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?

Non-binding preliminary agreements, such as letters of intent (LOIs) and memoranda of understanding, are typically executed to confirm the basic conditions of transaction generally understood, as of the date of these preliminary agreements, to form the basis of the definitive transaction. These preliminary agreements generally include:

  • a proposed structure for the transaction;
  • a proposed price for the target;
  • a proposed time schedule of the transaction;
  • a binding confidentiality clause; and
  • a binding exclusivity clause (possibly, depending on the deal).

Whether these agreements are utilised does not depend on the ownership structure of the target.

Generally, provisions in non-binding preliminary agreements are not enforceable, with some exceptions. However, these provisions are enforceable if both parties agree. In Japan’s practice, parties generally agree that the confidentiality and exclusivity clauses will be enforceable in order for those provisions to bind the parties to the preliminary agreement.

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.

In real estate business combinations, since the buyer’s interest is in the value of the real property that the target company holds, the purchase agreement usually includes representations and warranties (R&Ws) regarding:

  • good title to the properties;
  • the non-existence of burdens on the properties, such as liens, charges or encumbrances;
  • the non-existence of restrictions imposed by governmental or other public entities on use of the properties;
  • the non-existence of environmental contamination on the properties; and
  • similar matters.

The purchase agreement also typically contains general R&Ws, covenants and other usual provisions contained in an agreement involving the purchase of a company.


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?

There is no specific regulation that applies to gradually acquired interests in a public company in the context of a real estate business combination. Such a transaction, however, would be subject to the tender offer rules under the FIEA.

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?

The most serious issue in a real estate business combination that may arise is contamination of the real estate, especially if properties that the target company possesses are highly likely to be contaminated, as contamination is often not obvious to parties and third parties. To avoid the risk of contamination, a buyer usually intends to incorporate an R&W clause regarding contamination of the real property in the purchase agreement being made by the target company. However, as liability resulting from contamination can be significant, sellers generally choose not to agree to the clause at least initially, and instead have challenging negotiations regarding contamination when finalising the agreement.

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?

Depending on the transaction, as indicated in question 21, a buyer usually demands R&Ws from a seller regarding environmental issues (such as there being no soil contamination and no chemical or harmful substances (including asbestos or PCBs) in the relevant property), while a seller resists giving such comfort, either wholly or partly. In some cases, before the negotiation phase of the definitive share-purchase agreement, a seller will impose a condition upon negotiations regarding the absence of any environment representations, and such a prerequisite will be stated in the LOI (to sell) or the bidding instruction letter.

Other typical liability issues

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

As sometimes a target company in a real estate business combination has a long history, and relatively little or weak corporate governance, one of the typical liability issues is who owns the shares of the target company, including accuracy of the past shareholders’ history, which affects the present shareholder. A buyer typically seeks to confirm a past ownership history through legal due diligence as well as by securing the seller’s representation.

The other major issue is the existence of any off-balance sheet liabilities, such as a related company’s loan, unpaid salaries or any other labour-related claims by employees.

Other negotiation points vary depending on the deal, but they typically concern the payment schedule, defect liability issues regarding real estate and liability limitation (with respect to the amount of a claim and the period of time in which it can be brought).

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?

Typical lease-related representations are similar to those in real estate transactions, including:

  • the seller discloses all existing lease agreements to the buyer;
  • there are no other lease agreements or occupants;
  • rents, lease terms, extension rights of tenants and deposit moneys are returned to tenants; and
  • other conditions, if applicable, are negotiated by the buyer.

With respect to pre-closing covenants, a seller often is not permitted to execute new lease agreements without the buyer’s prior consent and to notify the buyer if there are any changes in any existing lease, such as a rent discount request by a tenant.