Real Estate Acquisition: Practical Aspects of Preparing to Bargain
- By Alexander Ermolenko Head of FBK Legal Corporate Practice
- Nov. 25 2008 00:00
The first constituent urges a check-up of the units in question. A realty check consists of an investigation of a unit's legal history: the lawfulness of its construction or reconstruction, the accuracy of the registration of its title to land, the purity of the property transactions, presence/absence of burden, i.e. revelation of any circumstances which could produce risk of seizure of the asset, contesting the rights of the purchaser to this asset or application of administrative sanctions. Apart from that, upon purchase of a building, facility under construction or even just a room in a building, a check of the technical condition of the unit is not out of place: whether it was well constructed or not, whether it will last long, whether it complies with requirements of construction rules and norms. The purchase of realty, notwithstanding the relative simplicity of structuring such transaction, is not always convenient and acceptable for a vendor and a vendee. Frequently, the constructions in question do not have proper legalization; a vendee can be deterred by complications associated with the re-legalization of a lease or privatization of a land plot, in most cases, the vendor is concerned about the amount of tax liabilities at paying out full market value. As we have mentioned, another way can be used.
In the case of acquisition of stocks or shares in companies owning realty, another need in a more exhaustive documentation check, that is nowadays referred to as due diligence, emerges. In this case, the purchase of realty turns into a purchase of business for realty. Consequently, check-up procedures should include financial, tax and legal research. The reason is obvious — with such a bargaining structure there is big risk of acquisition of an attractive asset and together with it, of a number of problems, ranging from underpaid taxes and given, but temporarily forgotten guarantees of third parties liabilities to incorrect charter capital formation, liabilities to employees of the entity and unpaid bills. If such a check has not been implemented, it is still a question which way will turn to be more expensive. At the same time, it is necessary to bear in mind the risks that you almost cannot be protected from — those same bills.
The second constituent is no less important, it depends on decision upon the to-be-purchased unit: whether it will be realty itself or stock, as well as on the revealed features of this unit. The bargaining structure changes with the emergence of new information found during research, it gets adjusted to the current situation to close risks for a vendor and a vendee; moreover, to reach better terms for each of them.
Carelessness in terms of orderliness of the bargain itself or contradictions of its structure to the revealed problems is fraught with difficulties for a vendee. The necessity to "legalize," implement juridical registration of unauthorized construction with a considerable number of constructions will cost a sum, comparable to the price of their purchase. Prolongation of negotiations or a dragged out execution period can cause, as a complication, the change of status of a land plot, for example, related plans of State can alter, by chance or as a result of influence of concealed forces. The lack of lease payments control before the "closing, for example, purchasing office facilities, can lead to a situation where the new owner will have to tolerate the former lessees for a long time, moreover — free of charge. Reluctance, or inability, to use protective mechanisms (for a example, part-payment, repurchase etc.) with no possibility to check the legal history of the object may cause necessity to return the asset back to the vendor, which, unfortunately, does not mean that the already paid sums will be automatically returned to the vendee.
The list of accidents can be continued, though, as well as the list of pure bargains, which could be complicated but still satisfactory for all parties. We all understand that good preparation, as a rule, brings good result. That's the rule we should be guided by.