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?
Typically, institutional investors approaching - as sellers or as buyers - a real estate transaction in Italy prefer to have non-binding agreements (eg, term sheets, MOUs, LOIs and non-binding offers) preceding the binding preliminary and definitive agreements.
Usually, the use of non-binding agreements depends on the parties being willing to negotiate the main terms and conditions of a transaction, without being legally obliged to close the deal in the absence of a satisfactory mutual agreement on the relevant commercial and legal items. However, it might also be because of other factors, such as the sale process mechanics (eg, in an auction the seller usually negotiates with bidders on a non-binding basis to find the best offer) or the structuring of the transaction (eg, the buyer might be interested in completing the relevant commercial, tax and legal assessments before confirming the transaction structure).
Non-binding agreements cannot be enforced in court, as judges in Italy are required by the applicable law to follow the parties’ decision. According to article 1362 of the Italian Civil Code, a judge must interpret a contract according to the common will of the parties: accordingly, if the parties determine that the agreement will not be binding, the judge cannot enforce it as if it was binding.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.
An Italian real estate-related purchase agreement usually includes both statutory and conventional standard provisions.
Statutory standard provisions refer to:
- title to property;
- conformity of the factual condition of the asset with the cadastral information filed at the local cadastral register;
- building permits issued by the competent municipality to build or to modify the asset (unless construction began before 1 September 1967, in which case an exemption applies);
- the involvement of brokers; and
- the energy performance of the asset.
Conventional standard provisions usually refer to a specific set of representations and warranties (R&Ws), for example:
- compliance of the asset with the local zoning and planning regulations;
- presence of a valid fire prevention and safety certificate;
- plants or equipment in the asset meeting required regulations;
- absence of pollution;
- lease agreements or business lease agreements;
- taxes and litigation;
- indemnification limitations; and
- thresholds and insurance coverage.
In terms of contractual drafting, in the definitive purchase agreement investors usually prefer to include only the minimum set of provisions statutorily required by the applicable law and to regulate conventional provisions concerning R&Ws, indemnities, covenants and specific undertakings (including the obligation to fix any irregularity in the property’s buildings) in a separate private deed. This is owing to the fact that a real estate-related purchase agreement must be signed before a public notary and publicly registered with the competent land register, therefore all the provisions set forth therein will be publicly disclosed.Stakebuilding
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?
The limitation that applies to the gradual acquisition of an interest in a public company does not specifically relate to companies operating in the real estate sector, but is owing to the Italian Financial Act’s specific rules regarding an interest exceeding certain thresholds.
In particular, if an investor comes to hold - directly or indirectly - a controlling stake in a public-listed company under certain circumstances, the investor is obliged to launch a public tender offer for all of the securities issued by the public company that entitle the holders to vote (even on specific items), at the ordinary and extraordinary shareholders’ meetings. These circumstances are:
- purchasing shares, or a shareholding, that exceed 25 per cent of the listed company’s share capital, provided that no other shareholder holds a higher stake;
- purchasing shares, or a shareholding, that exceed 30 per cent of the listed company’s share capital; and
- acquiring more than 30 per cent of the company’s voting rights, because of an increase in the share’s voting rights caused by the continuous possession of the shares for at least 24 months, certified through enrolment in a special register.
The circumstances defined under (1) do not apply to small and medium-sized enterprises, as defined under the Italian Financial Act.
Furthermore, whoever acquires a stake in a public-listed company that exceeds 10 per cent, 20 per cent or 25 per cent of the relevant corporate capital, must disclose the objectives it intends to pursue during the following six months.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?
Apart from the peculiarities of each negotiation process, the key issues typically detected in a real estate deal mainly concern technical matters, such as:
- major structural irregularities of the asset (eg, significant non-compliance with the relevant building title);
- non-compliance, in whole or in part, of the asset with the applicable zoning and planning regulations;
- obligations arising out of or in connection with the town planning agreements signed with the competent municipality (with specific reference to potential outstanding urbanisation and zoning fees);
- fire prevention and safety certificates;
- environmental matters (eg, pollution affecting the property);
- tax matters; and
- litigation matters.
In terms of negotiation tools used to handle such matters, a distinction is made between issues that might or might not prevent the asset’s transfer.
The first category corresponds to those that must be fixed before the closing date and are generally handled at a contractual level with conditions precedent (eg, major structural building irregularities, as the applicable law prevents an Italian public notary transferring assets that are affected by major building irregularities or are not compliant with applicable zoning and planning regulations).
The second category of issues can be solved through special indemnities, specific pre-closing or post-closing undertakings or price reductions (eg, tax or litigation and environmental liabilities - in this circumstance, references to tax and litigation liabilities do not include prejudicial transcriptions performed by the competent authorities at the land register, as such transcriptions would prevent the sale of the asset).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?
In Italy, environmental liabilities follow the ‘polluter pays’ principle. This means that liability sits with the creator of the pollution, regardless of whether the pollution was accidental or wilful. If the seller is the author of the pollution, it will be obliged to pay for the relevant remediation costs, irrespective of whether the pollution was found before or after the closing date. If the presence of pollution arises in the context of due diligence, the buyer will regulate the seller’s obligation to pay for the relevant remediation costs at a contractual level, either asking for a special indemnity or including an ad hoc condition precedent.Other typical liability issues
What other liability issues are typically major points of negotiation in the context of a real estate business combination?
With the exception of the issues described in question 21, a recurrent critical profile that usually triggers intense discussions between the seller and the buyer is the buyer’s need to obtain financing to pay - in whole or in part - the purchase price. The buyer’s best option would be to enter into a sale-and-purchase agreement subject to financing. On the other hand, sellers are often reluctant to accept such a condition as it reduces the certainty of the deal.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?
If the asset to be purchased is being leased by another party, the buyer usually seeks R&Ws concerning, among other things:
- the validity and enforceability of the lease agreements;
- tenants’ compliance with the obligations undertaken under the lease agreements (including absence of payment defaults);
- absence of termination notices received from the tenants;
- timely and regular registration of the lease agreements with the local Italian tax authority; and
- absence of further rights granted to third parties in connection with the use of the asset, except for those regulated within the lease agreement provided to the buyer.