Snapshot: negotiating real estate M&A transactions in Nigeria

Negotiation

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?

Parties in real-estate business combinations typically execute binding or non-binding preliminary agreements, and a commonly used one is the term sheet. Parties may agree on the binding nature or otherwise of these preliminary documents. This is not based on the ownership structure of the target; however, a well-structured target may retain the right to insist on non-binding preliminary agreements. Where this is the case, the buyer may need to insist on exclusivity terms, and a non-compete clause, to ensure some level of protection. It is also important to note that in certain clauses in a non-binding agreement, such as those regarding break fees, dispute resolution may be binding and enforceable.

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 real-estate business combinations, it is typical to include representations and warranties as to the target company’s title to the real-estate assets, warranties as to the legalities of the transactions, existing liens and other encumbrances, and indemnity against third-party claims or regulatory liability in respect of the transactions and the real-estate assets.

The warranties in respect of title generally provide that the seller owns the asset forming the subject matter of the business transaction, while the tax warranties provide that the seller has paid all taxes due in respect of the properties of the businesses.

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. However, the purchaser of a public company is required to disclose to the Securities and Exchange Commission once the interest acquired in the shareholding of the target company exceeds 30 per cent of the shares in the target company.

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?

In negotiating real-estate business combinations, issues such as completion arrangements have to be considered by the parties or their solicitors. Some of the most important issues to be considered are as follows:

• liability for payment of taxes or tax gross-up;
• indemnities and warranties;
• evidence of title (free from encumbrance);
• the relevance of an escrow arrangement; and
• the approach to force-majeure events.

To infuse certainty into the transaction process, parties insert clauses in the agreements providing a specific timeline within which the relevant condition precedents are to be fulfilled, otherwise the transaction would be deemed to have been frustrated or terminated.

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

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 business combinations, the common-law principle caveat emptor (buyer beware) applies regarding environmental remediation. It is expected that before proceeding with any transaction, the purchaser ensures it carries out due diligence on all aspects of the transaction to find out if there are environmental risks exposure that may be detrimental to the interests of the purchaser, as the vendor is under no obligation to disclose any defects except those that are patent and reasonably apparent. Thus, based on the caveat emptor rule, any environmental liability usually passes to the buyer as the new owner. Importantly, the responsibility for environmental remediation is dependent on the agreement of both parties. The contractual provision that specifically caters to this is the representation and warranty clause.

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

Typically, the seller’s liability in a real-estate business asset ceases after the close of the transaction. All known liabilities are often the responsibility of the seller in the course of the transaction and before closing. Upon closing of the transaction, however, there is a general presumption that the assignee or lessee acquires interest in the property together with all covenants attached to the headlease. These liabilities may include restrictive covenants, ground rent obligations, service charges and maintenance costs that may have accrued and would continue to accrue on the property. The parties may negotiate certain specific liabilities that are to be retained by the seller after the transaction, and indemnities and warranties are always extracted from the seller.

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?

A seller may be required to make certain representations for the protection of the interest of the buyer. This list is flexible and seeks to accommodate diverse events, and is not limited to matters on outstanding payment obligations to government agencies or the tenants, regulatory and compliance issues and any pre-emptive rights of first refusal to purchase the leased asset granted by the seller to the tenant. Also, covenants prohibiting 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 before closing.