In the first of three articles, Paul Chases looks at the different types of corporate entities, principal documents and key transaction stages involved in corporate real estate acquisitions/disposals
When property companies, private equity funds, institutional or overseas investors acquire or dispose of real estate, a significant number of these deals do not actually involve the transfer of title to the relevant property from seller to buyer.
Some of the largest, most complex and highest value corporate real estate deals that have completed in recent years involve (often for tax reasons) the acquisition or disposal of corporate vehicles which, through a structured web of corporate entities, own the property in question – hence the term corporate real estate (CPRE).
While CPRE acquisitions or disposals will always require property due diligence to be undertaken, such transactions are often viewed as corporate M&A deals, simply because they involve the transfer of ownership in the corporate entity (or entities) that directly or indirectly owns the property or properties.
This article considers the different types of corporate entities that can be acquired and the key transaction stages.
As CPRE transactions are generally more document-heavy than those involving just the transfer of title to the relevant property, the documents typically involved are also set out in this article.
Types of entities being acquired
A CPRE transaction will often involve the acquisition or disposal of an English domiciled property-owning company, limited liability partnership or limited partnership (or any combination of these).
The nature of the entity is not always at the forefront of a buyer’s mind at the outset of a CPRE transaction. As completion of these transactions involves the buyer acquiring the relevant property and the relevant corporate entity (or entities) that owns the property, what are the differences between them?
Company limited by shares
This is a body corporate with legal personality distinct from those of its shareholders and directors, incorporated by registration at Companies House (form IN01); it must have articles of association. A shareholder can be an individual or body corporate; there can be just one shareholder and there is no maximum number.
Public companies must have at least two directors, while private companies only need one. A director must be a natural person. Only public companies are required to have company secretaries; the sole director of a private company may also act as company secretary.
The key legislation covering limited companies is the Companies Act 2006.
Limited liability partnership (LLP)
This is a body corporate with legal personality distinct from those of its members, incorporated by registration at Companies House (form LL IN01). A members’ agreement is advisable though not compulsory and statutory provisions govern the operation of an LLP unless the members enter into one.
It must have at least two members that can be an individual or body corporate and there is no maximum number. There must be at least two designated members that are authorised to make decisions that members cannot. Where no designated members are notified to Companies House or there would be only one, all members become designated members. The limited company board or shareholder split is not replicated in the LLP and no parallel should be drawn from the distinction between members and designated members.
The key legislation is the Limited Liability Partnerships Act 2000, Companies Act 2006 and regulations regarding the application of the Companies Act 2006.
Limited partnership (LP)
An LP does not itself have capacity to act and acts by one or more of its general partners. It is established by registration at Companies House (form LP5). A partnership agreement is advisable though not compulsory and statutory provisions govern the operation of an LP, unless the partners enter into one.
It must have at least one limited partner and one general partner and there is no maximum number of either. Limited partners are prohibited by statute from participating in the day-to-day management of the LP, which should be conducted by the general partner; limited partners lose their limited liability status if involved in day-to-day management.
An LP must have at least one general partner who has unlimited liability for the debts and obligations of the LP. In practice, this liability can be capped by installing a vehicle with limited liability as a general partner (eg, a company or an LLP). Assets are held by the general partner(s) on trust for the partners collectively.
The key legislation is the Limited Partnerships Act 1907 and the Partnership Act 1890.
CPRE transaction stages
Stage one: prior to due diligence
It is important to agree heads of terms so that the parties have a basis for commercial negotiation (even if the terms are non-binding other than in relation to confidentiality or exclusivity).
Where significant cost is to be incurred by the buyer on the basis of exclusivity, it is sensible for a robust indemnity for such costs to be sought from an entity with sufficient financial covenant strength so that a meaningful claim can be made by the buyer against the seller if exclusivity
is breached. Generally, the exclusivity period should not start running until the buyer has been provided with due
diligence documentation and a draft sale contract.
Confidentiality provisions should be included to protect sensitive information about the deal and the respective parties. If acquisition bank debt is being procured, the parties should remember to include the lending bank within the list of parties to whom such information can be disclosed.
It is fundamentally important to get the deal structure right and agreed between the parties at the outset of a CPRE transaction. This can be difficult to pin down because the tax and commercial imperatives of the buyer and seller will often differ. Structural changes further down the line will almost certainly delay the deal and lead to increased costs for the parties.
Stage two: due diligence
Generally, if a single buyer is involved, the buyer’s advisers would undertake due diligence and report to the buyer accordingly.
If the transaction involves one seller and numerous prospective buyers then due diligence may be undertaken by the seller. This involves pulling together the corporate, real estate, debt, insolvency, tax, regulatory, employment and competition due diligence reports. The various buyers’ advisors would then review the reports and raise enquiries as appropriate (thereby streamlining the process).
The key point for the parties to consider at the due diligence stage is the “materiality threshold” so that all advisers are clear on what is sufficiently significant to be reported on and what should be raised as a red flag in the context of the deal.
Stage three: the sale agreement
The sale and purchase agreement (to be governed by English law) is at the heart of any CPRE transaction. It is the centre of negotiation involving all practice areas including corporate, real estate, finance, tax, regulatory, employment and competition. It often involves multiple jurisdictions where any of the parties are domiciled abroad. No CPRE transaction can complete until the sale and purchase agreement is agreed together with all ancillary documents.
Clearly the terms of the sale and a purchase agreement are fundamental. The key terms will be considered in next week’s Estates Gazette.
Principal documents for a CPRE transaction
| Heads of terms | Identifies the key deal terms on a non-binding basis (although confidentiality and exclusivity provisions are usually binding) |
| Due diligence reports | Covers corporate, tax, debt, property, regulatory, employment, and competition |
| Sale and purchase agreement | Main contractual document setting out the terms of sale |
| Disclosure letter and bundle (or virtual data room) | Sets out matters, facts and circumstances that are factually inconsistent with the warranties |
| Tax deed | Attributes responsibility between seller and buyer for tax administration and filing matters post-completion; provides the buyer with indemnity protection relating to any general or specific tax liabilities |
| Asset and property management terminations | Deal with the termination of existing contracts and the cessation of liabilities |
| New asset and property management agreements | Enables the buyer to appoint is own managers |
| Profit share or promote agreement | If the asset manager is to be rewarded for successful management and its role in the realisation of the property’s value there may be a promote agreement that pays the asset manager a proportion of the uplift in property value |
| Security release documentation | If the seller has bank debt in place (in relation to the property) there will likely be security over the property asset and the corporate entities in the property ownership structure. Assuming the existing bank debt (procured by the seller) is being repaid then the existing security will need to be released on completion |
| New security and debt documentation | If the buyer is procuring bank debt as part of its acquisition financing, there will need to be a facility agreement and security documents in place for completion |
| Ancillary documents | Usually there will be a raft of documents dealing with the approvals of the various contractual arrangements and execution by the seller or buyer |
Paul Chases is a senior associate and head of corporate real estate at Herbert Smith Freehills LLP
