M&A in the architectural sector the key legal considerations

Transactions in professional service firms are often driven by the quality of key personnel. Like other professions, architecture is tightly controlled. Under The Architects Act 1997 there are restrictions, for example, on who can describe themselves as an architect. Principally this means only those registered with the Architects Registration Board (the ARB) can do so. Additionally, architects must follow the Architects Code of Conduct and Practice. During due diligence, buyers should ensure that relevant staff are appropriately regulated and establish the extent of any disciplinary or compliance issues relating to individual staff. How compliance will be maintained post completion must be clarified. Buyers must receive assurances that, from a regulatory perspective, the prescribed minimum number of registered architects will still be involved with the business; a key statutory requirement for any business with the word ‘architect’ in the title.

Aside from the regulation of individuals within the target business, further regulatory responsibilities must be assessed during the transaction. Core changes to architect responsibility in certain types of building project and strict legal liability were introduced post-Grenfell by the Building Safety Act, 2022. Sellers will be asked to disclose all internal compliance processes relating to these onerous responsibilities. They should also make available all ‘golden thread’ records relating to past and current projects covered by the legislation.

Legal due diligence, warranties and indemnities play a pivotal role in transactions in the architecture sector. Naturally, the scope of the exercise will vary depending on the size of the practice, the complexity of its projects, and the structure of the transaction.

The most significant area of risk is historic claims for negligence against the target firm. In some cases, these can be brought up to 15 years after completion of the works. Therefore, it is essential that buyers carefully review the target entity’s existing PI insurance, seeking explanations for any cover limits or exclusions, and scrutinising the claims history.

Where necessary, approval by the insurer to keep the existing policy in place post completion should be sought. Indemnities dealing with the risk of claims arising from pre-completion projects should be negotiated between buyer and seller and included in the sale documentation.

The intrinsic value of architectural practices in the UK is often disproportionately dependent on existing projects and those in the pipeline. Client relationships that have been built up over many years are also important. Unlike businesses in many other sectors, recurring revenue streams are not as common.  As a result, buyers should carefully audit ongoing contracts to establish how transferable these will be on completion. Often, we see tranches of consideration being contingent on the successful transition and completion of an on-going contract to manage this risk.

In many cases, explicit client consent for work to be carried out by a new owner may be required or new contracts may have to be drawn up ahead of completion.

Agreements should be checked for any termination rights that will be triggered on the sale of a business or on a change of control. Buyers should assess what level of risk they are taking on for work done on part completed projects or designs and seek indemnities where appropriate.

For investors in architectural practices, the IP owned by the target company can be among its most attractive features. Buyers will expect to acquire copyright over designs, models, drawings, and CGI and 3D digital applications. Ownership of trademarked branding of specific projects or unique layouts, as well as trade secrets, should all be accounted for during due diligence.

Where projects are subject to Building Information Protocols (BIM) the contractual frameworks should be examined to establish the split between Background IP and Foreground IP (the latter is often licensed out to the client).

From a legal perspective, establishing ownership of IP in the architecture sector can be complex. To avoid post deal disputes, sellers must be ready to explain how any IP has been licensed and whether specific designs, for example, are, in fact, owned by employees or external consultants. Buyers will be keen to establish precisely the extent and value of the IP being transferred. Sellers, on the other hand, should bear in mind that an inability to transfer IP ownership will significantly devalue the business and could threaten the entire deal.

We have highlighted a selection of the legal issues buyers and sellers of architecture practices in the UK need to be aware of. Other matters to consider include how best to ensure a stable transition through the retention of key staff. This can be complicated if the target entity is structured as an LLP or other kind of partnership. And given the difficulty in hiring specialist architects generally, the acquisition wholesale of key staff or a well-known team is sometimes the central strategic motivation for the acquisition itself.

In addition, the deal may involve the transfer of valuable commercial real estate and the transfer of sensitive client data.

At DMH Stallard our solicitors in all commercial practice areas work together to support your M&A transaction. Our multi-team, collaborative approach adds real value for money and results in a first-class service. 

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