REAL ESTATE LAWYERS IN NON-REAL ESTATE TRANSACTIONS
Sheila Nolan Gartland, Sanford A. Weiner and Robert P. Wright
Introduction
Although Fellows of the American College of Real Estate Lawyers work daily on pure real estate transactions, they also assist their non-real estate colleagues in mergers and acquisitions, corporate, financing, project development, and other non-real estate transactions (a “Deal”). In these instances, even though real estate may form an important part of the assets, the non-real estate attorney running the Deal (the “Lead Lawyer”) may not realize the importance of real estate to the Deal, and may not involve the real estate lawyer (the “Real Estate Lawyer”) sufficiently early in the Deal to allow the typical due diligence, survey, environmental, and title review that would be undertaken in a pure real estate deal. Even if a Real Estate Lawyer is involved in a timely fashion, the Lead Lawyer (and the ultimate client) may not value real estate due diligence or understand the significance of real estate issues in the Deal. Conversely, the Real Estate Lawyer often does not have a sufficiently thorough knowledge of the Deal to understand the multitude of other issues, perhaps of greater financial importance or complexity as compared with the real estate issues, or exactly how the real estate issues fit in with the overall transaction.
I.REAL ESTATE IN NON-REAL ESTATE DEAL CONTEXTS
A.Types of Deals. There are many types of Deals in which real estate involves significant value (or raises significant risk) but that are not run primarily by a real estate lawyer.
These include:
(1)mergers and acquisitions of assets and equity interests;
(2)financing transactions where the lenders may be focused primarily on the creditworthiness of the borrower or sponsor rather than the collateral package, or where real estate may form an ancillary part of the collateral package;
(3)project development and project finance transactions involving leased or owned real estate, but where the focus of the Deal is on contracts that produce cash flow;
(4)the formation of public/private partnerships, which can be an important driver on development projects, particularly at a time in which public budgets are constrained and private funds are crucial to development of a wide range of infrastructure;
(5)public or private offerings of equity or debt that are the core business of a corporate department, where the real estate owned or leased by the entity is an important part of the value of the entity;
(6)purchases of under-performing loans or distressed debt, often secured by real estate; and
(7)separation of assets that were developed as one integral unit (e.g., separation of electricity generating assets from transmission/distribution assets, or separating assets relating to one line of business from those relating to another line in a chemical plant or refinery).
B.Types of assets. Various types of assets may be involved in the situations described above:
(1)energy projects, including power generating plants, solar or wind powered electricity generating, refineries, LNG facilities, storage facilities (above and below ground, including utilization of salt caverns and depleted reservoirs), pipelines, gathering lines, transmission lines, distribution lines and others projects involving production and distribution of energy assets;
(2)infrastructure development and financing projects that include toll roads, transportation facilities, stadiums, arenas and docks and wharves;
(3)hospitals, surgical centers, medical office buildings and other health-related assets; and,
(4)loan portfolios where the assets securing the loans are typically, if not solely, real estate.
II.PERSPECTIVES ON THE DEAL
A.The Lead Lawyer. It is important for the Real Estate Lawyer to understand the perspective of the Lead Lawyer in structuring a Deal, such as the acquisition of equity interests or underlying assets. The Lead Lawyer typically expects to negotiate and receive representations and warranties regarding the current and past state of the target and to require the seller to provide indemnification for breaches of those representations and warranties as the sole remedy for any damages suffered. Typically there will be limitations on that indemnification, such as materiality or knowledge qualifiers, deminimisexclusions (no claim less than $X, for example), thresholds (no obligation to indemnify until total damages suffered exceed $X, for example), and caps on overall indemnification claims (seller to have no liability greater than X% of purchase price, for example). See Section 3.1 of Appendix1 (adapted from an entity transaction PSA) and Section3.1 of Appendix2 (adapted from an asset transaction PSA). Note also that these floors and caps are applied to the entire company or group of assets being sold, not to individual assets.
Representations regarding owned or leased real estate, easements and licenses are usually only a few of the multiple categories of representations being provided to the buyer. Occasionally, in addition to representations on certain subjects, there are additional specific indemnification provisions. For example, the seller may agree to indemnify the buyer for any damages resulting from a specific risk or defect (which could be real estate-related).
In the context of such a typical acquisition agreement structure, the Lead Lawyer often wants the Real Estate Lawyer to provide the real estate representations he or she should request, preferably in electronic form and using the same terminology and defined terms of the operative agreement. In these transactions the Real Estate Lawyer is only one member of an overall team, and the Lead Lawyer is simultaneously assembling representations and revisions from antitrust specialists, environmental specialists, intellectual property specialists, employment specialists, tax specialists, ERISA specialists, and other specialists. The Lead Lawyer will take direction from the client as to the role the real estate owned or leased plays in the business of the target entity (and thus the value placed on it by the buyer). As the Real Estate Lawyer considers preparation of inserts, he or she has to be familiar with the client’s overall approach to indemnification. For instance, it would be inappropriate to try to sprinkle “materiality” qualifiers throughout the real estate representation if the approach of the overall document is to address the concept of materiality only through the use of a deductible or basket in the indemnity for losses resulting from breaches of representations. See Section 3.2.4 of Appendix2, which essentially ignores or deletes materiality qualifiers for the purpose of the De Minimis, Threshold and Maximum Amounts.
If the Lead Lawyer does not provide this information directly to the Real Estate Lawyer when he or she requests assistance (and often, the Lead Lawyer is supervising so many aspects of the Deal that he or she will not take time to discuss these issues), the Real Estate Lawyer should ask for such information before beginning review of and revisions to the documents.
B.The Real EstateLawyer. When involved in these transactions, it is important for the Real Estate Lawyer to understand his or her role. It is important to understand (and getover) the fact that this is not a real estate transaction and the Real Estate Lawyer is not running the Deal. The Real Estate Lawyer should not try to convert the transaction into a real estate deal.
Lead Lawyers, investment bankers and non-real estate corporate clients do not analyze or approach transactions in the same way that real estate professionals approach transactions. The Real Estate Lawyer needs to understand that analysis in order to understand how he or she can best assist the transaction. It is important, however, for the Real Estate Lawyer to educate the Lead Lawyer on how to utilize real estate lawyers as part of the team. For instance, the Lead Lawyer can get better and more complete assistance by bringing in Real Estate Lawyers early in the transaction. If the Real Estate Lawyer is brought in shortly before the closing it may be too late to provide assistance with title reports, surveys, and other third-party information that require long lead times to obtain and review or to resolve issues raised by the information. Lead Lawyers are accustomed to obtaining quick UCC and lien searches on a one or two day turnaround and, without proper schooling, cannot anticipate the amount of lead time required for typical real estate diligence.
Lead Lawyers will often send one or two representations or covenants (out of context) to the Real Estate Lawyer and ask for his or her input. However, the Real Estate Lawyer should be allowed to review key sections of purchase and sale agreements, credit agreements, and other project documents, and the glossary of defined terms, in order to spot issues and correct language. Many words have special meanings or different meanings in the context of real estate.
III.TYPICAL ACTIVITIES OF THE REAL ESTATE LAWYER IN THE NON-REAL ESTATE DEAL
A.Diligence. Real estate due diligence, particularly for large facilities or tracts of land for which no current (or even ancient) title policies or commitments or surveys are available, can be difficult. The older and larger the facility, the more likely that the land was accumulated over many years from multiple sellers, perhaps without title insurance. If the facility was constructed using corporate cash or unsecured debt, it is more likely that title has not been reviewed as it would have been if there had been project-specific financing. Traditional staked-on-the-ground or ALTA surveys are often very expensive and time-consuming and the client may not be willing to spend either the time or money. It may be that the best that can be obtained is an overlay of a Google Earth™ map onto a computer-generated boundary survey.
Often these transactions involve electronic data rooms assembled by the investment bankers’ most junior personnel who have no appreciation of real estate matters. Due diligence is often conducted at the bid stage, with no ability to speak with real estate counsel for the target company.
Under these difficult circumstances, the Real Estate Lawyer may only be able to focus on the most valuable assets as identified by the client or the Lead Lawyer. The ability to perform due diligence will differ, depending on the nature of the real estate interests. For instance, in the acquisition of pipelines that are composed of hundreds of fee, leasehold and easement tracts, time may not permit extensive review of each of the tracts. There may be gaps in coverage and the client may have to rely on the power of eminent domain, if available under the applicable state law, to mitigate problems.
B.Contract Review. In addition to assisting with due diligence, the Real Estate Lawyer will review, and attempt to revise, representations, warranties, covenants, conditions and indemnities, including key definitions, such as Permitted Liens or Permitted Encumbrances, which can have a sweeping effect on the value of representations and covenants. See, for example, the definitions of Permitted Encumbrances in the Appendices. Both of these were bid deals, in which due diligence was to be performed before the buyer submitted its highest and best bid. In light of the broad definition of Permitted Encumbrances, often knowledge qualifiers (see Section2.1 of Appendix2), and the De Minimis and Threshold Amounts, sellers are often willing to make representations that are not typical in real estate PSAs.
The Real Estate Lawyer will assist in preparing schedules containing real estate information, conveyance and assignment documents, leases, easements, and licenses. If assets are to be divided between seller and purchaser, the Real Estate Lawyer can assist with the survey and resubdivision issues that may arise in dividing the asset and with preparation of the conveyance documents, restrictive covenants, and easements and rights of way to assure access or necessary utilities to both parties. In addition to separating tracts of land, the Deal may require separating generating assets from transmission assets in connection with energy deregulation, or separating assets of a line of business or product in a refinery or chemical plant from assets used for other lines of business that are not being acquired.
C.Title Insurance. The Real Estate Lawyer will advise on title insurance and deal with title insurers. The Lead Lawyer (and the ultimate client) may not understand why it is needed and why it is so expensive, so the Real Estate Lawyer may have to educate the parties on the utility and function of title insurance, as well as why costs and coverages often should be negotiated in advance.
D.Taxes. An important task is to advise on transfer taxes, mortgage taxes and intangibles taxes. This is often done in conjunction with local counsel in the jurisdictions in which real property is located. These issues may play an important role in the decision regarding the structure of the ultimate Deal.
IV.SPECIAL CIRCUMSTANCES WHERE THE REAL ESTATE LAWYER
CAN CONTRIBUTE
A.Preparation of Title Commitments and Surveys. Real Estate Lawyers know that the most effective diligence on real property requires a title commitment (with copies of encumbrances) and a survey. Most non-real estate lawyers (and investment bankers) don’t. They may resist obtaining commitments for title insurance even though they are free. The Real Estate Lawyer also knows that substantial lead time might be required to obtain these items and refine them to the point that they are useful. This is particularly true in cases involving facilities such as power plants, chemical plants or refineries when the land involved is large in area, has not been the subject of title review in many years, has a complex assemblage of improvements on it, and has multiple appurtenant real property interests of importance, such as easements for pipelines, roads, and other facilities necessary for operation. If brought in early enough, the Real Estate Lawyer can address these matters to allow for preparation, cleanup and finalization in time for closing.
Obtaining a proper title commitment and survey involves substantial work on the front end by the title company in assembling a title base, working with the surveyor, and whittling down what initially may be dozens of potential exceptions to title to those that currently apply to the property. At the same time, care must be taken to establish at the outset the scope of work to be undertaken by the surveyor. A survey of a plant complex cannot, and need not be, undertaken based on standards that would be used for an office building. For example, rather than on-the-ground mapping of all improvements and other matters visible on the ground through normal surveying techniques, it is often far more efficient and useful to utilize orthophotography, photogrammetric mapping, or other similar techniques to establish what is on the ground (and where) to a degree and accuracy sufficient under the circumstances. These methods are now specifically sanctioned in ALTA survey standards, but they are part of the optional TableA standards and should be addressed with the client and surveyor before the surveyor begins the work. The Real Estate Lawyer can ensure the title company and surveyor are engaged in a timely manner, help establish the proper deliverables, and ensure progress and coordination as necessary to result in products that permit title review and validation to occur in a timely manner in the context of the overall transaction.
In addition to obtaining and reviewing the title commitment and survey in a timely manner, the Real Estate Lawyer for the seller can identify issues sufficiently far in advance to resolve or limit them by working with the title company and surveyor. It is far better to present, or include in the data room, a relatively clean title commitment than one that is full of problems that could have been solved with sufficient time and knowledge. Among the issues that corporate lawyers do not appreciate is the need to record a certificate of merger or certificate of name change in the real property records so that record title is reflected as being held by the entity that owns the property. Although a merger or corporate name change may be effective under corporate statutes by a filing with the secretary of state, a title examiner will not recognize them until there is a proper filing in the real property records.
B.Leases. In addition to other real estate issues, leases pose additional concerns that a Real Estate Lawyer can assist in addressing. State law may restrict assignment or sublease without consent of the landlord even if the lease does not contain such a restriction. Leases should be reviewed for anti-assignment provisions andcontractual provisions addressing change of control. The Real Estate Lawyer may have suggestions for structuring the transaction to mitigate these issues. The Real Estate Lawyer can also assist in determination of how to handle leased property which is used both in a business line being transferred as well as in lines of business being retained by the seller.