Non-binding agreements

Are non-binding preliminary agreements before the execution of a definitive agreement typical in real estate business combinations, and does this depend on the ownership structure of the target? Can such non-binding agreements be judicially enforced?

Letters of intent (LOIs) (also called memoranda of understanding) are rarely utilised in acquisitions of public real estate companies as a result of disclosure obligations, but are quite common for private companies. While such agreements are typically non-binding, there are a number of provisions that parties typically include as binding obligations including confidentiality, non-circumvention, choice of law, exclusivity and expense provisions.

Courts, as a general matter, respect provisions contained in LOIs that are intended to be enforceable. So long as the terms of the LOI are clearly and unambiguously non-binding, courts will respect the agreement of the parties. If, however, a party challenges the non-binding nature of the LOI and the LOI is ambiguous, courts will review and may find aspects of the letter to be enforceable so long as they contain all relevant material terms. For these reasons, it is a good practice to clearly state in the LOI that it is non-binding except with respect to the specified provisions in order to avoid ambiguity and potentially damages. Unless expressly disclaimed, most jurisdictions in the US will imply a general obligation of all parties to a transaction to negotiate in good faith.

Although public real estate companies rarely enter into an LOI to avoid being required to publicly disclose its content, they will require the target to enter into a non-disclosure agreement and in some cases will agree to enter into an exclusivity agreement for a short period of time to give the target time to formulate a proposal.

Typical provisions

Describe some of the provisions contained in a purchase agreement that are specific to real estate business combinations. Describe any standard provisions that are contained in such agreements.

Real estate M&A purchase agreements are substantially similar to purchase agreements for other business combinations. However, real estate M&A agreements often include additional property-specific R&Ws, including with respect to the status of the target’s ownership rights to the real property, tax status, existing liens on real properties, existing leases and insurance affecting the real property. These R&Ws force the target to disclose diligence materials prior to signing. Qualifications to these representations are based upon the target’s knowledge and the level of materiality necessary to cause a breach of the agreement are common.

Purchase agreements also include closing conditions. In general, closing conditions fall into the following four categories:

  • regulatory-related matters (eg, antitrust clearance and CFIUS);
  • required shareholder approval;
  • required deliverables (eg, in some REIT acquisitions, delivery of tax opinions); and
  • the absence of a ‘material adverse change’ of the target.

These closing conditions are typically significantly negotiated and, in particular with respect to the determination of a ‘material adverse change’, are the subject of the negotiated exceptions.

The target typically covenants to continue operating its business in the ordinary course between signing and closing, which usually prohibits incurring debt, selling or acquiring properties or undertaking major capital projects. In real estate M&A deals involving REITs, the seller may also covenant to not take actions that would compromise its REIT status.


Are there any limitations on a buyer’s ability to gradually acquire an interest in a public company in the context of a real estate business combination? Are these limitations typically built into organisational documents or inherent in applicable state or regulatory related regimes?

As discussed in question 11, there may be limitations on a buyer’s ability to acquire an interest due to limitations within the target’s organisational documents or a shareholder rights plan. In any event, if the target has more than a minimal amount of any non-real property assets before acquiring more than US$80.8 million of stock (subject to a cost-of-living based adjustment annually) the acquirer must obtain prior clearance by one of the US antitrust authorities pursuant to the Hart-Scott-Rodino Act. Additionally, if 5 per cent or more of the stock is acquired, the buyer will need to make a public filing with the SEC on Schedule 13D within 10 days containing specified information. The target’s board of directors may well consider the accumulation of a toehold to be a precursor to a hostile offer.

Certainty of closing

Describe some of the key issues that typically arise between a seller and a buyer when negotiating the purchase agreement for a real estate business combination, with an emphasis on building in certainty of closing. How are these issues typically resolved?

Public real estate M&A transactions typically include an array of deal protections and closing conditions that are heavily negotiated. ‘No-shop’ covenants are often included, which prevent the target from soliciting bids from other potential acquirers, but such provisions are uniformly subject to ‘fiduciary out’ provisions allowing the board to provide information to, and negotiate with, another bidder. Sometimes, particularly in private equity deals, the parties agree to ‘go-shop’ provisions that allow the target to affirmatively solicit competing bids for a limited period of time and, if that process leads to a superior deal during that period (or sometimes even later, if with a bidder who had surfaced during that period) then the size of the termination fee is significantly reduced. Under a no-shop or a go-shop, if a superior proposal surfaces, the bidder normally has ‘matching rights’ for several days before the target board is permitted to exercise its rights to withdraw its recommendation of the original deal and, if it has actual termination rights, before it can exercise such rights. Termination or break-up fees payable by the target (see question 10) somewhat reduce the bidder’s risk of a competing bid and provide some compensation if it is outbid.

Also heavily negotiated are the target’s rights if the acquirer fails to close, whether because of breach or a failure of its lenders to fund even though the acquirer did not breach (see question 29). Another heavily negotiated provision in real estate M&A purchase agreements is the exact scope of the ubiquitous closing condition that the target not have suffered a material adverse effect that is continuing as of the closing.

Environmental liability

Who typically bears responsibility for environmental remediation following the closing of a real estate business combination? What contractual provisions regarding environmental liability do parties usually agree?

In public-company sales, including public REITs, the acquired company continues to have the pre-closing liabilities and the selling shareholders retain no liability post-closing. The acquirer typically has the right to inspect the properties to gauge the scope of its potential liability and may require the target to perform environmental testing of the properties to assess liability. In some cases, the parties may negotiate environmental insurance coverage for known clean-up issues.

Other typical liability issues

What other liability issues are typically major points of negotiation in the context of a real estate business combination?

As described in question 22, in a public-company real estate acquisition the selling shareholders do not retain any liability or risk of liability post-closing. Conversely, in the context of a private M&A deal, the sellers will often retain some risk of pre-closing liabilities. The scope of the liability risk the sellers agree to keep post-closing is the subject of significant negotiation. Issues include the threshold of damages giving rise to a claim, the cap on overall damages and the way in which the seller gives the acquirer comfort that it will be able to perform its obligation (eg, establishing an escrow arrangement, a holdback by the target or by delivering a guarantee from a creditworthy entity).

Sellers’ representations regarding leases

In the context of a real estate business combination, what are the typical representations and covenants made by a seller regarding existing and new leases?

Common lease-related R&Ws include those relating to whether there are any defaults under leases in place, any outstanding amounts owed to tenants under the leases and whether the leases contain any right for the tenant to purchase an individual property. Typically, there will be a covenant in the purchase agreement preventing the target from entering into any new lease or leases above certain thresholds between signing and closing and restrictions on terminating existing leases.