Snapshot: negotiating real estate M&A transactions in Switzerland

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?

Yes. Non-binding preliminary agreements, including LOIs and NDAs, are commonly used to ensure a smooth transfer from a pre-contractual to a contractual relationship between the involved parties. Especially for bigger and more complex transactions, using non-binding preliminary agreements is standard practice and is recommended.

Pure non-binding preliminary agreements are not legally binding and do not result in an obligation to carry out the envisaged transaction. However, damages arising out of a breach of basic principles, such as acting in good faith, are enforceable. Further, certain provisions in an LOI are often declared to be binding (eg, confidentiality provisions, break-up fees, non-solicitation clauses, choice of law and jurisdiction) and are therefore 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.

Most standard provisions contained in a purchase agreement in the context of real estate-related business combinations are similar to the provisions that can be found in customary asset and share purchase agreements. Real-estate-related purchase agreements do, however, provide for a more comprehensive set of provisions regarding rental agreements and service (maintenance) contracts, and may deal with authorisation requirements under the Lex Koller or contain specific warranties dealing with environmental liabilities and contamination sites.

If an asset deal is executed pursuant to the Merger Act, assets and liabilities listed in the inventory are, by operation of law, automatically transferred. In other words, except for the notarisation of transfers of real estate, the usual formal requirements regarding the transfer of each individual asset must not be complied with. This means that the entry in the Land Register has a purely declaratory meaning and title will already have been transferred upon registration of the asset transfer with the Commercial Register.

If real estate is transferred by way of singular succession, agreements and governmental authorisations can, as a rule, only be transferred with the consent of all parties involved. Exceptions apply to rental agreements, certain insurance policies and, in the case of a transfer of business, to employment agreements (unless the transfer is opposed by the relevant employee).

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?

A gradual acquisition of an interest in a public target is generally limited by the applicable disclosure and reporting obligations set out in the Financial Market Infrastructure Act, requiring each person or group that reaches, exceeds or falls below certain voting rights in listed company thresholds (these are 3, 5, 10, 15, 20, 25, 33.3, 50 or 66.6 per cent) to notify the company and the disclosure office of SIX Swiss Exchange within four trading days of a threshold being reached. Further, if an acquirer (stand-alone or together with persons acting in concert) exceeds the threshold of 33.3 per cent of the voting rights in a target company, an obligation to submit a mandatory public tender offer is triggered. Exceptions apply if the articles of association of the target company include a provision based on which the threshold to trigger the mandatory offer is raised from 33.3 to up to 49 per cent (opting up), or that the obligation to submit a mandatory public tender offer is waived (opting out). In the case of a listed real estate company, the articles of association often contain further limitations and the possibility to restrict the transferability of registered shares that are listed on a stock exchange. Based on such transfer limitation clauses, the board of directors of the real estate company may be allowed to refuse the registration of a non-Swiss acquirer as a shareholder with voting rights if, and to the extent, such registration could prevent the company from providing evidence that less than one-third of its shareholder base is non-Swiss and, therefore, compliance with the requirements under the Lex Koller could not be ensured.

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 an asset deal, deal certainty can only be achieved by entering into a purchase agreement in the form of a public deed. This means that the negotiation phase should be kept as short as possible to mitigate the risk of the other party deciding to pursue a different opportunity. In a share deal, the seller usually tries to avoid any conditions precedent to closing and wishes to agree on a simultaneous signing and closing to achieve deal certainty. The buyer usually not only wishes to achieve deal certainty by not allowing the seller to walk away from the deal (which is addressed by exclusivity obligations combined with liquidated damages clauses) but also has an interest in achieving certainty concerning certain specific issues before closing. These are, for example:

• potential risks discovered in the course of the due diligence (eg, the existence of environmental liabilities);
• obtaining tax rulings;
• a waiver of specific change-of-control rights under important rental or financing agreements;
• merger control clearance; and
• the absence of material adverse changes, which are typically addressed by the buyer as conditions precedent to closing, indemnities, deductions, holdbacks from the purchase price or earn-out provisions.

In the end, which provisions or mechanisms find their way into the agreement often depends on the negotiation powers of the parties involved.

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?

As a general rule, Swiss environmental law rests on the ‘polluter pays’ principle. In an asset deal, the buyer acquiring real estate will be held liable as the new owner of the relevant asset or real estate for any forthcoming environmental damage. The liability for previous contamination is not affected and thus remains with the former owner. In the context of a share deal, the target remains liable for the clean-up of the pollution and the costs associated therewith. Therefore, environmental liability is not altered by a change in ownership. However, the parties are free to deviate from the polluter pays principle in the purchase agreement. The allocation of liability is subject to negotiation among the relevant parties. Typically, the buyer will request specific warranties or indemnities to cover such risks with regard to any environmental risks relating to the period prior to closing.

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

The buyer wants to ensure that the target has obtained any and all permits required by law and that it complies and has complied with the terms and conditions of the permits (in particular, that the real estate has been constructed and used in accordance with the permits). Another key aspect of negotiations in the context of a real estate-related business combination is how the real estate gains tax (the gain realised through the real estate transfer is subject to either a special real estate income tax or a normal income tax) and the real estate transfer tax, if applicable, are split between the parties. While the parties usually agree that the real estate gains tax shall be payable by the seller, the real estate transfer tax, if applicable, is frequently borne by the buyer, although the prevailing local law or customs may provide differently. In certain cantons, tax laws may foresee a lien on the property to secure the transfer taxes.

In an asset deal, the VAT treatment of a building is a very important issue, although transfers of real estate are, as a rule, excluded from VAT. However, a waiver of exemption and an option for VAT on the purchase price of a building (which can either be paid or declared by way of the notification procedure) is possible, provided that the real estate is not used for private purposes. As a result, the investor will be able to reclaim Swiss input VAT on the purchase price (the current VAT rate is 7.7 per cent). Many interesting questions may arise regarding VAT and Swiss real estate that cannot be discussed in detail here, although they may be very relevant in economic terms and should, therefore, be considered carefully.

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 list regarding all leases containing information regarding, among other things, the parties, the size, location and term (including options to extend the lease and rent), is usually attached to the purchase agreement. In the context of representations and warranties (R&Ws), the seller represents and warrants that this list is true, correct and complete. No R&Ws are given regarding the collectability of rents.