Due diligence

Legal 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?

The legal due diligence normally includes all company and real estate information, and any information on disputes or litigation and similar matters, excluding tax and VAT, financial issues and technical or environmental issues (unless it concerns disputes or similar issues). Typically, M&A and real estate lawyers conduct the legal due diligence. There is variety in scope and thresholds, as well as reporting format, depending on the individual client’s needs. Usually, international investors and Nordic institutions request a fully fledged due diligence, while Swedish real estate companies and private investors normally complete parts of the due diligence themselves, with their own personnel.

Other specialists involved, except for lawyers, are tax experts, accountant firms, corporate finance houses and technical or environmental consultants.

Normally, more thorough due diligence activities are initiated at a late stage of negotiations, after agreement on exclusivity or some kind of cost coverage by the seller, since due diligence will drive costs for the buyer.

On certain occasions, the seller initiates a vendor due diligence, to introduce and organise the data room in an effective manner and to reduce the need for buyer due diligence, but more often so to clean up the company or property documentation and information to be presentable to investors.

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?

Information in these areas is normally found in the data room presented by the seller, as supported by R&Ws relating to the accuracy of the data room information and independent searches by the buyer in public registers or information.

Title issues are rarely a problem regarding commercial properties in Sweden. The Land Registry provides online information on title to real estate, which is supported by the government. In addition to this, full due diligence is normally conducted with regard to title to shares with uncapped R&Ws by the seller to support this position.

R&W insurance is also available on the Swedish market, by both international and local brokers (insurance companies normally being international). However, such instruments are used mainly due to an assessment of a weaker financial standing of the seller; for example, in connection with the closure of a real estate fund or similar.

Representation and warranty insurance

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

See question 26.

Such insurance is available and is used to some extent, but not as a standard general practice.

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?

See question 23.

The prime issues would be to verify the rent roll as regards lease periods, rent and other charges, any break-up clauses, obligations to make investments, etc. The scope normally varies between property portfolio deals (where only an agreed part of larger leases with a certain rental value are reviewed, excluding minor leases) and single property deals (where the due diligence is normally more thorough and specific).