Real estate transactions in a corporate context

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When it comes to corporate transactions, most people think of mergers and acquisitions or stock and asset transfers. But oftentimes, corporate transactions involve real estate as well — and real estate and business attorneys need to learn how to work together to achieve the best result for their clients.

At a continuing legal education seminar earlier this month, Minneapolis attorney Debra K. Page spoke on the topic of “Real estate lawyer assistance in corporate transactions.” During the two-hour seminar, Page shared her expertise and advice with real estate and corporate attorneys.

Page pointed out that real estate attorneys tend to approach corporate transactions differently than the business community, especially because the real estate portion of most corporate transactions is relatively minor. Corporate clients and counsel tend to think in terms of the “big picture,” while real estate professionals are trained to focus on details, explained Page, adding that differences in approach can cause tension and ultimately affect the results obtained for clients.

“When the total deal is worth $20 million and the real estate portion is worth $1 million, it is difficult for corporate lawyers to understand why one-twentieth [of the transaction’s worth] seems to be driving the transaction,” observed Page. “The challenge is for real estate attorneys to quantify in dollars the risk of failure to cure problems in the real estate portion of the transaction.”

Page suggests real estate attorneys adopt the following approach:

• Educate yourself about the client’s business and goals;

• Identify the parties involved in the real estate transaction;

• Keep the real estate details to a minimum;

• Quantify the risks for the parties;

• Understand that in the context of the larger transaction, there may be greater tolerance for real estate imperfections which would not be acceptable in a singular real estate transaction; and

• Work toward creative solutions to cure real estate problems in ways not typically found in real estate transactions.

Educate yourself

Real estate attorneys need to be involved from the beginning of a transaction, must be proactive, and must be prepared to work with corporate clients and attorneys, said Page. One of the best ways to achieve these objectives is to become educated about the client’s business and objectives, continued Page.

Real estate attorneys must keep in mind that the real property is only a portion of the overall corporate transaction, and understand that this fact can color the client’s decisions, observed Page.

Corporate buyers will often layer transactions and transfers to shield themselves from liabilities or to allow for the best possible outcome from a tax perspective. While these “layers” benefit the corporation, they may complicate the real estate transaction, said Page.

Rather than fight the desires of the corporate client, the real estate attorney should learn the client’s motivations and desired result, and then find a way for the real estate transaction to achieve that result. “The real estate lawyer should always focus on what is being purchased (or leased) and what will be the resulting entity,” advised Page. In corporate transactions, it is especially important to identify the actual buyer and seller, said Page. Page explained that the real estate lawyer must understand who owns the stock and assets of a business, as well as how ownership is transferred if “layers” are involved, prior to the transaction to ensure that the buyer is dealing with the correct selling party in all negotiations. In addition, the real estate attorney should determine the standard of knowledge imputed to each representation or warranty, and identify the specific individuals who hold such knowledge, added Page.

In addition to identifying the proper parties to a real estate transaction, the real estate attorney should understand the core business of the buyer and seller to gain perspective on the relative real property needs and goals, said Page. Such knowledge allows the real estate attorney to better evaluate the risks of a real estate transaction and advise the client. For example, if the attorney knows that the buyer plans to dispose of the property within a short time, and knows how the buyer plans to use the property, the attorney will be in a better position to advise the client with respect to zoning and other codes.

Share your knowledge

Most individuals in business are only involved in the sale or purchase of real estate a few times in their lifetimes, and their focus will likely be on other areas of the corporate transaction, observed Page.

The fact that real property is typically not the core of most corporate transactions can be frustrating for some real estate attorneys, especially because it can be difficult to “capture enough attention … to obtain informed decisions” regarding the real estate portion of a transaction, she added. To reduce or eliminate this frustration, real estate attorneys should help business clients and counsel focus on the end results of significant real estate matters, for example loss of access, restrictive covenants, material encroachments, and adverse possession, suggested Page.

Page emphasized that real estate attorneys should be involved early on in corporate transactions, especially because certain matters will take time to resolve. For example, it is important to identify any environmental or title matters early on so the risks can be evaluated and the imperfections can be dealt with in a timely manner, she said. Encourage the sellers to collect all of the documents regarding the real estate as early as possible so that a listing of available documents can be included in the purchase agreement, advised Page. Such documents may include tax statements, existing title policies and surveys, leases, rent rolls, contracts regarding service and maintenance of the property, warranties, and construction documents.

Since the real property transaction is relatively minor in the grand scheme of the corporate transaction, real estate attorneys should be aware that they may be requested to “review and comment” on existing real estate contracts, said Page. While the tendency may be to create a new contract or work from a form, it could be worthwhile to at least examine the existing contracts because they often include language favorable to the client, she explained.

It is also helpful to “educate” business clients and counsel that real estate carries history which requires review to understand and may require work to clear title, said Page. For example, many people in the business community perceive title insurance as a cure-all without understanding that coverage is for the existing state of the title, not for the optimum state of title, Page observed. If corporate clients don’t understand that title insurance does not ensure marketable title and does not cover pre-existing conditions, they may object to spending money to cure problems, she explained.

Real estate counsel should explain that the consent of other parties, such as tenants or easement holders, may be required for certain aspects of the transaction — and that the time required to obtain this consent may conflict with the timelines desired by the parties to the transactions, she added. Real estate counsel should also explain that mergers and acquisitions m
ay be affected by environmental matters, said Page.

And don’t forget that baskets and caps limiting the seller’s duty to indemnify or requiring the buyer to absorb a certain portion of the risk prior to requesting compensation from the seller may apply in corporate transactions, even though they are typically not found in real estate transactions, Page noted.

Real estate attorneys should be aware that “due diligence” may be different for corporate transactions, said Page.

“In a corporate transaction, it is not uncommon for the purchase agreement negotiations to continue to and through the closing, such that due diligence often commences without an executed contract governing the extent of the due diligence,” she observed. Real estate counsel for sellers should obtain confidentiality agreements, and real estate counsel for buyers should review all real estate related documents prior to closing, she added. Remember that real estate due diligence may include obtaining the consents and approvals of various third parties to the contemplated transaction, she added.

Due diligence may reveal concerns that outweigh real estate concerns, and real estate counsel must keep perspective of property matters and still provide clear disclosures of real estate risks, Page pointed out.