Due diligence for real estate M&A transactions in Nigeria

Due diligence

Describe the legal due diligence required in the context of a real estate business combination and any due diligence specific to a real estate business combination. What specialists are typically involved and at what point in the transaction are the various teams typically brought in?

In carrying out due diligence, two critical factors must be considered: timing and the structure of the business combination. It is always better to carry out the due diligence early in the process. In terms of structure, the due diligence process will depend on whether the transaction is structured as an asset sale, share sale or a merger of entities.

Generally, due diligence will focus on the following: the title of the real estate asset, to verify its ownership, and the nature of title to be acquired; and discovering any pending litigation or encumbrances on the asset, such as liens, charges, mortgages, easements and other third-party rights over the property. A proper review of all title documents is required to highlight specific issues, such as pre-emptive rights, restrictive covenants, prohibitions against assignments and requirements for third-party consents.

In any real estate business combination, such as a merger and acquisition, necessary corporate searches will be conducted at the CAC to ascertain the target company’s ownership, its directors and any other relevant information about the company that may affect the transaction. It is important that relevant experts are engaged to critically investigate matters such as tax issues, employment and staff benefits, asset audit, and valuation and environmental risk exposure. It is also necessary to check the target company’s exposure to litigious claims.

The specialists involved in the due diligence process are usually solicitors, accountants and auditors, and estate surveyors and valuers.

How are title, lien, bankruptcy, litigation and tax searches typically conducted? On what levels are these searches typically run? What protection from bad title is available to buyers, and does this depend on the nature of the underlying asset?

Title searches are usually conducted at land registries located within each state where records of title of real estate assets are kept. Tax searches on target entities are usually conducted at the local Federal Inland Revenue Service office, or the specific government agency in charge of enforcing the relevant property tax regime in the state where the property is located, to ascertain if there are any outstanding tax payments due on a specific real estate asset.

To determine if there is existing litigation on a real estate asset or a target company, a visit to the registry of the regular courts is required. There is, however, a property litigation registry in Lagos State where all litigation on properties are listed and members of the public can access the database upon payment of a fee.

In Nigeria, there is no provision for title insurance and the state does not give a title guarantee. It is incumbent on the party conducting the due diligence to ensure that it carries out all relevant checks to protect itself and that adequate safeguards are provided in the parties’ agreements, such as guarantees and indemnities in the event of a defective title.

Do sellers of non-public real estate businesses typically purchase representation and warranty insurance to cover post-closing liability?

Sellers of non-public real estate businesses are not likely to purchase representation and warranty insurance to cover post-closing liabilities. Rather, a clause is usually contained in the definitive agreement, which is, at best, a warrantee by the seller to the purchaser on reimbursement in the event of a defective title.

What are some of the primary agreements that the legal teams customarily review in the context of a real estate business combination, and does the scope vary with the structure of the transaction?

Generally, every material agreement needs to be reviewed, including title deeds of the real estate assets, leases, joint venture development agreements, contracts executed by the target company with other entities to determine the specific rights and liabilities thereunder and any other matter that will affect the transaction (eg, contracts that may be terminated following a change in control of the company). The scope of documents to be reviewed will depend on the structure of the transaction.