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?

Preliminary agreements, such as letters of intent, offer letters and term sheets, are common in real estate business combinations. The agreements generally set out the terms upon which the acquirer intends to undertake the transaction.

If the parties specifically agree that the terms of preliminary agreements are binding, the courts generally uphold them as binding. This is true irrespective of the transaction structure.

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 a real estate business combination when real property is generally the subject of acquisition, it is typical to include representations and warranties as to the target company’s title of the real estate assets; warranties as to the legality of the transaction; existing liens and other encumbrances; and indemnity against third-party claims or regulatory liability in respect of the transaction and the real estate assets.

The warranties in respect of title generally provide that the seller owns the assets that are used for doing business. While the tax warranties provide that the seller has paid all taxes due in respect of the properties of the business.


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 are no restrictions that preclude the gradual acquisition of a real estate public company. When the buyer attains more than a 30 per cent shareholding in the company, it is necessary to disclose the interest to the SEC.

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?

Whether the transaction is an asset or share deal or a typical merger and acquisition, parties will make relevant provisions for completion. The completion date will be either a fixed date or subject to the occurrence of specified events.

Failure of completion will arise from either a party’s default or because of both parties’ actions and resulting consequences, such as the right of the innocent party to claim any of the available remedies (eg, damages, specific performance or rescission).

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?

Generally, in real estate transactions, the common law principle of ‘buyer beware’ applies with regard to environmental remediation. It is expected that before proceeding into a contract regarding property, the purchaser must ensure to carry out due diligence on the property to spot the environmental hazards that the property may be exposed to. Environmental liabilities usually pass to the buyer as the new owner. However, the responsibility of environmental remediation is dependent on the agreement of both parties and parties may agree on specific liability on known environmental issues.

The contractual provision that caters to this is the representation and warranty clause.

Other typical liability issues

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

Typically, the liability of the sellers of a real estate business asset cease after the close of the transaction. All known liabilities are often the responsibility of the sellers in the course of the transaction and prior to closing. The parties may, however, negotiate certain specific liabilities that are to be retained by the sellers after the transaction, and indemnities and warranties are always extracted from the seller. The scope depends on the parties and these may include liability issues, such as placing a cap on overall damages, the extent or degree of liability or damage that will ground a claim and other arrangements, such as third-party guarantees, holdback and escrow arrangements to provide comfort to the buyer.

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?

With respect to leases, the seller may be required to make certain representations that it will be held to for the protection of the buyer. The list of representations is not closed and the usual representations and covenants regarding existing leases relate to matters on outstanding payment obligations to government agencies or the tenants, regulatory and compliance issues, any pre-emptive rights of purchase or any rights of first refusal to purchase the leased asset granted by the seller to the tenant. Additionally, covenants prohibiting any new leases or limiting the term of years and the extent of rights to be granted under a new lease may be imposed during the transaction cycle and prior to closing.