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 in the context of a real estate business combination must be tailored to match the structure of the proposed transaction (particularly as regards the incorporation of the relevant property holding vehicle). Relevant due diligence matters may include the following.Title investigation
If the relevant contributors’ solicitors provide certificates of title and title reports, these will need to be reviewed and re-addressed to ensure the necessary parties may rely upon them.
In the absence of certificates or reports the relevant title documents, deeds, occupational leases and associated matters will need to be reviewed by the acquiring parties’ solicitors and reported upon.
Irrespective of whether certificates or reports are to be provided commercial property standard enquiries replies will need to prepared by legal advisers, in conjunction with relevant contacts with knowledge of the properties.Environmental matters
Environmental reports will need to be commissioned, if the relevant parties are not already holding recent reports. The type of property and its past uses will determine whether a simple desktop search will suffice or whether more detailed investigations are required.
If reports are being provided, reliance letters should be requested to ensure the property holding vehicle will have reliance.Surveys
Advisers will need to check the availability of recent building surveys. New surveys will need to be commissioned if none are available.Construction matters
Diligence of both ongoing development and extant development liabilities will need to be assessed under building contracts, appointments and agreement for leases. The suite of warranties that will need to be assigned or novated across to the property holding vehicle will need to be identified.Property searches
The standard suite of searches will need to be undertaken and reviewed. Care needs to be taken to ensure that all results will be available prior to exchange of the relevant agreement.Planning
The planning history for each property will need to be reviewed and copies of relevant consents, planning and highways agreements obtained. If development sites are being contributed, the terms of any stopping up or diversion orders may need to be reviewed.Corporate
The level of due diligence will depend on whether the relevant property assets are already held in a corporate structure which is being combined into the new business. If corporate property vehicles are being contributed then the due diligence will expand to cover:
- intellectual property;
- information technology;
- contracts, data protection, registration and licences;
- employment (including contracts and TUPE issues);
- constitutional arrangements;
- litigation (including pending); and
If the associated warranty package is being supplemented with insurance, the relevant policies will also need to be reviewed.
In the context of large-scale business combinations legal advisers should be appointed at the earliest opportunity to ensure that a data site can be established to house all of the necessary due diligence materials. Ideally, this should take place well in advance of heads of terms being agreed. Further advisers will need to be brought in as required (surveyors, accountants, environmental consultants) to deal with specific due diligence issues as they are identified.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?
Title searches are split into two categories, namely, pre-contract searches and pre-completion searches. The pre-contract searches are carried out, normally by the purchasing party’s solicitor, before the purchaser becomes contractually bound to purchase the property. In certain circumstances, where time is of the essence, the seller may have already carried out the searches and will provide these in a pre-prepared sales pack for the property.
Pre-completion searches are carried out a few days before completion, the aim of these searches is to confirm (where possible) whether any information obtained from the pre-exchange searches has changed and to grant the buyer protection that its purchase can be registered at the Land Registry, hence perfecting its title to the new property.
It is important that a solicitor carries out searches that are appropriate for the particular property bearing in mind its location, current use and proposed use. If the purchaser requires bank funding, the lender may also stipulate the searches that they require.
Some searches should be carried out in all circumstances. These are described below.Local land charges search
This provides information on any local charges on the land, such as:
- planning matters including planning permissions for the property;
- enforcement notices;
- compulsory purchase orders;
- whether the property is listed or in a conservation area;
- tree preservation orders; and
- whether any local taxes are payable.
There is a list of standard enquiries and certain optional enquiries where relevant for the property. This search will reveal information about the property and the surrounding area, and the standard enquiries will reveal:
- pending planning applications;
- planning designations;
- public rights of way;
- noise abatement notices; and
- nearby road proposals.
Optional enquiries can provide information on environmental and pollution notices and whether the property or land has been designated as common land etc.Drainage and water enquiries
This will reveal if the property is connected to the mains supply and mains drainage.Pre-contract enquiries
These are a list of industry-standard questions that the purchaser raises with the seller. The purchaser is also entitled to raise questions specific to the property. The industry-standard enquiries raise questions such as the extent of boundaries, if there are any party walls, the VAT status of the selling company, if there is asbestos or other environmental issues. The seller may be liable in misrepresentation for inaccurate replies.Location-specific searches
Depending on the location of the property, additional searches should be carried out. For example, a coal-mining search must be made when the property is located in a coal-mining area to determine if subsidence is a risk or an underground railways search for a central London property for the same reason. If the property is being purchased for development purposes, utilities searches should be carried out to reveal the location of cables and conduits and to ascertain if their location would sterilise part of the development. In many circumstances, environmental searches are also important so that the buyer can be advised of any potential liabilities if the land is contaminated.
The overall aim of carrying out searches is so that their results can be analysed and the purchaser (and the purchaser’s lender, if any) can investigate whether or not there are any defects in the title which would adversely affect the value of the property.
In certain circumstances, title defects can be insured against by way of title indemnity policies or the seller can provide statutory declarations confirming matters relating to the property have been ongoing for many years where this is not clear from the title documents.
One essential pre-completion search is a search to ensure that the seller is not subject to any insolvency proceedings which may adversely affect its right to sell the property. In the case of an individual, the buyer’s solicitor will carry out a bankruptcy search at the Land Charges department of the Land Registry. This search will show if the person named in the search was subject to any bankruptcy proceedings in the previous five years.
In respect of companies or LLPs, the buyer’s solicitor will carry out a search against the entity at Companies House to determine whether it is subject to any ongoing insolvency proceedings. A search should also be carried out at the High Court to ascertain whether any insolvency petitions have been issued against the entity. Should this be relevant, it is possible to carry out searches at the High Court (but not most district registries and county courts) of any litigation in which a party is involved, and to obtain copies of all publicly available pleadings and orders.
Finally, unlike in some jurisdictions, there are no registers of liens that can be searched by the public.Representation and warranty insurance
Do sellers of non-public real estate businesses typically purchase representation and warranty insurance to cover post-closing liability?
Sellers’ side W&I insurance is not common at all as this leaves the seller involved with post-completion matters to a far greater extent than desired (sellers’ side insurance involves a claim being made on the seller and the seller claiming on the insurance policy, with the risk of the policy’s non-response being on the seller).
By far the most common approach is for the buyer to take out W&I insurance, which has seen premiums ever more competitive and nil attachment points are becoming increasingly common.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?
Documents to review in a combined real estate and business transaction often include:
- title documents (those listed in the Land Registry’s title registers for registered land or root of title documents for unregistered land) - these provide details of the matters the property has the benefit of and is subject to, including any financial liabilities and title restrictions to be discharged or complied with on or before completion;
- lease documents and documents supplemental to the lease - these provide details of landlord and tenant obligations and liabilities, both of which may apply to a purchaser where title to the property is leasehold and there are also occupational tenants;
- planning and construction documents - these contain details of any outstanding and ongoing liabilities on the part of the property owner and any guarantees or warranties that may still be applicable and benefit the purchaser;
- replies to standard enquiries and all management documents that should be provided with the replies - these provide wider details of the day-to-day use and management of the property and any known issues or complications, including any service charge disputes and voids and SDLT documents;
- search results - a standard set of search results will provide details of services the property is connected to and the location of conduits and connection points, drainage and water details, information on private and public highways, exercise of local government powers affecting the property, environmental concerns and statutory notices;
- documents relating to the property or the business, or both, that are linked to individuals connected to the business - the individuals may need to be released from their obligations, new individuals may need to enter deeds and guarantees or perhaps obtain W&Is from the outgoing individuals;
- commercial contracts - depending on the plans for the property and business following completion, these may need to be terminated or novated or additional advice may be required in relation to any employment law considerations; and
- certificates of title - where the main asset of the business is an investment property or a portfolio of properties, certificates of title may be provided for review and issues requiring additional warranties, guarantees and insurance may arise as a result of this review.
A review of the above documents will provide details relevant to the negotiation of transaction documents and any additional provisions and documents that need to be covered, for example, details to cover in a disclosure letter and specific warranties or supporting guarantees and insurance policies that may need to be provided.