Acquisition of Property

1. This section gives guidance on the procedures and safeguards to be adopted in any proposal to acquire property i.e. land and buildings and other rights in property. The guidance is aimed at all organisations to which the Scottish Public Finance Manual (SPFM) is directly applicable but in particular the constituent parts of the Scottish Administration (i.e. the core Scottish Government (SG), the Crown Office and Procurator Fiscal Service, SG Executive Agencies and non-ministerial departments) and bodies sponsored by the SG.

Key Points

2. The decision to acquire property should be part of an overall strategic plan for the organisation's needs.

3. When a requirement for additional property for accommodation is being considered business areas within the Scottish Administration must seek advice from the SG's Property Advice Division. Other organisations to which the SPFM is directly applicable may seek advice from Property Advice Division on a voluntary basis or, in the case of bodies sponsored by the SG, where required to do so under the terms of their framework document.

4. It is essential to check if there is suitable surplus property available within the acquiring organisation or the wider public sector and, where appropriate and possible, to acquire property using the Guidelines for the Transfer of Property within the Scottish Public Sector as set out in the section of the SPFM on the Disposal of Property, Plant & Equipment.

5. An Option Appraisal consistent with the Green Book must be undertaken to examine the total costs and benefits of different potential solutions. A decision must not be taken on a particular solution before a range of options has been fully considered and appraised - including an analysis of the risks involved.

6. The price paid on the acquisition by a public body will be open to scrutiny and it is therefore vital that an independent valuation is correctly instructed. Acquisition in excess of the independent current valuation should be supported by the Option Appraisal showing that the option represents the best value for money.

7. A full building survey is essential before purchasing or leasing an existing building. It should be sought at the earliest possible stage.

8. A post appraisal evaluation should be carried out within six months of acquisition being completed to assess whether or not the appraisal was done as well as possible and check that the property meets the current need.

Background

9. Property transactions by their very nature are generally expensive and there is scope for substantial financial loss if they are not handled properly. The decision to acquire property should be part of an overall strategic plan for the organisation's needs. Acquiring property is not necessarily the way to solve operational problems. Property commitments whether purchases or leases can be very expensive to reverse.

10. The guidance in this section essentially covers the acquisition of property for accommodation but is equally applicable to the acquisition of land and buildings for other purposes. When a requirement for additional property for accommodation is being considered business areas within the Scottish Administration must seek advice from the SG's Property Advice Division. (Other organisations to which the SPFM is directly applicable may seek advice from Property Advice Division on a voluntary basis or, in the case of bodies sponsored by the SG, where required to do so under the terms of their framework document.) However, detailed reference of each case to Property Advice Division is not necessary for the acquisition of land and buildings for other purposes provided that appropriate professional advice is obtained from other sources.

Statement of Need

11. The Scottish Ministers' policy is that property holdings should be kept to a minimum. The case for acquiring property for accommodation must be set out as below to ensure that property is acquired only after the Statement of Need criteria have been fulfilled. The Statement of Need criteria is designed to enable a wide range of alternative options to be considered including different locations, types of properties and tenures. They are as follows:

the number, grade and function of staff to be accommodated and any further specialised space such as conference rooms, record storage, cafeteria, etc. The SG's Property Advice Division can give guidance to relevant organisations on appropriate space provision and specialist space planning consultants.
the underlying objective must be stated, e.g. a local office needing to be situated near clients and close to public transport. Objectives should be in terms of outputs in order that the range of options is not constrained. This is especially important in acquisitions financed by means of public private partnerships.
the intended date of occupation must be set out together with the anticipated period of occupation.
any potential breaks or variations in the requirement that can be anticipated over the life of the scheme.

12. The Statement of Need gives clear direction to the search and forms the foundation for the "Instruction" to external property advisers, when appointed, to identify suitable properties. More detailed guidance on the Instruction is set out in the attached Annex. The SG's Property Advice Division will assist relevant organisations in drawing up the Statement of Need, the Instruction and in the appointment of external property advisers.

13. It is essential to check if there is suitable surplus property available within the acquiring organisation or the wider public sector and, where appropriate and possible, to acquire property using the Guidelines for the Transfer of Property within the Scottish Public Sector as set out in the section of the SPFM on the Disposal of Property, Plant & Equipment. (Property acquired using the guidelines can be acquired without the need for external property advisers and without incurring unnecessary costs.) There should be a strong presumption in favour of using existing property rather than acquiring new property.

14. The external property adviser will undertake a search of the property market and provide a report on all the alternatives that meet the criteria in the Instruction, and help the business area and its internal advisers draw up a short-list.

Project Sponsor

15. In some cases the acquisition of property will be part of a major investment to which relevant guidance in the SPFM applies. In such instances property acquisition will be part of the functions of the Project Manager and the Project Sponsor for the whole project, so a separate Project Sponsor will not be needed. If the property acquisition is not part of a larger project the organisation should appoint a Project Sponsor to obtain an Option Appraisal to plan, co-ordinate and ensure that best practice is followed. Where other pressures require an abbreviated procedure and this presents a serious risk to best practice, the Project Sponsor has a duty to ensure that the implications are drawn to the attention of the relevant Accountable Officer so that decisions can be taken on the way forward. Project Sponsors within the Scottish Administration must seek advice from the SG's Property Advice Division while the Statement of Need is being developed.

16. Further guidance on the role of Project Sponsor is given in the section in the SPFM on Major Investment Projects. Advice on the appointment of Project Managers should be obtained from the SG's Centre of Expertise: Programme and Project Management.

Option Appraisal

17. An Option Appraisal consistent with the Green Book must be undertaken (business areas within the Scottish Administration should consult as appropriate with the relevant Analytical Services Division and/or Property Advice Division) to examine the total costs and benefits of different potential solutions. This will include fixed and variable costs taken over the expected life of the project. The economic costs to be appraised - these exclude capital charges and depreciation - will include the following:

for new build, the construction costs, including cost of land, consultant fees, fitting out, etc;
for existing property, the purchase price and expenditure in adapting the property to meet the specific needs of the customer;
rent, service charge, rates, annual repair costs, insurance if appropriate;
transaction costs, e.g. professional fees, premiums, etc;
repairs, immediate and cyclical, and decoration;
dilapidations;
running costs, services, cleaning, security costs etc;
staff costs, travel relocation expenses, removal costs;
any unusual or onerous lease conditions;
any penalties for break options in the lease;
quantifiable benefits e.g. part of a larger than necessary building leased out to a third party at a commercial rate; and
residual value of the property at the end of the appraisal period.

18. A decision must not be taken on a particular solution before a range of options has been fully considered and appraised - including an analysis of the risks involved. The Option Appraisal will consider the availability of existing property, the surrender of existing property (if appropriate) and other specific points which may give rise to costs during the appraisal period.

19. All costs should be as at the date of the appraisal, which is usually the present date. The costs must be on a comparable basis throughout the appraisal period which must be defined. No adjustment should be made for future inflation although future significant relative price changes should be included in the calculation. The advisory team will give advice on costs, timing and discount rates. The cash flow generated will then be converted into NPV or NPC terms using the appropriate discount rate.

20. When the number of options has been reduced alternative outcomes can be studied by sensitivity testing. The appraiser can take the preferred and next best options and see how they respond to changes such as unexpected rises in costs, the exercising of lease break clauses, or premature termination, etc.

Procurement Options

21. The options for the procurement of the new accommodation will form a separate section of the appraisal document. Possible methods of procurement include purchase, lease or the provision of serviced accommodation by means of the non-profit distributing public private partnership model (NPD) - see the section of the SPFM on Public Private Partnerships. If NPD is being used, the negotiation process will be quite different from a conventional procurement and will be conducted under EU procurement procedures on the basis of an output specification. Advice on the suitability of projects for NPD, and on public private partnership procurement methodology should be sought from the Scottish Futures Trust.

22. For some requirements acquisition by lease should be considered. Although this avoids the need for capital up front, a lease is a rigid legal commitment with long-term cost implications and it should only be undertaken after receiving professional advice. New lease contracts should be examined carefully to determine if they constitute operating or finance leases and ensure that accounting treatment issues have been fully considered. Acquisition by way of site purchase and new build is a complicated process that usually demands time and considerable input from a variety of professional disciplines. Advice on selecting and purchasing a site can be obtained from the SG's Property Advice Division and advice on building procurement is available from the SG's Procurement and Commercial Directorate.

Non-Quantifiable Benefits

23. In some circumstances, the options will differ significantly in terms of their non-quantifiable benefits, such as accessibility, ambience and general environmental features. These can be assessed using weighting and scoring methodology. Under this methodology, the different options can be given a score for each of the factors, such as accessibility. This will generally be an expert judgement. Then each of the factors can be given a weight, representing their relative importance, by the advisory team. The sum of weighted scores can then be used to rank the options by their level of output. (This is also a useful methodology for deriving a short list from the initial list of options.)

Preferred Option

24. The economic and financial costs of the options, the results of the sensitivity testing and the ranking of options in terms of their outputs and policy considerations should then be considered together to determine which option gives the best value for money. This will not always be the cheapest option, as other options may offer a much better balance of benefits to cost, or be significantly less risky. The budgetary consequences and affordability of the preferred option must also be considered and it is therefore essential that a separate financial appraisal is undertaken and that the relevant specialist finance function is involved in the evaluation process. Once a provisional decision on appropriate properties or locations has been taken, and the necessary approvals have been obtained, then negotiations for particular properties can be opened. As negotiations proceed, and the final terms of the purchase or sale emerge, it is necessary to revise the appraisal to ensure that the provisional decision on the best options remains valid. This is because appraisal is an iterative process. As the process brings better information to light the appraisal should be updated and revised to ensure that the original assumptions remain valid. The relevant specialist finance function should be informed immediately of any change in projected costs.

Negotiations

25. The external property advisers' report will suggest alternatives which the organisation will wish to view. It is advisable for the numbers viewing properties to be small and to be accompanied by a surveyor. Organisations must refrain from making any comment on the property to the sellers or their agents as this may prejudice negotiations and the terms obtained.

26. During negotiations for the preferred option a fallback option should be pursued where possible to preserve bargaining power and in case the preferred option collapses. Options are often dependent upon variables such as planning consent which may not be forthcoming.

27. As more detailed information is obtained during negotiations, the appraisal should be continually updated and refined and provisional decisions re-examined to ensure that they remain valid.

28. If there will be a delay of 6 months or more between the initial decision and the conclusion of missives, then the Project Sponsor should seek advice on whether the figures should be adjusted, or if a further valuation or survey is required. This is important if the valuation is subject to special conditions or if the surveys undertaken or local knowledge suggests delay which will cause further expense.

29. When provisional negotiations are concluded the final package should be put to the Project Sponsor for approval. A current valuation should be part of the package. The Heads of Terms of Agreement to Lease or Purchase must be clearly stated. The Project Sponsor should consider whether any special conditions are to be included in the purchase offer and where none are required positive mention of this should be included in the instructions to legal advisers to formally conclude the transaction. Business areas within the Scottish Administration should note that the Scottish Government Legal Directorate does not undertake conveyancing work. However, a number of firms of solicitors are party to a contract for the provision of legal services to the Scottish Government and Property Advice Division can assist with making an appropriate appointment.

30. Any correspondence on the Heads of Terms between the business area and the seller/landlord should observe the Requirements of Writings (Scotland) Act 1995 to ensure that such correspondence is not legally binding. Accordingly all correspondence should contain the paragraph:

"For the avoidance of doubt this letter is not intended to have contractual effect nor to impose or create any legal binding obligation or liability."

Acquisition Price

31. The price paid on the acquisition by a public body will be open to scrutiny and it is therefore vital that an independent valuation is correctly instructed. Acquisition in excess of the independent current valuation should be supported by the Option Appraisal showing that the option represents the best value for money. A proposed acquisition with a cost in excess of the independent current valuation should be cleared in advance by the relevant specialist finance function.

32. In public private partnerships value for money is determined by comparing the Net Present Value of the whole life costs of a conventionally procured public sector comparator, adjusted to reflect all the risks which are to be transferred to the private sector, with the Net Present Value of the public private partnership payments.

Building and Specialist Surveys

33. A full building survey is essential before purchasing or leasing an existing building. It should be sought at the earliest possible stage. Business areas within the Scottish Administration must seek advice on obtaining a survey from the SG's Property Advice Division. Where existing properties are to be altered, refurbished, converted or otherwise developed, building surveys should always be commissioned prior to any commitment to acquire. Problems identified may require further investigation.

34. With listed buildings or scheduled monuments it is particularly important to get specialist advice on what can be done with the building, what adaptations, if any, will be allowed, and to assess the future running and maintenance costs.

35. With new-build options, site investigations will check that the ground can bear the proposed development, and ensure that there is no environmental contamination of the site which may limit the use and value of the site. Such investigations may also alert business areas to the presence of archaeological remains which may delay, or preclude development.

36. With a new building there will normally be a defects liability period for the occupier to have defects remedied by the contractor. It is also important to secure collateral warranties from the building contractor, the architect and others associated with the building project and for the missives or the lease to specify the steps to be taken in the event of latent defects appearing.

37. Where an existing property is taken on lease a Schedule of Condition must be prepared by a Building Surveyor and agreed by the landlord and tenant prior to occupation. This will record the condition and state of repair and decoration and assist the assessment of any dilapidations claim by the landlord at the end of the tenancy. The Schedule of Condition will normally be annexed as a Schedule to the lease itself so that it forms part of the signed lease between the parties. The tenant will not normally have to do any work which would render the property in any better condition than that disclosed in the Schedule.

38. The information generated by these surveys and reports should be fed back into the appraisal to ensure any hidden costs they reveal are properly taken into account.

Closing Date

39. In the event of a property being subject to a short closing date advice must be obtained from property advisers on the steps that require to be taken in order to ensure that value for money considerations still apply.

Auctions

40. Auctions are not common in Scotland. Nevertheless properties may be acquired in this way and an authorised agent can bid up to a pre-arranged limit. Auctioneers will take instructions to do this on behalf of potential purchasers. One difficulty is that auctioneers usually require a deposit from the successful bidder at the auction so a member of staff with authority to sign for large sums of money will need to be present. As any bid accepted is binding, the title, surveys and all other investigations must have been completed before the auction and sufficient time must be allowed for this to be done. Property and legal advisers must therefore be involved prior to the auction to carry out the relevant investigations. The auctioneer may allow a joint deposit receipt system to be used in instances of difficulty. Property and legal advisers should be asked to have representatives present at the auction.

Fitting Out

41. Fitting out a new building or converting and fitting out an existing building is fairly specialised work. The SG's Property Advice Division can advise relevant organisations on appropriate surveyors or property consultants to supervise this work. Specialist space planners can assist with the design of layouts to fulfil client's needs and also go on to manage the fitting out process. The additional time and cost of fitting out must be taken into account at the appraisal stage.

Property Database / Fixed Assets Registers

42. Business areas within the Scottish Administration should ensure that Property Advice Division is made aware of all acquisitions of property whether for accommodation or for other purposes to enable the Scottish Government Property Database to be updated. Areas responsible for maintaining non-current (fixed) asset registers (e.g. the SG's Financial Reporting Unit) should also be informed.

Post Appraisal Evaluation

43. A post appraisal evaluation should be carried out within six months of acquisition being completed to assess whether or not the appraisal was done as well as possible and check that the property meets the current need. If the project involved a major construction contract, a formal Post Project Evaluation will be required in accordance with the guidance in the Major Investment Projects section of the SPFM.

Page Published / Updated: March 2012

Page updated: Wednesday, October 10, 2012

Scottish Government

Acquisition of Property

Subscribe for updates

Menu

Acquisition of Property