Introduction

Cross border real estate investment contributes to a country’s foreign direct investment (FDI). Over the past two decades, due to lack of unified laws governing international real estate transactions across borders and other factors, investment in real estate across borders was not encouraged.  

Understanding the concept of cross-border real estate transaction

A real estate transaction is the process whereby rights in a unit of property (or designated real estate) is transferred between two or more parties, e.g. in case of conveyance one party being the seller(s) and the other being the buyer(s). It can often be quite complicated due to the complexity of the property rights being transferred, the amount of money being exchanged, and government regulations

Cross-border real estate involves a party from one country buying or leasing property in another country. Parties such as buyer, tenant, seller, landlord, bank, real estate broker, developer, architect, engineer, title insurance company, government entity, or other stakeholder are usually legally represented.

The buyer could be an individual, corporation, investment fund, Asset Management Company, or other entity. The property could be an existing building, or land for development. Transactions may involve an individual seeking a vacation home in another country, or a multinational corporation interested in acquiring a property to establish a factory or a distribution centre in a new jurisdiction, or a Real Estate Investment Trust (REIT) seeking to acquire property in another country that has potentially higher yields.

Key issues in cross border real estate transactions

Most cross-border real estate transactions start with initial understandings between parties (investors, owner, developers and other interested parties) such understandings are integrated into memorandum of understanding, letter of intent, or head of terms.

A thorough due diligence is required before making a cross-border acquisition to verify the possible risk of investing in the country and on the property. It is imperative to understand what is considered normal to investigate and report on during due diligence, due diligence in one country may vary greatly in another depending on the economic outlook.  Also, there is a need to perfectly understand the legal, tax, environmental, technical, and real estate and construction framework.

In conducting due diligence, usually, it is usually not strange to demand for representations and warranties from the other party. Consequently, understandings are usually reduced into writing.

Nigeria real estate cross-border policy.

In 2018, according to National Bureau of Statistics, real estate investment declined in first quarter of 2018 with real GDP growth  for the sector standing at 9.40 per cent, and contribution to the GDP for the quarter is 5.63 per cent which is a drop compared to 6.34 per cent recorded for same period in the 1st quarter of 2017.

Cross-border real estate transactions in Nigeria do not have a clear-cut policy. The absence of a defined framework clogs cross- border investment in enhancing economic development. Unarguably, Nigeria improvement in the recent ease of doing business index and also the recent ranking of Kaduna state by World Bank as the top state in registering property and enforcing contract indicates a favourable economy, the Federal Government of Nigeria should re-evaluate the ease of doing business policies to ease improvement in real estate transactions in other states of the federation.

Also, there is an urgent need to retool the existing policies and laws in relation to investment with the view to attracting the desirable real estate investors into Nigeria.

Challenges involved in cross-border real estate transactions

There are hurdles impeding effective cross-border real estate transactions. The most popular of these hurdles are language barrier, cultural variation, taxation, lack of knowledge of the prevailing real estate laws of the foreign country and absence of unclear familiarity with the foreign country.

In a similar vein, a cross-border real estate transaction may be extremely complicated; it may require the incorporation of local companies or for tax reasons, a company in a third jurisdiction, and multiple agreements among several parties in multiple jurisdictions.

The transaction may be executed as a share deal rather than an asset deal, this is because some laws may require payment of administrative land tax on land acquired.  An investor will prefer a share swap rather than acquisition of land.

Also, it could require additional agreements with further obligations than those in the purchase agreement. It may require that a new road and infrastructure be constructed before any occupancy permits for new development on the acquired land could be obtained. Thus, it will be necessary to negotiate a public-private partnership agreement for the construction of the road and infrastructure.

Ethical practice in cross border real estate transactions

While conducting cross-border real estate transaction, every joint venture partners (lawyer, investor, developer, site engineers, bankers) are expected to adopt a set of rules of professional conducts. The question is which jurisdiction’s code of conduct is applicable to parties or interested to the transaction?  Lawyers are bound by the code of conduct of the jurisdiction they are admitted to practice law, therefore, conducting or advising on cross-border real estate transaction outside jurisdiction a legal practitioner is admitted to practice law is unethical. A legal practitioner is at best bound by the rules of professional conduct applicable where the property is located, resolving this conflict in ethical practice in cross border real estate transactions requires an expertise of a local attorney who is familiar with laws of the jurisdiction of the property and has been admitted to practice law in the same jurisdiction.

Making a bluff or false representation while negotiating a real estate cross borders agreement is unethical, rather, a negotiation while learning opponent’s true position will enable press towards minimal acceptable position.

Comments

Cross border real estate transaction has not been regulated through international codes, regulations, convention and treaties, in aiding effectiveness of cross border real estate investment across the globe, a core and unique cross border real estate law and practice is essential.

Due to the composite nature of cross border real estate transaction, the assistance of a local attorney is needed. Acquisition process in the jurisdiction of the property may be lengthy and sometimes cumbersome, especially when government authorizations are required prior to closing, such as the subdivision or merger of plots of land and changing the applicable zoning.