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?
In general, non-binding preliminary agreements are rarely utilised in real-estate business combinations of a public company as a result of disclosure obligations but are quite common for private real-estate companies. Similar to other industries, the seller and buyer will enter into a non-binding preliminary agreement (eg, letters of intent and a term sheet) before the execution of a definitive agreement in a real-estate business combination to record the intention of both parties as well as key commercial terms and conditions of the transaction (eg, exclusivity, confidentiality and break fees) and it does not depend on ownership structure of the target.
Regarding enforcement, Vietnamese laws allow individuals and legal entities to establish, perform and terminate their civil rights and obligations on the basis of free and voluntary commitments and agreement, and, therefore, depending on commercial terms agreed by relevant parties, the preliminary agreements can be non-binding or binding against the parties and, in particular, if there is no provision in the preliminary agreement that expressly states that the preliminary agreement or specific clauses under the preliminary agreement are non-binding, the entire preliminary agreement or remaining clauses under the preliminary agreement are deemed binding on the parties and generally upheld by Vietnamese court and arbitration. In practice, for the purpose of securing certain rights of the potential buyer during the due diligences on the target, the buyer usually requires certain specific clauses in the non-binding preliminary agreement together with remedies in the case of breach of this clause (eg, exclusivity period committed by the seller).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.
Purchase agreements in real-estate business combination are substantially similar to the purchase agreements for other industries; however, the purchase agreement in a real-estate transaction includes the following additional representations and warranties (R&Ws), and conditions precedent to close the transaction (CPs), which can be varied subject to the status of the real-estate project and project land:
- R&Ws of seller or target: valid title over the land (including acquisition of land in accordance with applicable law); right to develop the real-estate project (including the compliance with the zoning); paid-up charter capital and satisfaction of owner’s equity per total investment capital of the real-estate project; no encumbrances over target’s equity interest and properties or land of the real-estate project (especially housing properties); no restriction on the transfer of land or property of the real-estate project as well as equity interest or shares in the target; no outstanding financial obligations to the state or the third party in relation to the project and project land (eg, land use fee, land rental and escrow deposit for performing the investment project); and no outstanding or potential inspection, investigation, litigation or dispute with the competent authorities and the third party in relation to the project and project land;
- CPs: evidence of title over the land (eg, land allocation decision, land lease decision, land lease agreement, certificate of land use rights, house ownership and other assets attached to land); evidence of right to develop the real-estate project (eg, in-principle investment approval, investment registration certificate); documents on zoning and environment (eg, detailed master plans, environmental impact assessment report and environmental protection plan); and pre-merger filing clearance; and
- specific indemnity by the seller in relation to the breach of representations and warranties (R&Ws).
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?
Like other industries, a buyer’s ability to gradually acquire an interest in a public company in the context of a real-estate business combination is limited by (1) public tender offer (PTO) procedures (ie, when the potential buyer reaches PTO Thresholds); (2) pre-merger filing clearance when transaction causes the potential buyer to control the target or one of the trades of the target and reportable thresholds being triggered; and (3) the 50 per cent foreign ownership limit.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?
Key issues necessary for closing include (1) title over transferred shares; (2) land use rights (eg, land allocation decision, land lease decision, land lease agreement, certificate of land use rights, house ownership and other assets attached to land); (3) the right to develop real-estate projects (eg, in-principle investment approval, the decision on selection of investor and the investment registration certificate); (4) zoning and environment (eg, detailed zoning master plans, the environmental impact assessment report and the environmental protection plan); (5) other necessary licences, permits and approvals of real-estate projects, completion of land clearance and infrastructure; (6) no material adverse change; and (7) other key conditions precedent, covenants, representations and warranties subject to the status of the project and project land.
To resolve these key issues, the relevant purchase agreement may be included the followings:
- longstop date: if any conditions precedent (especially items (2) through (5) above, which are subject to the review and opinions of licensing authorities) cannot be completed by the seller and, consequently, the closing cannot occur by the longstop date, the buyer could have the right to defer the closing to such other date as decided by the buyer, in addition to its right to terminate the purchase agreement; and
- regulatory approval of real-estate project: owing to the ambiguity and complexity of land laws and regulations, certain regulatory approvals for implementing the real-estate project may be missing or issued ultra vires by the competent authority. Parties may need to agree to clarify with the competent authority as a CP or provide specific indemnity for those matters.
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 an equity deal, the target bears responsibility for environmental remediation that the seller may shoulder if any results from actions and breaches of the law by the target prior to closing. In an asset deal, the allocation of risk will be subject to negotiation by the parties. It is common that the seller will bear the risk of environmental remediation prior to closing and the buyer will bear the risk after closing.
Subject to the type and status of the project, the following contractual provisions regarding environmental liability are agreed in the purchase agreement:
- general R&Ws of the seller that the target or the seller has complied with Vietnamese law in relation to environmental regulations and there are no outstanding administrative sanctions imposed on any violation of the target in relation to environmental requirements; and
- in the case of environmental misrepresentation, the seller shall indemnify the potential buyer.
What other liability issues are typically major points of negotiation in the context of a real estate business combination?
The parties may negotiate the seller’s liability in respect of the following matters:
- the target does not have any social housing obligations (applicable to certain residential housing projects);
- the target has paid in full the land rent or land use fee for project land and there is no additional land rent or land use fee or other financial obligations relating to project land;
- obligations for returning the deposit paid by tenants;
- completion of connecting points (eg, road, electricity and telecommunications) or construction works in accordance with the investment registration certificate and construction permit; and
- limits for a single claim, basket claims, the maximum aggregate liability for all claims and the time limit for making a claim.
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?Existing leases
If the target being leased the land or construction work by the state or other land user, the buyer can request the seller to give the following representations and covenants:
- there is no requirement to obtain consent on change of control from a third party for real-estate business combination;
- the existing terms and conditions of the lease shall continue and the target shall comply with such terms and conditions until the closing or can only be changed on no less favourable terms and conditions, all of which are satisfactory to the buyer; any breach of aforesaid covenants shall subject the seller to indemnity obligations; and
- the buyer shall not be subject to any transfer fees charged by a third party for a real-estate business combination.
If the target is the lessor, the buyer can request the seller to procure the target:
- to not terminate existing lease agreements between the target and the tenants;
- to disclose all deposit, rental and other fees paid by tenants to the target; and
- to pay all financial obligations owed to competent authorities prior to the closing date.
Typically, to avoid complicating the financials, there may be a pre-closing covenant in the purchase agreement restricting the target (whether as the lessor or lessee) from entering into any new lease except in the ordinary course of business or as approved by the buyer.