Lawyers who fail to evolve their approach slow down what should be quick and easy deals, and create unnecessary and costly barriers, writes Peter Sugden
One of the most notable changes in commercial real estate over recent years has been the rising proportion of deals effected through corporate transactions. Thanks, in part, to the UK government’s progressive legislation against SDLT savings schemes, buyers and sellers are now frequently choosing to use a “corporate wrapper” to carry out their deals, structuring transactions as the sale of shares in a property-owning special purpose vehicle.
The rise and rise of the corporate real estate transaction also has a self-perpetuating element. With more deals being transacted by SPV sales, the warranty and indemnity insurance market is growing (and becoming more price-competitive), which helps the efficiency of processing and choice of SPV transactions and the growth of confidence in choosing that route, which means more deals get transacted this way. And so on.
But while the real estate market as a whole continues to embrace sales and purchases through corporate deals, it seems that too many lawyers are not adjusting their approach. Too often it is the lawyers that generate unnecessary, frustrating and costly roadblocks to what in reality should be straightforward corporate real estate deals.
Unfamiliarity breeds discontent
Part of this is to do with too many real estate lawyers being unfamiliar with corporate deals. Many real estate lawyers with insufficient knowledge of corporate transactions pass these deals to corporate colleagues who, in turn, may have limited knowledge of real estate transactions.
To be clear, there are some very experienced and balanced lawyers (both real estate and corporate) out there who do not approach deals in this way. But if we are going to get to a point where corporate real estate transactions are done as smoothly as “traditional” asset deals, there needs to be a shift among all lawyers, not just a select group of experienced specialists.
Corporate lawyers need to better understand the real estate approach. Meanwhile, more real estate lawyers need to build a skill set that will allow them to run and even process SPV sales themselves, in the way that many real estate finance lawyers have already done (combining real estate and finance skills together).
By developing and combining corporate skills with their existing sector experience, real estate lawyers can offer a quicker, more cost effective, one-stop service for clients on corporate SPV deals.
Steps to take
This will not happen overnight, but, in the meantime, there are aspects of corporate SPV transactions that lawyers, surveyors and owners can focus on to reduce some of the more frequent frustrations seen in corporate real estate transactions:
1. Sellers need to ensure that data rooms for corporate deals include all the extra information needed for a share deal, including full sets of accounts, financial and tax information, copies of key agreements, and all the necessary “company books”. Files need to be labelled properly and filed under appropriate headings.
2. No “sales package” is deemed complete without including replies to commercial property standard enquiries (CPSEs). So when dealing with a share sale, the same approach to replies to a standard corporate questionnaire should apply. These answers help frame the corporate structure and scope of the due diligence required.
3. If the deal involves W&I insurance with the seller’s liability for warranties and indemnities capped at £1, then start with a sale and purchase agreement (SPA) incorporating a sensible full set of warranties and indemnities at day one. Presenting a draft with a limited suite of warranties and indemnities where the seller has effectively no risk is pointless and uncommercial.
4. More often than not, there will be a gap between exchange and completion of the deal. So SPAs need to include a sufficiently comprehensive set of controls for this gap, which should not be contentious.
5. Sellers should accept that it is reasonable for a buyer to expect material adverse change (MAC) clauses in SPAs with an appropriate materiality threshold for risks outside the seller’s control.
6. All real estate professionals are familiar with basic “notice to complete” wording, as used in real estate asset deals for many decades now: SPAs for corporate deals should contain the same wording.
Fortune favours the brave
It would also help all parties if surveyors and lawyers were involved earlier on in the corporate sales process, so that heads of terms address some of the basics of a share deal, as opposed to simply adding an additional sentence or two to a conventional set of asset sale terms.
Finally, here is a suggestion: the LMA forms of real estate finance facility, the CLLS forms of certificate of title, the standard conditions of sale and the CPSEs are all excellent examples of how, by collective industry effort, a degree of commoditisation can be introduced into otherwise complex everyday real estate and real estate finance transactions.
Isn’t it about time the real estate industry started to collectively develop a model share sale agreement, corporate questionnaire and share sale heads of terms? (A standard property SPV sale finance and tax questionnaire developed by accountants would be useful too.)
Real estate clients are looking to effect share deals on smaller lot sizes in today’s market, and are not typically prepared to pay for the unnecessarily complicated aspects of deals that come from the issues flagged above, wherever the fault lies.
Peter Sugden is a managing partner at Katten Muchin Rosenman UK
