The first step in a real estate transaction in Norway is usually an offer letter from the bidder setting out the main terms of the transaction. The seller can either countersign the letter or prepare a separate acceptance letter in which it clarifies its position regarding the terms in the offer letter. This update highlights the most important issues to address at the beginning of a transaction.

Offer letters

An offer letter defines the main terms of the transaction, including the purchase price, the timeline for the transaction and other contractual terms of importance to the bidder. The assumptions on which the offer is based, including the information available to the bidder, are key elements of the offer letter. The bidder should set out its assumptions as conditions and thus ensure that any external changes affect the conditions of the deal.

The offer letter should contain detailed specifications and assumptions regarding the value of the property, including the various elements of the purchase price calculation. This is particularly important where the target is a property company, in which case the purchase price will depend on the principles on which the purchase price of the shares has been calculated.

The purchase price is usually linked to the income from the property. It is thus important that the offer letter clearly presumes that the information received by the bidder in relation to tenancy, rent rates and details of the location is correct. Other assumptions are more transaction specific, but often relate to title, encumbrances, public requirements and the physical state of the property.

Under Norwegian law, the parties to a transaction may be contractually bound to consummate it once they have agreed on its essential terms and conditions. The offer letter should therefore include conditions relating to a signed agreement, board approval, due diligence and financing (if relevant) – all of which will ensure that the bidder is not legally bound to the transaction before the actual contract has been signed and approved. If the offer letter contains well-drafted conditions, the bidder will be free to withdraw from the transaction at any time before contract.

Confidentiality clauses and exclusivity requirements are also commonly included in the offer letter. Further, if a break-up fee is agreed, it must be included in the offer letter.

Acceptance letters

When the seller is preparing an acceptance letter, it should make sure to include the necessary reservations, such as due diligence and purchase price calculations. An unconditional acceptance letter may oblige the seller to complete the transaction regardless of miscalculations or external changes – for example, if discovery thrown up by the due diligence process results in a lower purchase price than previously intended for the transaction, the seller may be obliged to accept it. It is therefore important to ensure that the acceptance letter contains the appropriate conditions for avoiding such consequences.

In the acceptance letter, the seller will seek to clarify the main terms of the transaction – such as the purchase price calculation – as first defined by the offer letter. The seller should prepare an estimated balance sheet before signing the acceptance letter, since it can reveal whether any elements of the purchase price calculations have been excluded from the offer letter.

Further, if the seller is aware that some of the bidder's conditions and assumptions in the offer letter are incorrect, these should be corrected in the acceptance letter. If the acceptance letter contains such clarifications, it should be conditioned on the bidder's acceptance of the clarifications in order to avoid confusion.

Extensive conditions relating to financing or board approval on the bidder's part will impose on the seller a period in which it may not negotiate with any other party (while the bidder may freely withdraw from the transaction). The conditions of the acceptance letter should limit this exclusivity period. However, an exclusivity period cannot usually be dispensed with entirely, since the bidder's due diligence has usually not commenced by the time the acceptance letter is drafted.

If the conditions in the offer letter are not fulfilled, the seller may have to withdraw the property from the market – which often affects its market value. This should be taken into consideration by the seller when it considers whether to accept the offer letter.

If the offer letter includes general assumptions, the acceptance letter may include a general condition presuming that all of the assumptions and conditions on which the offer letter is based will be confirmed during the purchaser's due diligence and reserving the right for the seller to withdraw from the transaction if the bidder claims a reduction of the purchase price. Further, it may include a reservation for board approvals on the seller's side as additional security for unexpected events.

For further information on this topic please contact Gøran Mjelde Aarvik at Wikborg Rein's Bergen office by telephone (+47 55 21 52 00) or email (gla@wr.no). Alternatively, contact Jens Aas at Wikborg Rein's Oslo office by telephone (+47 22 82 75 00) or email (jaa@wr.no). The Wikborg Rein website can be accessed at www.wr.no.

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