrast, is one in which the parties set out all the terms of the agreement in a formal agreement. It is the practice in Ireland that the standard form Contract for Sale produced by the Law Society of Ireland is used.

You can learn more about the standard form contract for sale here. This is the contract that will be used in property transactions in Ireland.

Side Letters to Commercial Leases-What You Should Know

If you are leasing a commercial property you may encounter a ‘side letter’ in addition to the lease itself.

A side letter in such a situation is used by a landlord and tenant-as it is signed by both parties-to modify the terms of the lease itself, generally on a temporary basis. This would be done to confidentially vary the terms of the lease and prevent any knock on comparable consequences for the landlord from other tenants in a development.

An example of this would be a concession in relation to rent for a temporary period of time.

This concession would not be in the public domain as the rent might be if the lease was lodged in the Registry of Deeds or details registered with the Commercial Lease Register of the Property Services Regulatory Authority.

Some points to consider

  1. The time period or special event which is to be covered by the side letter should be clear if the concession is to be temporary and for the particular lessee
  2. If the lease itself contains an ‘entire agreement’ clause then the side letter should be mentioned in the entire agreement statement
  3. If the side letter is agreed and granted at a different time from the lease itself then there should be some consideration given for the side letter, even a nominal sum
  4. The landlord needs to be careful that the granting of the side letter will not inadvertently let a guarantor off the hook
  5. Is this side letter to be binding on a future landlord if the sells the building? Is the side letter to be personal to the existing lessee and not assignable to a new tenant?
  6. The side letter will be terminated if any provisions of the lease are breached-for example, late payment of rent

A problem may arise if the breach of the lease leads to the side letter being set aside as this may amount to a penalty for the tenant which is disproportionate to the loss suffered by the landlord for the breach. If that is the case the side letter may be unenforceable if challenged.

Provided the penalty is proportionate the side letter is likely to be enforceable, however.

Side letters will usually bind a landlord’s successor in title and should, therefore, be disclosed to a any future purchaser. For this reason any side letter should be kept with the lease so that it is disclosed on sale. If it is not disclosed a future purchaser will probably succeed in a claim for misrepresentation and the cost of complying with what has been agreed in the letter.

The leading case in this area is Vivienne Westwood Limited v Conduit Street Development Limited, a UK case. This decision is not binding on Irish Courts but would probably be persuasive as the Irish and UK landlord and tenant law is broadly similar and the decisions tend to be similar.

Buying Property? Why You Need to Know About Certificate of Title

Certificate of Title

Are you thinking about buying a residential property? Or a commercial property?

If you are you should know about the Certificate of Title system in conveyancing in Ireland.

Let’s take a look at how it works, shall we, and what it might mean for you as a purchaser?

Good marketable title

If you are not a cash buyer and you are borrowing from a bank your solicitor will have to give the bank a ‘solicitor’s undertaking’. This is an undertaking to obtain good marketable title to the property.

Once good marketable title is obtained the sale will complete and the solicitor will send in the title documents to the lender. The solicitor will then give a Certificate of Title and the bank will rely on this rather than the solicitor’s undertaking and the lender will hold onto the documents of title.

Once the bank’s mortgage is secured on the property and good marketable title has been obtained then the bank will be able to move on the property if there is a default on the loan.

It is a rare enough occurrence in Ireland, quite frankly, but when the bank does repossess a property they want to know they can sell it without any major title problems.

And they will already have the solicitor’s certificate, which certifies title, and on which they will rely.

If any problems then arise in relation to the sale of the secured property the solicitor who certified titled will have a major problem as the bank will be able to pursue him/her for professional negligence if he failed to notice a major title defect with the property.

How does this affect you?

You may be happy to proceed with the purchase of a property but your solicitor may not if there is a problem which will affect his ability to give an undertaking to obtain good marketable title and to certify title later on.

Problems which would concern a solicitor would be issues such as easements, rights of way, planning permission issues, building regulation problems, septic tanks on someone else’s property, no certificate of compliance from an architect/engineer, and so forth.

Minor issues which might be flagged up in a structural survey may not cause much concern, but the issues would need to be genuinely minor.

Qualification on title

If any of these serious issues arise the solicitor will write to the lender and state that he proposes qualifying his undertaking and certificate of title due to the problem he has encountered and he will ask the bank to accept this qualification and confirm its approval.

The lender may approve or may not agree. If the lender does not agree then the purchase cannot proceed.

The key point to understand is that if you are buying property and there is a lender involved and there is a problem with the title documents to the property the decision to proceed is not yours alone.

Because the solicitor will also be putting his professional indemnity insurance on the line and will naturally wish to have a say.

Without your solicitor giving an undertaking to the lender in the first place and later providing a certificate of title the lender will not advance your loan for completion.