Overview

Typical transaction structures – public companies

What is the typical structure of a business combination involving a publicly traded real estate-owning entity?

In terms of investment structures, the involvement of a publicly traded real estate-owning company rather than a privately held company does not have a significant impact. Typical investment structures are discussed below.

Typical transaction structures – private companies

Are there any significant differences if the transaction involves a privately held real estate-owning entity?

No, except for the specific regulatory requirements that should be taken into account in dealing with publicly held companies.

Typical transaction process

Describe the process by which public and private real estate business combinations are typically initiated, negotiated and completed.

The negotiation process is usually composed of the following phases:

  • marketing - usually assisted by brokers appointed by the seller;
  • commercial negotiation - handled directly by the principals or with the assistance of external advisers for larger transactions;
  • the pre-contractual phase - typically consisting of drafting and negotiating memoranda of understanding (MOUs), letters of intent (LOIs), head of terms and preliminary agreements;
  • due diligence - often done before the preliminary agreement; and
  • the final phase - execution of the final deed of transfer in execution of the preliminary agreement.

Law and regulation

Legislative and regulatory framework

What are some of the primary laws and regulations governing or implicated in real estate business combinations? Are there any specific regulations or laws governing transfers of real estate that would be material in a typical transaction?

The primary law that applies in the context of sale-and-purchase transactions (including those involving real estate) is the Italian Civil Code. In addition, other specific provisions of law are entailed in the context of real estate transactions including laws and local regulations concerning:

  • building;
  • zoning and planning;
  • fire prevention;
  • health and safety;
  • energy performance; and
  • brokerage.

Moreover, if the real estate transaction is performed via an asset deal, the final sale-and-purchase agreement will be signed before a public notary, and will be subject to the formalities imposed by the Italian Civil Code and by the laws and regulations including notarial regulations.

Cross-border combinations and foreign investment

Are there any specific material regulations or structuring considerations relating to cross-border real estate business combinations or foreign investors acquiring an interest in a real estate business entity?

Italian law does not provide for any specific material regulations relating to cross-border real estate business combinations or acquisition by foreign investors of interests in a real estate business entity. As a consequence, the general rules on cross-border merger and acquisition transactions will apply. In particular, it is always important to verify that the reciprocity rule is respected.

Choice of law and jurisdiction

What territory’s law typically governs the definitive agreements in the context of real estate business combinations? Which courts typically have subject-matter jurisdiction over a real estate business combination?

Definitive agreements concerning real estate matters are typically subject to Italian law. This is mainly because, in Italy, definitive agreements executed in the context of a real estate transaction must be signed in front of an Italian public notary who must ensure compliance of the agreement with the applicable legislation. Private deeds signed by the seller and the purchaser in connection with a real estate transaction to regulate additional undertakings by the parties may be subject to the law selected by the parties themselves.

In terms of competent authorities that may hear disputes, high-value sale-and-purchase agreements usually include an arbitration clause. Arbitration is faster than ordinary proceedings in Italy, but it is more expensive. Alternatively, the competent court would be a court of the municipality where the asset is located.

Approval and withdrawal

Public disclosure

What information must be publicly disclosed in a public-company real estate business combination?

Disclosure duties that apply to public companies (regardless of whether the company operates in the real estate sector) are triggered during business combinations, such as mergers and takeovers, and are regulated under the Italian Financial Act. In a voluntary public tender offer for an Italian listed company, specific provisions apply. In particular:

  • the bidder’s decision to launch the offer must be disclosed to the Italian market regulator, the Italian Companies and Exchange Commission (CONSOB), and the market with an ad hoc notice as soon as the relevant decision is taken;
  • once approved by CONSOB, the offer document must be published on the CONSOB website and on the bidder’s website; and
  • the bidder’s and the target’s management bodies are required to comply with certain duties to keep their respective employees’ representatives or, if there are none, the employees themselves, informed of the offer’s progress.

In mergers, in addition to disclosure related to the shareholders’ vote on the transaction, a detailed information document including pro forma financials and the objectives of the business combination must be published. This requirement depends on the size of the transaction and the regime applicable to the company at stake. Depending on the actual structure of the transaction and the status of the incorporating company, a listing prospectus of the shares to be issued in the context of the merger might be required.

In any case, according to the applicable transparency rules, if an individual or entity has aggregate direct or indirect interests in the voting shares of a listed company that are equal to, exceed or fall below certain thresholds, it must disclose this information to the relevant issuer, CONSOB and the market.

Duties towards shareholders

Give an overview of the material duties, if any, of the directors and officers of a public company towards shareholders in connection with a real estate business combination. Do controlling shareholders have any similar duties?

Ordinary fiduciary duties imposed by Italian law include:

  • the duty of acting in accordance with law and the company’s by-laws;
  • managing the company with diligence;
  • being properly informed;
  • disclosing the company’s interests in individual transactions; and
  • pursuing the company’s purposes.

Conversely, Italian law accepts the business judgment rule. Directors are not subject to specific duties, depending on the subject matter of the transaction. By law, the role of controlling shareholders differs from that of directors and, consequently, different obligations apply to them.

Shareholders’ rights

What rights do shareholders have in a public-company real estate business combination? Can parties structure around shareholder dissent or rejection of a real estate business combination, and what structures are available?

Italian law does not grant shareholders of a public-company real estate business combination particular rights, other than those granted by the applicable legislation to any Italian listed company. These include, among other things, the right to withdraw in the case of delisting. Italian law does not grant shareholders any appraisal rights.

Termination fees

Are termination fees typical in a real estate business combination, and what is their typical size?

Yes. Usually, termination fees are agreed between the parties, either under the form of penalties (also known as liquidated damages) or as a deposit. The size of penalties and deposits varies on a case-by-case basis, although usually the amount ranges between 5 per cent and 20 per cent of the purchase price. The parties should bear in mind that, if challenged, a judge may reduce a penalty should it be manifestly burdensome.

Takeover defences

Are there any methods that targets in a real estate business combination can employ to protect against an unsolicited acquisition? Are there any limitations on these methods?

Hostile takeovers are not common in Italy. Public companies may protect against unsolicited takeover attempts by using both pre-bid and post-bid defences. Such defence strategies are not tailor-made for real estate public companies, but are common to all Italian listed companies.

Notifying shareholders

How much advance notice must a public target give its shareholders in connection with approving a real estate business combination, and what factors inform this analysis? How is shareholder approval typically sought in this context?

If the business combination consists of a merger, 30 days’ prior notice must be given to shareholders, along with a report describing the terms of the transaction and an information memorandum. Shareholders’ approval may be sought through a proxy solicitation process.

Taxation and acquisition vehicles

Typical tax issues and structuring

What are some of the typical tax issues involved in real estate business combinations and to what extent do these typically drive structuring considerations? Are there certain considerations that stem from the tax status of a target?

Tax issues arising from a real estate investment may vary depending on the nature of the transaction; for instance, whether the acquisition is implemented as a share deal, an asset qualifying as a going concern including one or more real estate assets or as a stand-alone real estate asset not qualifying as a going concern. In this connection, the main tax issues consist of:

  • the taxation of capital gains upon transfer;
  • the step-up of the tax basis of the transferred assets;
  • the transfer of the tax losses of the seller;
  • the indirect tax burden;
  • the transfer of the tax liabilities; and
  • the taxation upon exit from the investment.
Capital gains

In the case of a transfer of shares of a real estate company, the applicable tax regime varies depending on whether the transferor is resident in Italy or not. In particular, if the transferor is an Italian resident company, any capital gains are fully subject to corporate income tax (IRES), currently levied at a rate of 24 per cent, as the transfer of shares in real estate companies is generally not entitled to benefit from the participation exemption regime. For non-resident transferors, the capital gains are, in principle, subject to tax in Italy. However, certain exemption regimes are available under Italian domestic tax law and tax treaties (in most of the tax treaties signed by Italy, the right to tax capital gains exclusively pertains to the country of residence of the seller).

In an asset deal, any capital gains are subject to 24 per cent IRES and, in the transfer of real estate not qualifying as a going concern, to regional tax on productive activities (IRAP) currently levied at 3.9 per cent (the rate may be increased on a regional basis).

Step-up

In a share deal scenario, a step-up of the tax basis of the assets owned by the target is not recognised unless the acquisition is carried out through an Italian company acquiring and merging with the target.

In this scenario, a share deal is less attractive for the buyer than an asset deal (which entails a tax step-up), but from a non-Italian resident seller’s perspective, a share deal may be more efficient because of the possibility of obtaining exemptions from Italian taxation on capital gains. Such a mismatch of interests is generally balanced in the market via a discount on the purchase price, somehow reflecting the circumstance that no tax step-up is obtained by the buyer.

Generally, in an asset deal scenario, the transfer of assets allows the buyer to obtain the step-up of the same assets for tax purposes.

Tax losses

In a share deal scenario, any tax losses of the target are maintained, except for the application of certain anti-avoidance rules providing for expiration of tax losses. Anti-avoidance rules also apply when the target is merged, limiting the carry forward of losses by the surviving company, should certain equity and ‘vitality’ tests not be met. In an asset deal, none of the tax losses are transferred to the buyer.

Indirect tax regime

In a share deal scenario, the indirect tax regime is generally less burdensome than in an asset deal scenario. On transfer of stock, a fixed amount registration tax of €200 applies. A financial transaction tax at a rate of 0.2 per cent also applies in the case of joint-stock companies.

In an asset deal scenario, the tax regime varies between an asset qualifying as a going concern including one or more real estate assets, or a stand-alone real estate asset not qualifying as a going concern.

In the first scenario, the transfer of assets is not subject to value added tax (VAT); instead it triggers a registration tax, the rates of which depend on the nature of the assets included in the going concern (generally, 9 per cent on real estate assets, 0.5 per cent on receivables and 3 per cent on goodwill and other assets).

In the second scenario, the indirect tax burden depends on the nature of the transferred real estate assets (eg, buildable land, agricultural land, commercial or residential building) and on the nature of the seller; in particular, the transaction may trigger VAT or not and this also affects the transfer tax burden.

A favourable temporary indirect tax regime (€200 fixed amount registration, cadastral and mortgage taxes) has been introduced for transfers (occurring before 31 December 2021) of entire buildings to companies qualified as restructuring or building companies that, within 10 years of the transfer, will (i) carry out demolition and reconstruction works or certain qualified restructuring works and (ii) sell at least 75 per cent of the building volume. This is provided that the reconstructed (or restructured) building will comply with anti-seismic and energy-saving rules.

Transfer of tax liabilities

In a share deal, all the tax liabilities of the target company are transferred (see question 14). The buyer is jointly liable with the seller regarding taxes and penalties connected with violations for the transferred going concern related to the fiscal year in which the sale occurs and the two preceding fiscal years, and for assessments notified in the aforementioned period, even if related to previous fiscal years. However, a tax certificate may be requested to limit the aforesaid joint liability.

In an asset deal, transfer of tax liabilities varies between an asset qualifying as a going concern, including one or more real estate assets, or a stand-alone real estate asset not qualifying as a going concern. The buyer’s tax liability is limited to certain real estate property taxes directly attributable to the real estate asset acquired.

Exit

For the direct and indirect tax regime upon exit, see ‘Capital gains’ and ‘Indirect tax regime’ above.

Mitigating tax risk

What measures are normally taken to mitigate typical tax risks in a real estate business combination?

Tax risks associated with a real estate business combination are twofold: tax liabilities transferred to the buyer and a challenge of the tax structure by the Italian tax authorities.

To mitigate the first risk, performance of a tax due diligence is essential. Generally, tax liabilities are managed through tax warranties and tax indemnities. An insurance policy covering tax risks is also an available option that, in recent years, has become more common in the market.

The second risk can be managed by a careful structuring of the transaction, paying attention to the structure’s economic and material substance to avoid a challenge under the abuse of law principle.

In certain sophisticated transactions, requesting a ruling to the tax office is also considered.

Types of acquisition vehicle

What form of acquisition vehicle is typically used in connection with a real estate business combination, and does the form vary depending on structuring alternatives or structure of the target company?

Generally, the most popular acquisition vehicle used in Italy is a limited liability company (LLC). LLCs are subject to IRES and IRAP. If certain regulatory requirements are met (see question 35), investors can also opt for an Italian real estate investment fund (REIF).

The main tax benefits of a REIF are:

  • exemptions from IRES and IRAP;
  • exemptions from Italian taxation on the proceeds distributed to non-Italian pension funds and collective investment vehicles resident in white-listed countries;
  • exemptions from taxation on capital gains for white-listed non-resident investors;
  • the contribution of several commercial real estate assets (which are leased for the prevailing part) to a REIF in exchange of the issue of its units, is outside the scope of VAT and subject to indirect taxes at a fixed amount (namely, each of registration, mortgage and cadastral taxes applies at the fixed rate of €200); and
  • mortgage and cadastral taxes due in connection to the transfer of commercial real estate assets are reduced by half.

Take-private transactions

Board considerations in take-private transactions

What issues typically face boards of real estate public companies considering a take-private transaction? Do these considerations vary according to the structure of the target?

In the event of a public tender offer and during the relevant period, the directors of a listed company should refrain from taking actions that may jeopardise the achievement of the scope of the offer, unless such actions are authorised by a shareholders’ meeting resolution of the target company (the passivity rule). Notwithstanding, the target’s shareholders may decide to exclude the application of the passivity rule to their company by amending the target’s by-laws.

The applicable law does not expressly identify what acts would fall within the scope of the passivity rule. As a consequence, its applicability will need to be verified case by case. In this respect, however, the mere research of an alternative bidder is considered to be outside the scope of the passivity rule.

Furthermore, authorisation by a shareholders’ meeting is required to implement any decision taken before the passivity rule takes effect, as indicated above, provided that the decision:

  • has not been wholly or partly implemented;
  • is not included within the decisions relating to the ordinary course of the company’s activities; and
  • if implemented, does not conflict with achieving the offer’s purposes.

Finally, the target’s independent directors (parties that are not related to the bidder) will draw up an evidence-based opinion containing their assessment on the offer and the fairness of the price. They have the right to request the aid of an independent expert of their choosing, at the target’s cost.

In the context of mergers, directors should take into account the corporate interest of the overall transaction and must determine the exchange ratio in good faith.

Time frame for take-private transactions

How long do take-private transactions typically take in the context of a public real estate business? What are the major milestones in this process? What factors could expedite or extend the process?

If the going-private transaction is carried out by merging a listed company with a private company, the process may take 90 to 120 days from the two companies’ management bodies approving the merger plan.

Where a going-private transaction is carried out through a tender offer, the bidder must file an offer document with CONSOB within 20 days of the decision to launch the offer. CONSOB will approve the document within 15 days. This period can be extended by up to 15 days, but only once.

In cases where regulatory approvals are necessary, CONSOB clears the offer document within five days of the approvals being granted.

Before the beginning of the offering period, the bidder must provide CONSOB with a performance guarantee (ie, cash confirmation). The offering period must be agreed upon with the Italian Stock Exchange and range between 15 and 40 business days for voluntary or partial tender offers, and 15 and 25 business days for mandatory offers. Under certain circumstances, the offering period can be reopened for a further five business days from the settlement date of the tender offer.

Negotiation

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?

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:

  1. 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;
  2. purchasing shares, or a shareholding, that exceed 30 per cent of the listed company’s share capital; and
  3. 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.

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?

Comprehensive real estate-related due diligence usually covers legal, technical and commercial aspects, which require the input of experts from each sector. This is why the involvement of such experts is usually put in place in the early phase of due diligence.

In addition, as the purchase of a real estate asset must be formalised before an Italian public notary, the notary must be chosen in good time, as he or she needs to carry out specific notarial investigations on the asset concerning title to property, liens and encumbrances, and the ‘continuity of the transcriptions’ principle (ie, confirming the chain of title). More precisely, the public notary’s investigation consists of analysing all the deeds of transfer of the asset executed during the preceding 20 years. The Italian Civil Code provides the time limit of 20 years for opposing legal rights connected to donations, inheritance or other circumstances that might affect the ownership title, which, except for the deed being nullified, can be opposed at any time.

At the end of such investigations, the notary provides the ‘20-year notarial report’, which is aimed at confirming the validity of the title to property and the existence of liens or encumbrances on the asset.

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?

In addition to the documentation made available by the seller during due diligence, searches on title, lien, bankruptcy, litigation and tax are made by the appointed public notary by consulting the local Land Register.

As far as bad title is concerned, buyers are generally protected by the statutory warranty against eviction provided under the Italian Civil Code. This warranty applies to all sale-and-purchase transactions, regardless of the subject matter of the transactions. Risks deriving from bad title can also be covered by ad hoc property liability insurance.

Representation and warranty insurance

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

In recent years, many institutional investors have manifested their interest in the purchase of ad hoc insurance policies - warranty and indemnity (W&I) insurance - aimed at covering liabilities arising in connection with potential breaches of the R&Ws provided by the seller under the sale-and-purchase deed.

Usually W&I insurance grants the seller the possibility of negotiating lower indemnification thresholds (eg, de minimis, caps and baskets) as the purchaser may recover the loss from the insurer. However, W&I insurance does not cover losses from fraud or wilful misconduct. In these circumstances, the seller cannot impose any limitations on the buyer under Italian law. On the other hand, the buyer’s advantage of purchasing W&I insurance consists in transferring the entire risk deriving from a potential breach of the seller’s obligations to a third party.

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?

The scope of legal due diligence varies depending on the transaction structure. If the transaction is structured as a share deal, due diligence will include documents related to the real estate, as well as corporate, financial, tax and employment-related documents concerning the target.

If the transaction is structured as an asset deal, the due diligence will be limited to just documents related to the real estate. In this scenario, the set of documents that legal teams must review to perform comprehensive due diligence include documents concerning:

  • title to property;
  • building titles;
  • liens and encumbrances (including mortgages, if any);
  • lease agreements (if any);
  • taxes;
  • litigation; and
  • permits and authorisations (eg, fire prevention certificates and safety certificates).

Further documents might be required in connection with further specific areas, such as the environment and technical factors (eg, documents on plants).

Breach of contract

Remedies for breach of contract

What are the typical remedies for breach of a contract in the context of a real estate business combination, and do they vary with the ownership of target or the structure of the transaction?

Remedies that can be applied in a breach of contract are generally provided under the Italian Civil Code and can be applied to the breach of any contract, irrespective of the subject matter. These remedies might consist of the right to terminate the agreement or the right to ask for the performance of the agreement consistently with the obligations set forth thereunder, without prejudice to the right to be compensated for the damage suffered by the non-breaching party.

Financing

Market overview

How does a buyer typically finance real estate business combinations?

Real estate financings are usually structured with a mix of equity and indebtedness. The percentage ratio between indebtedness and equity varies, mainly owing to the borrower’s financial indebtedness or the bank’s policies. In recent deals, the ratio between the level of indebtedness and value of the real estate asset ranged between 55 per cent and 65 per cent.

Seller’s obligations

What are the typical obligations of the seller in the financing?

Typically, the seller does not undertake any obligation in the financing transaction implemented by the buyer.

Repayment guarantees

What repayment guarantees do lenders typically require in the context of a property-level financing of a real estate business combination? For what purposes are reserves usually required in the context of property-level indebtedness?

The mortgage over the acquired property is the standard repayment security required by lenders in Italy, in the context of real estate financing. Generally, the value secured by the mortgages ranges between 150 per cent and 200 per cent of the principal amount.

Depending on the complexity of the deal, other standard guarantees granted by borrowers in favour of the lenders include:

  • pledges over bank accounts;
  • assignments by way of security (or pledge) of receivables arising under contractual relationships, for example:
    • lease agreements;
    • management agreements;
    • hedging agreements; and
    • due diligence reports;
  • assignments of claims arising under insurance proceeds and VAT refunds;
  • pledges over the quotas or shares of the borrower, with caveats relating to financial assistance provisions in the case of a share deal;
  • special privilege over the movable assets of the borrower; and
  • seldom, first-demand guarantees issued by the entity controlling the borrower.

Loan agreements may also provide for undertakings by the borrower to create reserves aimed at curing cash shortfalls (including for temporary vacancy of the property) and breach of financial ratios.

Borrower covenants

What covenants do lenders usually insist on in the context of a property-level financing of a real estate business combination?

Lenders usually insist on including the following covenants in real estate loan agreements:

  • information covenants, for example:
    • financial statements;
    • property reports;
    • change of control;
    • material adverse changes;
    • insolvency-related information;
    • proceedings and third-party claims; and
    • change of tax treatment;
  • general covenants, for example:
    • compliance with laws and tax obligations; and
    • maintenance of authorisations;
  • negative covenants, for example:
    • negative pledge provisions;
    • no further financial indebtedness;
    • no loans out;
    • no distributions of dividends and reserves;
    • no investments on properties or entities;
    • no amendment to certain contracts (eg, lease agreements and management agreements);
    • no change of business; and
    • no extraordinary transactions;
  • property related covenants (eg, maintenance of properties and insurance); and
  • financial covenants, for example:
    • loan-to-value ratio;
    • debt-service-cover ratio; and
    • interest-service-cover ratio.
Typical equity financing provisions

What equity financing provisions are common in a transaction involving a real estate business that is being taken private? Does it depend on the structure of the buyer?

Loan agreements strictly limit upstream payments, which are generally subordinated to the outstanding debt.

Depending on the structure of the deal, equity injection provisions may be required to solve various issues, such as:

  • breach of financial covenants;
  • repayment obligations, to the extent not financed by the loan agreement; and
  • maintenance or refurbishment works on the real estate asset.

Collective investment schemes

REITs

Are real estate investment trusts (REITs) that have tax-saving advantages available? Are there particular legal considerations that shape the formation and activities of REITs?

REIF schemes are possible and provide some tax advantages (see question 15), provided that, among other things, certain requirements are met (see question 36).

Private equity funds

Are there particular legal considerations that shape the formation and activities of real estate-focused private equity funds? Does this vary depending on the target assets or investors?

Italian REIFs may be established as contractual funds or as investment companies with fixed capital. In both cases, REIFs are funds investing exclusively or mainly (at least two-thirds of their aggregate value) in real estate assets, real estate rights and public granting rights, interests in real estate companies and participations in real estate funds.

REIFs are generally ‘reserved’ (as opposed to retail REIFs). For example, they only have either professional investors within the meaning of Directive 2011/61/EU, or other investors making an individual commitment of €500,000 or more to the REIF, or directors and employees of the Italian manager. According to applicable Italian laws and regulations, reserved REIFs benefit from certain exemptions and derogations (eg, they are not subject to the investment restrictions laid down by the Bank of Italy).

Update and trends

Key developments of the past year

Are there any other current developments or emerging trends that should be noted?

Key developments of the past year37 Are there any other current developments or emerging trends that should be noted?

In 2017, the Italian government, by the approval of new Competition Law No. 124/2017, introduced, inter alia, new buyer-oriented legal tools for closing real estate transactions in Italy.

The reform impacts, in particular, the purchase price payment mechanism of real estate properties transfers.

Under Italian law, the acquisition of a real estate asset can be enforced against third parties only after successful transcription of the relevant deed of sale at the competent Land Register. The transcription process of a deed of sale is successful as long as no other third-party transcription request - concerning the same asset - has been previously executed, and if this would be the case such previous transcription request (relating to a different deed of sale on the same asset) would prevent the positive completion of the subsequent transcription process due to the fact that, pursuant to Italian law, transcriptions are governed by priority rules. The transcription of a deed of sale is carried out by the public notary as soon as possible (usually within a few hours) after the closing (ie, the execution of the notarial deed of sale) and not simultaneously. As a consequence, a buyer runs the risk of executing a deed of sale, paying the relevant price to the seller, and then finding out - only after the execution of the deed and the payment of the purchase price - that a third party has previously already recorded (having submitted a previous transcription) another transaction on the same asset. The rules introduced by the Italian government, with the new Competition Law 124/2017, protect the buyer against that risk by granting them the right to avoid paying the price to the seller before the successful completion of the transcription. Indeed, according to the new rules the price may be paid by the buyer to a separate and dedicated bank account of the Italian public notary - instead of to the sellers’ bank account - involved in the transaction who will be obliged to release the sums to the seller’s benefit only upon having: (i) successfully completed the registration of the deed of sale at the competent Land Register and (ii) verified that - at the time of the transcription - no burden has been created, other than those existing and known by the buyer at the time of the closing. The advantage is apparent, which is why such a purchase price escrow mechanism is becoming the default rule in recent Italian real estate transactions.