Due diligenceLegal 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?
Legal due diligence is required to:
- appoint contingencies and liabilities associated with the seller and former owner’s solvability that may impact the transaction;
- establish real estate issues as clean title, zoning rules, licences and approvals;
- establish environmental issues;
- establish tax and labour matters;
- establish any critical and relevant points in the legal structure of the company; and
- establish legal risks and liabilities arising from the judicial and administrative proceedings.
Complete legal due diligence would usually cover the following areas:
- real estate;
- environmental; and
- litigation (eg, tax, labour, social security and civil).
In addition to the legal team, specialists typically involved in the due diligence of a real estate transaction are:
- real estate consulting firms - to proceed with an appraisal of the area to define its market value and evaluate its technical aspects, such as the status of the construction and required permits (ie, municipal operation permits, zoning and fire department inspections); and
- environmental consultants - to assess environmental compliance, considering the legislation in force and potential or material liabilities. This appraisal also includes the compliance of social standards and the protection of minorities (eg, quilombolas or indigenous people).
Finally, because of the recent wave of corruption investigations, in some transactions a compliance due diligence is being carried out. Although it is not common and has its limits, this due diligence is a measure to avoid reputational issues.Searches
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?
The searches are typically based on:
- the analysis of real estate title;
- real estate chain of domain certificates and related documentation;
- court certificates (issued by the relevant tax, civil and labour lower courts and court of appeal);
- protest offices certificates;
- administrative certificates issued by relevant authorities (ie, Federal Revenue, and state and municipal treasury offices);
- analysis of the main lawsuits and administrative procedures; and
- legal reports.
A due diligence procedure should encompass the assets, owners and title holder, legal possessor and former owners.
Currently, there is no real estate title insurance in Brazil. However, it is possible to buy insurance for specific liabilities or in connection with potential third-party claims related to the target asset. Regardless of the target asset, the most common protections from bad title are:
- legal and title due diligence, as mentioned above;
- R&Ws; and
- indemnification provisions.
Do sellers of non-public real estate businesses typically purchase representation and warranty insurance to cover post-closing liability?
The purchase of R&W insurance to cover post-closing liabilities is not usually practised by real estate businesses in Brazil, even given the cost of insurance and the uncertainty of the risks’ maturity period. However, it is common to withhold, in full or in part, the price of an escrow account or another similar instrument, the release of which would be subject to the compliance of conditions or the non-existence of contingent liabilities during a period of time. The consideration can be paid in a lump sum or in instalments. Regarding payment in instalments, parties may establish mechanisms that allow offsetting of indemnity claims against future payments.Review of business contracts
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?
Regardless of the transaction’s structure, the primary issues reviewed in real estate agreements are:
- the right of first refusal;
- assignment matters;
- the term;
- responsibilities and obligations;
- termination matters;
- guarantees; and
- procedures in the event of transfer of control (share transaction) or ownership.
Urban and rural lease arrangements are ruled by specific laws and there are provisions of the law that cannot be waived by the parties. Therefore, in spite of specific written agreements, legal provisions always prevail. Notwithstanding, some lease arrangements are not governed by such laws (ie, built-to-suit, shops and stores), in which case the written agreement prevails.