Originally published in The In-House Lawyer
Boekel De Nerée has recently advised on the largest ever real estate transaction in Dutch history. Vendex/KBB – one of the leading retailers in the Benelux countries – sold its property portfolio to a consortium of institutional investors for approximately €1.4bn. In this article we discuss the legal issues raised by real estate deals of this size, including the implications of a controlled auction process.
Reducing Risk
The value that investors attribute to property is largely determined by the risk involved in the investment. This relates not only to the solvency of the tenants, but also to the other risks and uncertainties inherent in a largescale, complex property portfolio such as Vendex's.
An investor will partly base the return it wishes to generate on its estimate of this type of risk. This is known as the risk-return trade-off: the more risks involved in the transaction, the higher the desired return will be (and therefore the lower the price that the market will be willing to pay). A vendor's objective is therefore to strip the proposition of any unnecessary risks. Any lack of clarity or deficiencies must be investigated thoroughly and in good time so that they can be remedied and resolved.
Pre-sale examinations such as this usually takes the form of a vendor's due diligence investigation, in which all the legal and financial aspects of the portfolio are examined. The information obtained can also serve as a basis for compiling the (largely virtual) data room and in drafting the information memorandum and the draft contract of sale, which are presented to the prospective buyers at an early stage of a controlled auction process.
It is also important to note that the Dutch disclosure process differs from, for example, the UK approach. Under Dutch law, the vendor is under an obligation to disclose material information to the purchaser and failure to do so may constitute breach of good faith. For this reason it has also become common practice in the Netherlands for the vendor to conduct a due diligence investigation before embarking on the sale process.
Controlled Auctions
In general, a vendor of property that wishes to make optimal use of the competition between investors will organise a controlled auction. In such an auction, several investors are invited, after signing a confidentiality agreement, to make a provisional bid on the basis of an information memorandum, which explains the financial, tax and legal aspects of the property.
The vendor then invites a limited number of bidders to a second round. At this stage, the prospective buyers perform a due diligence investigation on the basis of an on-line data room in which the vendor and its advisers have collected all the relevant information on the objects to be sold. Using the information gathered in the due diligence investigation, the bidders are asked to make a binding offer on the basis of a draft contract of sale presented to them.
The vendor then selects what it considers to be the best bid, after which an agreement is concluded on the basis of the contract of sale amended by the prospective buyer.
The controlled auction process described above requires very careful preparation, strict planning and a structured approach. Vendors (or their advisers) must have the necessary experience in monitoring this type of transaction. They must also have sufficient capacity to handle the flow of documents, questions, answers and information that need to be dealt with. The sound organisation and legal supervision of the controlled auction process are crucial to the ultimate success of the transaction.
The latter is particularly necessary in the Netherlands, where the relationship between the parties – even before a contract is signed – is governed by the concept of pre-contractual good faith. This means that the parties may not be at liberty to discontinue negotiations and may be bound to continue them under Dutch law. Failure to do so may result in a duty to compensate the innocent party for the costs incurred or even for loss of profit.
Moreover, a controlled auction is structured in such a way that it may qualify as a securities offering under the Wet toezicht effectenverkeer (Securities Transactions Supervision Act). This could, for example, make it necessary to produce a prospectus.
Shares Instead of Property
When a property is sold in the Netherlands, the rights and obligations arising from the lease are transferred to the new owner. The advantages of the sale of shares in the capital of a special purpose company (indirect property) over the direct sale of property therefore primarily relate to tax.
We don't have the room here to talk about all the tax aspects of such a deal, but it should be noted that, in the Netherlands, the acquisition of real property, whether in whole or in part, is subject to a real estate transfer tax (RETT) of 6%. RETT is payable upon the acquisition of both legal ownership and beneficial ownership. Upon the acquisition of interests in property companies (those with at least 70% of their assets consisting of Dutch property) RETT is due only if more than one-third of the shares is acquired. This rule means that RETT can be avoided if shares in a property company are sold to at least four unconnected entities. From a purchaser's point of view, this is often a reason to prefer the acquisition of a real estate portfolio through shares in real estate companies.
In principle, the book profit (the capital gain that a vendor generates on the sale of property in the Netherlands) is taxed at the ordinary corporate income tax rate, although there are ways to postpone the payment of tax on profit generated by the sale of property.
On the other hand, in principle, a participation exemption applies to a vendor in the Netherlands selling shares in the capital of a property company. From a vendor's point of view, this is often a reason to dispose of a real estate portfolio through shares in real estate companies.
Conclusion
In the Netherlands, real estate transactions are often effected through the sale and purchase of shares in the capital of real estate companies, resulting in added complications.
A controlled auction enables the vendor to exert more influence on the sales process and the terms of the sale. However, sufficient safeguards have to be built in when maneuvering through the straits of the controlled auction since regulatory issues under the Dutch Securities Act may come into play.
In conclusion, a successful transaction and auction process requires detailed preparation and planning whether you are dealing with a portfolio the size of Vendex's, or a small plot of land.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
