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?
In Brazil, it is common to have preliminary agreements in a real estate business combination. This could be an MOU, a letter of intention or a term sheet.
Preliminary agreements are commonly used by the parties to establish purchase and sale conditions. Even though agreements are usually intended to be non-binding, they usually contain binding provisions (eg, confidentiality, exclusivity, responsibility for expenses and dispute resolution). Pursuant to the Brazilian Civil Code provisions, a preliminary agreement is binding on the parties strictly to the limits of its content. Depending on the related parties, the preliminary agreements can trigger the transaction’s filing for the approval of CADE.
Except for binding provisions contained within, non-binding agreements cannot be judicially enforced. Normally, preliminary agreements are not subject to specific performance, as the obligations deriving from a future transaction are not (partially or totally) perfected, and the termination of the preliminary agreements should reinstate parties to the status quo ante. Losses deriving from the breach of a preliminary agreement may be subject to an indemnification lawsuit, as the case may be.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.Closing provisions and precedent conditions
Based on the findings made during the due diligence and the negotiations of the parties, it is common in a real estate transaction for some procedures related to the regularisation of the property’s title and the fulfilment of environmental aspects to be addressed before closing as a precedent condition.Transfer of actual possession over the property
The purchase and sale agreement should establish the conditions, procedure and term for the transfer of the possession of the property.Price or other financial aspects of the transaction
The financial aspects of the purchase and sale agreement must be stated clearly and in detail (eg, price, instalments, price adjustments, applicable interest, escrow account) and linked to the transfer of ownership rights and procedures before the relevant real estate registry office.Representations and warranties
Representations and warranties (R&Ws) are given by both parties to disclose material information and allocate risk between the parties. In a real estate transaction, R&Ws are usually related to the:
- property’s chain of domain;
- owner’s power and authority to sell;
- solvability of sellers;
- compliance with applicable law;
- existence of pending court or out-of-court cases;
- existence of liabilities that could affect the property;
- third-party claims;
- property having a clean title;
- liens and encumbrances on the property;
- property’s environmental compliance and lack of environmental liabilities; and
- possession and eviction liability.
In a real estate transaction, liability is commonly related to clean title, liens and encumbrances, insufficiency of assets, environmental liabilities, zoning rules and regulatory approvals.Termination provisions
Termination provisions establish the situations in which parties may terminate the agreement and, if applicable, the relevant penalties.Brokerage and taxes
One of the standard provisions establishes the responsibility for brokers’ fees and the payment of taxes levied over related assets, prior to and after closing of the transaction.Eviction liability
The responsibility of sellers in the event of the real estate being lost to a third party by a judicial decision.Stakebuilding
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 mentioned in question 11, one of the ways to avoid the hostile offer is the obligation to make a public offering of shares.
Also, the shareholders’ agreement may provide for limitations on the acquisition of shares with voting rights, capitalisation of loans and non-compete clauses, among other restrictions.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 key issues that usually arise are:
- price adjustments (ie, based on the due diligence findings - tax issues, environmental and licences matters, etc);
- escrow or holdback provision (ie, used as indemnification for breaches of the agreement);
- indemnity issues;
- environmental liabilities; and
- termination rights.
These issues are usually solved by covenants, representation and warranties, closing conditions, guarantees, indemnification and penalties that should motivate parties to close the deal, or agreements in which the potential costs of the dead deal will be borne by the party that decided to walk away from the transaction.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?
Environmental liability consists of administrative, civil and criminal liability. These are independent and can be applied cumulatively. Environmental civil liability to remediate environmental damages is joint, several and strict. Regardless of the fault, negligence or wilful misconduct of a party, the owners or legal possessor, or by virtue of their activity at a given site, those who facilitate or contribute to the occurrence of damages (ie, contamination), are liable for the recovery of such damages. The seller, buyer or occupants of the real estate are jointly and strictly liable for carrying out the remediation, regardless of who is responsible for the damage.
It is also important to have the seller’s R&Ws state its compliance to environmental laws, so as to assure the right of the buyer to seek recovery from the seller for any environmental liability and costs as the case may be. Under Brazilian law, clean-up obligations (such as remediation) are not subject to a statute of limitations.
With regards to administrative environmental liability, parties are liable for their real estate activities. Environmental authorities may assess and fine current or past owners or possessors for environmental administrative liabilities arising from past or current activities at such property. However, the majority of case law provides for five-year statutes of limitation for the environmental authorities to collect environmental penalties, which should be paid by the actual pollutant (not prevailing on the administrative environmental liability ‘polluter pays’ doctrine).
Criminal liability depends on the causal connection between the criminal conduct and the agent.Other typical liability issues
What other liability issues are typically major points of negotiation in the context of a real estate business combination?
The major points are:
- risks of labour and tax succession;
- sufficiency of assets;
- possession matters;
- the safety and soundness of constructions;
- hidden defects;
- clean title and good standing of the title holder;
- seller’s and former owners’ solvability;
- the right of first refusal or any commercial agreements that limit the ability of seller to perfect the transaction;
- liens and encumbrances, as well as pledge over the assets and crops;
- the seizure or annulment of the sale due to past liability of former owners;
- the attachment and tax enrolment of the property;
- third-party claims;
- bankruptcy or judicial reorganisation claims; and
- lack of licences and permits.
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?
The typical representations and covenants are:
- the transaction does not contravene, conflict with, result in breach or default, or give rise to any right of termination or acceleration case of any obligation related to the lease;
- the transaction is not and should not have conflicts, nor cause any breach of contract, nor characterise non-compliance, nor result in any violation, now or in the future, regarding the leases, and of any obligation or commitment before third parties in relation to the lease;
- there are no infringement notices, subpoenas or penalties imposed by authorities relating to the real estate;
- the lessee has signed any relevant document in relation to the lease or waiver of the right of first refusal;
- the existing lease is not terminated or amended, directly or indirectly; and
- no new leases are executed without the buyer’s prior approval.