Legal Aspects of Commercial Property Purchase
- By Nina Evstratova
- Nov. 17 2009 00:00
Head of Land, Real Estate,
Yakovlev & Partners Law Offices
Real estate is one of a company’s most valuable assets, and so it is necessary, when purchasing commercial property, to pay serious attention to the legal support of the assumed deal. There is great variety in real estate objects (premises, buildings, enterprises, land plots etc.), as well as ways of acquiring them. Each specific real estate deal is subject to a specific legal regulation, has its own peculiarities and restrictions, and involves different legal risks.
These are the stages of real estate purchase: definition of the way the property will be acquired; legal due diligence of the real estate object; and conclusion and execution of the agreement.
The first question that arises after the purchaser has identified what real estate object they are looking for is to approve the method of its acquisition with the seller. Property is often acquired by purchasing the company that owns the property. It takes less time and is much easier than direct purchase of property. At the same time, it is much more risky because it involves purchase of a whole company, not just a real estate object owned by that company. The property title in this case is not transferred, which decreases the possibility of defense in the case of appearance of disputes with the previous owner of the property.
At this stage the long process of approving the terms of the deal also starts (price, payment procedure, effective dates of agreements, guarantees etc.), which usually lasts until the agreement has been signed by both parties. Undoubtedly, the participation of lawyers is very important in negotiations between counteragents, not necessarily corporate lawyers, but ones attracted from law firms. Having such lawyers’ support is a great advantage because they are independent and so have no interest in the deal. It is also important to get specialized lawyers who work only in this sphere of business and so know all its subtleties.
Legal due diligence of property is one of the most important stages, which includes legal analysis of the seller’s title to the property, or in the case of purchase of a company, also the seller’s rights to its shares (participation interest). The aim of such analysis is to define “the legal cleanliness” of the property, i.e. the possibility of the real estate deal, as well as identification of any problems connected with the purchasable property and the risks assumed. In the case of improper execution of the deal, or if the seller’s property rights are insufficient, the purchaser may find themselves involved in long judicial proceedings and might lose the property. It is also worthwhile analyzing not only the existing rights to the property, but also its history. Sometimes this type of analysis can reveal new information, which, if not invalidating the assumed deal, may at least cause considerable decrease in the value of the property.
The legal procedure should include not only checks of the property offered for sale, but also of the parties who are involved in the assumed deal. Lawyers engaged in such expertise are aware of tens of reasons for nullity of deals provided in the modern Russian legislation. The lawyers’ task under execution of the deal is to avoid such negative effects in the future.
It is necessary to investigate all the above problems and specifics of the purchasable property prior to conclusion of the deal and, if possible, to persuade the seller either to settle the problems, or to decrease the price of the property. Only after all problems concerning the subject of the deal are identified may the parties commence the final stage of negotiations, prepare the necessary documents for the deal and close the deal.