PREL1405_Gartland.pdf

40 | The Practical Real Estate Lawyer May 2014

Sheila Nolan Gartland, Sanford A. Weiner and Robert P. Wright

There are a lot of good reasons to bring real estate lawyers in on non-real estate transac-tions—not the least of which are added value and peace of mind.

ALTHOUGH 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.

Sheila Nolan Gartland is a partner in the Vorys Columbus office and a member of the energy and real estate groups. She regularly advises clients in the acquisition, sale, development (including annexation and zoning matters), leasing and disposition of real property. She also assists with obtaining economic development incentives and other real estate financing. Ms. Gartland manages and works in the firm’s oil and gas title opinion practice, which focuses primarily on properties located in the Utica shale play. Ms. Gartland’s experience also includes advising clients on real property issues related to environmental remediation compliance and bankruptcy proceedings. Sanford A. Weiner is of counsel with Vinson & Elkins whose principal areas of practice are real estate law and finance law. His experience includes real estate aspects of energy, project development and project finance transactions; sale-leasebacks and other leveraged lease transactions; synthetic lease transactions; project finance; private placements; equity relationships, mezzanine loans, and other hybrid debt-equity transactions; workouts, restructurings, and foreclosures; acquisitions and dispositions; leasing; and finance. He also provides advice on usury and choice-of-law issues in commercial financing transactions.com. Robert P. Wright is a partner with Baker Botts who concentrates on commercial real estate and industrial transactions and on environmental matters related to commercial transactions generally. In the transactional area, Mr. Wright represents developers, institutional lenders, landowners and users in projects locally and around the country. The work he does for these clients includes acquisitions, debt and equity financing, workouts, development, leasing and disposition of such major real estate projects as shopping centers, hotels, high-rise office buildings and subdivision developments. He has substantial experience in transactions involving wind and solar farms, coal, gas and nuclear power plants, geothermal resources, pipelines, chemical facilities and other large-scale industrial projects. An earlier version of this article was presented by the authors as a paper for the ACREL 2014 mid-year meeting.

Real Estate Lawyers in Non-Real Estate Transactions

http://www.transactions.com

Real Estate Lawyers in Non-Real Estate Transactions | 41

REAL ESTATE IN NON-REAL ESTATE DEAL CONTEXTS •

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:• Mergers and acquisitions of assets and equity

interests;• Financing transactions where the lenders may

be focused primarily on the creditworthiness of the borrower or sponsor rather than the collat-eral package, or where real estate may form an ancillary part of the collateral package;

• Project development and project finance trans-actions involving leased or owned real estate, but where the focus of the Deal is on contracts that produce cash flow;

• The formation of public/private partnerships, which can be an important driver on develop-ment projects, particularly at a time in which public budgets are constrained and private funds are crucial to development of a wide range of infrastructure;

• Public or private offerings of equity or debt that are the core business of a corporate depart-ment, where the real estate owned or leased by the entity is an important part of the value of the entity;

• Purchases of under-performing loans or dis-tressed debt, often secured by real estate; and

• Separation of assets that were developed as one integral unit (e.g., separation of electricity gen-erating 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).

Types of Assets Various types of assets may be involved in the situations described above:

• Energy projects, including power generating plants, solar or wind powered electricity gener-ating, refineries, LNG facilities, storage facilities (above and below ground, including utilization of salt caverns and depleted reservoirs), pipe-lines, gathering lines, transmission lines, distri-bution lines and others projects involving pro-duction and distribution of energy assets;

• Infrastructure development and financing proj-ects that include toll roads, transportation facili-ties, stadiums, arenas and docks and wharves;

• Hospitals, surgical centers, medical office build-ings and other health-related assets; and

• Loan portfolios where the assets securing the loans are typically, if not solely, real estate.

PERSPECTIVES ON THE DEAL •

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 represen-tations and warranties regarding the current and past state of the target and to require the seller to provide indemnification for breaches of those rep-resentations and warranties as the sole remedy for any damages suffered. Typically there will be limi-tations on that indemnification, such as materiality or knowledge qualifiers, de minimis exclusions (no claim less than $x, for example), thresholds (no ob-ligation to indemnify until total damages suffered exceed $x, for example), and caps on overall indem-nification claims (seller to have no liability greater than x percent of purchase price, for example). See Section 3.1 of Appendix 1 (adapted from an entity transaction PSA) and Section 3.1 of Appendix 2 (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 indi-vidual 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 addi-tional specific indemnification provisions. For ex-ample, the seller may agree to indemnify the buyer for any damages resulting from a specific risk or de-fect (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 Law-yer is simultaneously assembling representations and revisions from antitrust specialists, environ-mental specialists, intellectual property specialists, employment specialists, tax specialists, ERISA spe-cialists, 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 prepa-ration 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 docu-ment is to address the concept of materiality only through the use of a deductible or basket in the in-demnity for losses resulting from breaches of repre-sentations. See Section 3.2.4 of Appendix 2, 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 infor-mation directly to the Real Estate Lawyer when he or she requests assistance (and often, the Lead Law-yer 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 infor-mation before beginning review of and revisions to the documents.

The Real Estate Lawyer When involved in these transactions, it is im-portant for the Real Estate Lawyer to understand his or her role. It is important to understand (and get over) the fact that this is not a real estate trans-action 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 ap-proach transactions in the same way that real es-tate 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 clos-ing 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 repre-sentations or covenants (out of context) to the Real Estate Lawyer and ask for his or her input. Howev-er, the Real Estate Lawyer should be allowed to re-view 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 spe-cial meanings or different meanings in the context of real estate.

TYPICAL ACTIVITIES OF THE REAL ES-TATE LAWYER IN THE NON-REAL ES-TATE DEAL •

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 sur-veys are available, can be difficult. The older and larger the facility, the more likely that the land was accumulated over many years from multiple sell-ers, perhaps without title insurance. If the facil-ity was constructed using corporate cash or unse-cured 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 expen-sive 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 es-tate 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 dili-gence 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 un-der the applicable state law, to mitigate problems.

Contract Review In addition to assisting with due diligence, the Real Estate Lawyer will review, and attempt to re-vise, representations, warranties, covenants, con-ditions and indemnities, including key definitions, such as Permitted Liens or Permitted Encumbranc-es, 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, of-ten knowledge qualifiers (see Section 2.1 of Ap-pendix 2), and the De Minimis and Threshold Amounts, sellers are often willing to make repre-sentations that are not typical in real estate PSAs. The Real Estate Lawyer will assist in preparing schedules containing real estate information, con-veyance and assignment documents, leases, ease-ments, and licenses. If assets are to be divided be-tween seller and purchaser, the Real Estate Lawyer can assist with the survey and resubdivision issues that may arise in dividing the asset and with prepa-ration of the conveyance documents, restrictive covenants, and easements and rights of way to as-sure access or necessary utilities to both parties. In addition to separating tracts of land, the Deal may require separating generating assets from transmis-sion 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.

Title Insurance The Real Estate Lawyer will advise on title in-surance and deal with title insurers. The Lead Law-yer (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 negoti-ated in advance.

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 ju-risdictions in which real property is located. These issues may play an important role in the decision regarding the structure of the ultimate Deal.

SPECIAL CIRCUMSTANCES TO WHICH THE REAL ESTATE LAWYER CAN CON-TRIBUTE •

Preparation of Title Commitments and Surveys Real Estate Lawyers know that the most effec-tive diligence on real property requires a title com-mitment (with copies of encumbrances) and a sur-vey. Most non-real estate lawyers (and investment bankers) don’t. They may resist obtaining commit-ments 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 facili-ties such as power plants, chemical plants or refin-eries 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 inter-ests 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 sur-vey involves substantial work on the front end by the title company in assembling a title base, work-

ing with the surveyor, and whittling down what ini-tially 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 improve-ments and other matters visible on the ground through normal surveying techniques, it is often far more efficient and useful to utilize orthophotogra-phy, 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 Table A 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 en-gaged 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 cor-porate name change may be effective under corpo-rate 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.

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 assign-ment or sublease without consent of the landlord even if the lease does not contain such a restric-tion. Leases should be reviewed for anti-assignment provisions and contractual 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 be-ing transferred as well as in lines of business being retained by the seller. The Real Estate Lawyer is well aware of issues involved in sale-leaseback or leveraged lease trans-actions in which landlord remedies may be more oppressive than a typical lease. Other issues con-fronted in such a Deal include the ability (or lack of ability) to disclose the credit rating or identity of the buyer with the landlord (in connection with consent solicitations) before the public announcement of the Deal. Often the Deal will involve leased prop-erty in foreign jurisdictions, which requires dealing with local counsel and foreign landlords. The Real Estate Lawyer can assist the seller in structuring a real estate sublease, rather than an as-signment, if the original tenant is concerned with the credit of the buyer. Typically, the assignor is not relieved of obligations upon an assignment unless there is a specific release from the landlord. With-out an ability to regain possession of the leased property upon the buyer’s default (as would be a possibility in the case of a sublease) the original ten-ant would lack the means to take curative actions for which it remains responsible to the landlord.

Multiple Survivor Mergers Applicable state law, such as Section 10.008 of the Texas Business Organizations Code, may per-mit a divisive merger, or a merger in which assets are allocated to multiple entities rather than to a single successor. To the Lead Lawyer, this transac-tion may be viewed as a way to avoid consents or restrictions that would be triggered by an outright transfer. While applicable corporate law may only require an identification of the manner and basis of allocating the property among the surviving or new organizations, the Real Estate Lawyer will be con-cerned with requirements of real property transfers, including identification of the property transferred and filing the certificate of merger (with adequate property descriptions) in county real property re-cords. If the Lead Lawyer is not aware of these concerns, he or she may not allocate sufficient time to compiling property descriptions for all of the real property assets involved in the merger.

Loan Portfolios In purchases of real estate loan portfolios, the Real Estate Lawyer could be asked to perform nor-mal due diligence regarding the underlying collat-eral for each loan, a review of loan documents and correspondence, and an analysis of enforceability and potential lender liability exposure. In addition, the Real Estate Lawyer can assist in an analysis of remedies available to the lender, including timing for enforcement, and various local limitations on remedies, such as those in jurisdictions with one-action, fair value, or security first laws. Although enforceability of loan documents is important to all lenders, timing of that enforcement is important to the purchaser’s return on investment when invest-ing in a portfolio of loans.

Mineral Rights and Surface Control Particularly where a client is acquiring land for future development, in those states in which min-


eral production is (or has become) active, the rights of the owners of severed mineral interests must be considered in light of local law. For instance, in Tex-as, the mineral estate is dominant over the surface estate in its right to use of the surface, but there is a rule of accommodation, at least in instances in which improvements have already been built. The Real Estate Lawyer can assist in outlining possible protections for the surface owner, including obtaining surface waivers and drill site designations

or outright mineral purchases, perhaps in consider-ation of the grant of royalty interests. Determining who owns the minerals is the first step in identifying risks to the client. If title insur-ance is not available, the Real Estate Lawyer can assist in obtaining abstracts from petroleum land-men to construct a mineral history. At that point the client can make an informed decision as to whether the Deal is at risk from the mineral operations of others.

Appendix 1

Excerpts from PSA for Entity Sale

1.1 Excluded Assets; Retained Liabilities. On or prior to the Closing Date, the Company shall transfer the real property interests owned by the Company or any of its Subsidiaries set forth on Sched-ule 1.1(a) (the “Excluded Real Property”). The Excluded Real Property shall be transferred pursuant to that certain Real Estate Contribution Agreement substantially in the form attached hereto as Exhibit 1.1(b) (the “Excluded Real Property Agreement”).

2.1 Representations Regarding Real Property.

(a) To the Knowledge of the Company: Schedule 2.1(a)(i) contains a list of all real property owned in fee simple by the Company or any of its Subsidiaries (“Fee Owned Real Property”); Sched-ule 2.1(a)(ii) contains a list of all real property (“Leased Real Property”) leased to the Company or any of its Subsidiaries pursuant to a lease agreement (“Real Property Leases”) identified in Schedule 2.1(a)(ii); Schedule 2.1(a)(iii) contains a list of all real property owned by the Company or any of its Subsidiaries, or in which the Company or any of its Subsidiaries has an interest, which is leased to a third party or another Subsidiary of the Company pursuant to a lease agreement (“Third Party Real Property Leases”) all of which are identified in Schedule 2.1(a)(iii); and Schedule 2.1(a)(iv) contains a list of all Purchase Options.

(b) Subject to the Permitted Encumbrances, to the Knowledge of the Company: (i) the Company or its applicable Subsidiary has good and indefeasible title to the Fee Owned Real Property and the improvements located thereon; and (ii) the Company or its applicable Subsidiary has a valid lease-hold estate in the Leased Real Property, in each case in clause (i) or (ii) free and clear of all Liens and Purchase Options.

(c) To the Knowledge of the Company, except as disclosed in any engineering report, facilities re-port or other such report listed in Schedule 2.1(c) or otherwise disclosed in this Agreement or any


Schedule or Exhibit hereto, neither the Company nor any of its Subsidiaries has received any notice

from a Governmental Authority of any violation of Law with respect to any Real Property: (i) that

remains uncured; and (ii) that the failure to cure is reasonably likely to result in a Threshold Adverse

Effect.

3.1 Indemnification by the Seller.

(a) Subject to the terms and conditions of this Article III, following the Closing, the Seller hereby

agrees to indemnify and hold Buyer, the Company, and their respective directors, officers, employ-

ees, Affiliates, stockholders, agents, attorneys, representatives, successors and permitted assigns (col-

lectively, the “Buyer Indemnified Parties”) harmless from and against any and all losses, liabili-

ties, obligations and damages (individually, a “Loss” and, collectively, “Losses”) based upon or

arising directly from any breach of the representations, warranties, covenants or agreements made

by the Seller or the Company in this Agreement and any and all notices, actions, suits, proceedings,

claims, demands, assessments, judgments, costs, penalties and expenses, including attorneys’ and

other professionals’ fees and disbursements (collectively, “Expenses”) incident to such Losses.

(b) Notwithstanding the provisions of this Section 3.1, the Seller and its Affiliates shall not have any

indemnification obligations for any Indemnification Claim brought under Section 3.1(a)(i): (i) for

any individual item (or aggregated items that are the subject of or arise out of the same or related

facts, events or circumstances) where the Loss relating thereto is less than ___ Hundred Thousand

Dollars ($__00,000) (the “De Minimis Amount”); and (ii) in respect of each individual item

(or aggregated items that are the subject of or arise out of the same or related facts, events or cir-

cumstances) where the Loss relating thereto is equal to or greater than the De Minimis Amount,

unless the aggregate amount of all such Losses exceeds _____ Million Dollars ($__,000,000) (the

“Threshold Amount”), and then only to the extent of such excess and until the aggregate amount

of all such Losses equals or exceeds the Threshold Amount. In no event shall the aggregate indem-

nification to be paid by the Seller and its Affiliates for Losses under Section 3.1(a)(i) exceed ______

Million Dollars ($__,000,000) (the “Maximum Amount”).

(c) No Punitive Damages. Notwithstanding anything to the contrary elsewhere in this Agreement,

no party shall, in any event, be liable to any other Person for any punitive damages of such other

Person relating to the breach or alleged breach hereof.

(d) Exclusive Remedy. Following the Closing, the sole and exclusive remedy for any breach or inac-

curacy, or alleged breach or inaccuracy, of: (i) any representation or warranty in this Agreement; or

(ii) any covenant or agreement to be performed on or prior to the Closing Date, shall be indemnifi-

cation in accordance with this Section 3.1.


DEFINITIONS

“Lien” means any lien, encumbrance, pledge, mortgage, deed of trust, security interest, claim, lease, charge, option, right of first refusal, easement, servitude or transfer restriction.

“Permitted Encumbrances” means and includes:

(a) liens for taxes or other charges or assessments by any Governmental Authority to the extent that the payment thereof is not in arrears or otherwise due or is being contested in good faith and by appropriate proceedings;

(b) encumbrances in the nature of zoning restrictions, building and land-use Laws, ordinances, or-ders, decrees, restrictions, easements, servitudes, oil, gas or other mineral interests or leases, royalty interests, reservations or other title imperfections or any other conditions imposed by or pursuant to any agreement with any Governmental Authority or other Person; provided, however, that the same in the aggregate do not materially detract from the value of the Real Property as currently used or materially interfere with the current operation or use of the Real Property or the business operations of the Company;

(c) any lien or title imperfection with respect to the Real Property created by Buyer or resulting from any act or omission of Buyer;

(d) all agreements, leases, occupancy agreements, instruments, documents, liens, licenses, encum-brances or other title imperfections that are described in any of the Schedules or Exhibits attached hereto, shown on [Schedule B/Schedule B-Section II of] any commitments for title insur-ances, title reports, title certificates or surveys provided to or obtained by Buyer prior to the date of this Agreement, or posted in the electronic data room or through the electronic access maintained by the Title Company;

(e) undetermined or inchoate liens or charges constituting or securing the payment of expenses that were incurred incidental to the conduct of the business of the Company and materialmen’s, me-chanics’, repairmen’s, employees’, contractors’, operators’, warehousemen’s, carriers’ liens or other similar liens, security interests or charges arising in the Ordinary Course of Business incidental to the conduct of the business of the Company, securing amounts the payment of that is not delin-quent and that will be paid in the Ordinary Course of Business or, if delinquent, that is being con-tested in good faith and for which a foreclosure sale of the Assets cannot occur within ten (10) days;

(f) Any matter of public record which Buyer could have discovered through the exercise of reason-able due diligence;

(g) any liens or security interests created by Law or created in leases, easements, licenses, rights-of-way or other real property interests for rental or for compliance with the terms of such leases,


easements, licenses, rights-of-way or other real property interests, provided payment of any debt secured is not delinquent or, if delinquent, is being contested in good faith in the Ordinary Course of Business with any action to foreclose or attach any of the Real Property on account thereof properly stayed;

(h) all defects, irregularities and liens that are: (i) imposed by the terms and conditions of any Gov-ernmental Authorizations affecting the business of the Company; (ii) imposed by the terms and conditions of this Agreement or any Related Agreement; or (iii) waived in writing by Buyer;

(i) the Purchase Options set forth on Schedule 2.1(a);

(j) all Liens securing indebtedness of the Company or any Subsidiary which, by the terms of this Agreement, are to remain outstanding or be assumed by Buyer after the Closing; and

(k) all Liens that will be released or removed at or prior to Closing; provided, however, that none of the foregoing clauses (a) through (h) shall include Liens relating to or securing indebtedness for borrowed money.

“Real Property” means the Fee Owned Real Property and the Leased Real Property.

“Threshold Adverse Effect” means any result, occurrence, change, event or effect that results in, or would be reasonably likely to result in aggregate Losses to the Company and its Subsidiaries (taken as a whole) equal to or exceeding ___ Million Dollars ($__,000,000).

APPENDIX 2

Excerpts from PSA for Asset Sale

Section 1.1 Segment Regarding Description of Real Property Assets.

1.1.1 Owned Real Property. The real property owned in fee by the Sellers, including all subsurface mineral rights, if any, associated with such real property, that is identified in Schedule 1.1.1, together with all buildings, fixtures and real property improvements owned by the Sellers located thereon (collectively, the “Owned Real Property”).

1.1.2 Leased Real Property.

(a) The leasehold estates and the related lease or sublease agreements, licenses that are in the nature of leases (rather than in the nature of easements) or other similar occupancy agreements (collectively, the “Real Property Leases”) respecting real property and build-


ings, fixtures and real property improvements under which the Sellers are the lessee that are identified in Schedule 1.1.2(a) (collectively, the “Leased Real Property”); and

(b) the lessor’s interest in leases, subleases, licenses that are in the nature of leases (rather than in the nature of easements) and other similar occupancy agreements (but, in each case, excluding Easements) under which the Sellers lease to Third Parties certain real property and buildings, fixtures or real property improvements located at the Business that are identi-fied in Schedule 1.1.2(b) (collectively, the “Third-Party Real Property Leases”).

1.1.3 Easements.

(a) All easements used in connection with the ownership or the operation of the Assets and the Business, including those easements shown on the Title Commitments or identified in Schedule 1.1.3(a) (collectively, the “Easements”); and

(b) the grantor’s interest in all easements, licenses that are in the nature of easements (rather than in the nature of leases), rights-of-way, servitudes, surface use agreements, leases (other than Real Property Leases), franchises, permits and similar agreements granting to a Third Party the right to use any of the Owned Real Property for pipelines, utilities or other facili-ties or services, including those shown on the Title Commitments or identified on Sched-ule 1.1.3(b) (collectively, the “Third-Party Easements”); for the sake of clarity, Third-Party Easements does not include any Easements or Third-Party Real Property Leases.

1.1.4 Pipeline Rights. The pipeline rights (other than Easements) used in connection with the ownership or the operation of the Business (the “Pipeline Rights”).

Section 1.2 Cooperation and Efforts With Respect to Transfers of Assets. [NOTE: This is a universal concept not limited to Real Property.]

1.2.1 Buyer acknowledges that certain of the Assets (including Material Contracts) may be sub-ject to restrictions on transfer and may otherwise not be readily assignable or transferable. Notwith-standing anything to the contrary set forth in this Agreement, this Agreement shall not constitute an agreement of the Sellers to assign any Asset which is non-transferable, if the attempted assign-ment of the same, as a result of the absence of the consent or authorization of a Third Party or failure of a Preferential Right notice period to expire, would constitute a breach or Default with respect to such Asset or would violate any applicable Law (a “Non-Assignable Asset”). Provided a Seller complies with its obligations under this Section 1.2.1: (i) no breach of this Agreement shall be deemed to have occurred due to such Seller’s inability to assign any Non-Assignable Asset; and (ii) such Seller shall have no Liability whatsoever to the Buyer because of any breach or Default or violation of any applicable Law with respect to any such Non-Assignable Asset subsequent to the Closing Date arising from such Seller’s compliance with its obligations pursuant to this Sec-tion 1.2.1. The Parties shall cooperate and use Reasonable Efforts to obtain such authorizations


or consents. If, despite the Parties’ collective Reasonable Efforts, any such consent, authorization

or waiver necessary to effect the assignment and assumption is not obtained with respect to any

such Non-Assignable Asset, so that the Buyer would not, in fact, receive all such rights and assume

the obligations, of the applicable Seller with respect thereto as of the Effective Time as they exist

prior to such attempted assignment or assumption, then the following provisions shall apply: [Note:

Rarely do these alternatives work well for real property leases, easements, etc., depending on the

language of the relevant documents.]

Section 1.3 Title and Surveys.

1.3.1 Real Property. Buyer and Sellers acknowledge that, except as expressly provided in this

Section 1.3.1 and subject to Seller’s delivery of the executed Title Certificates to the Title Com-

pany, all issues relating to title to the Business Unit A Owned Real Property and the Business Unit B

Leased Real Property, which are reflected in the ascribed real estate folders in the Data Room or in

the respective Title Commitments as of the date of this Agreement, were addressed and resolved by

Buyer and Sellers prior to the date of this Agreement and that Buyer will be precluded from making

any claim against the Seller or its Affiliates with respect to title to the Business Unit A Owned Real

Property and the Business Unit B Leased Real Property.

1.3.2 Title Commitments.

(a) Sellers have caused the Title Company to prepare and issue title commitments with

respect to the Business Unit A Owned Real Property and the Business Unit B Leased Real

Property (together with any updates thereto, the “A/B Title Commitments”). The cop-

ies of the underlying documents evidencing or creating the exceptions and conditions set

forth in the A/B Title Commitments shall be provided by the Title Company or Sellers

through the electronic data rooms maintained by Sellers (the “Data Room”) or through

electronic access maintained by the Title Company (the “A/B Title Exception Docu-ments”).

(b) Sellers have caused the Title Company to issue title commitments with respect to the

Business Unit C Owned Real Property (together with any updates thereto, the “C Title Commitments”). The copies of the underlying documents evidencing or creating the ex-

ceptions and conditions set forth in the C Title Commitments shall be provided by the Title

Company or Sellers through the Data Room or through the electronic access maintained by

the Title Company (the “C Title Exception Documents”).

(c) The cost of any title commitment and the [base] premium for any Title Policy issued for

the benefit of Buyer shall be paid x% by Buyer and y% by Sellers.


Section 2.1 Representations and Warranties Concerning the Assets and the Business.

2.1.1 Ownership of the Assets. Except as set forth on Schedule 2.1.1, the Sellers have good and valid title to, have a valid, binding and enforceable leasehold interest in, or other-wise own the rights to possess, use, and obtain the benefits of, all of the Assets (excluding the Real Property and any Easements relating to the Assigned Assets), in each case free and clear of all Encumbrances other than Permitted Encumbrances. Such title or rights to such Assets will be transferred at the Effective Time to the Buyer free and clear of all Encumbrances, except for Permitted Encumbrances.

2.1.2 Real Property.

2.1.2.1 Subject to Permitted Encumbrances: (i) the Easements; (ii) the Owned Real Property; and (iii) the leasehold estates and the related lease or sublease agree-ments identified in Schedule 2.1.2, constitute all of the real property used primarily by the Sellers in connection with the operation of the Assets and conduct of the Business.

2.1.2.2 There is no condemnation, eminent domain or similar Proceeding pend-ing against any of the Sellers or its Affiliates or, to the Knowledge of Sellers, threat-ened against any Sellers or its Affiliates affecting all or any portion of the Real Prop-erty.

2.1.2.3 To the Knowledge of Sellers, there are no unexercised Preferential Rights to purchase any portion of, or interest in, the Owned Real Property.

2.1.2.4 Sellers have (to the extent within their possession) made available, or will provide when available (in the Data Room or through electronic access maintained by the Title Company) to the Buyer, copies of the title reports or title commitments with respect to the Owned Real Property and the Business Unit B Leased Real Prop-erty and Title Exception Documents that relate to the Real Property.

2.1.2.5 To the Knowledge of Sellers and except as indicated on the title reports or title commitments with respect to the Owned Real Property and the Business Unit B Leased Real Property, no written notice from any Governmental Authority has been received by the Sellers concerning the actual or potential imposition of any special assessments on the Real Property.

2.1.2.6 There are no outstanding materialman’s liens or mechanic’s liens filed against any of the Real Property for work authorized or performed by or on behalf of the Sellers except for Permitted Encumbrances as set forth on any Title Reports or title commitments delivered to Buyer by the Sellers.


Section 3.1 Indemnification Provisions for Benefit of the Buyer. Each Seller shall, severally and not jointly, defend, indemnify and hold harmless the Buyer, its Affiliates, the Buyer’s and its Affiliates’ successors and each of their respective directors and officers (or Persons in any similar capacity if such Person is not a corporation) (each, a “Buyer Indemnified Party”) against and agree to hold each Buyer Indemnified Party harmless from any and all Losses incurred or suffered by such Buyer Indemnified Party to the extent resulting or arising from, or attributable to, any of the following matters:

(a) any breach or failure to be true and correct of any representation or warranty of such Seller under this Agreement or in any certificate delivered pursuant hereto [with certain exceptions];

(b) any breach of any covenant of such Seller under this Agreement [with certain excep-tions].

Section 3.2 Limitations of Liability. Notwithstanding the foregoing or anything herein provided to the contrary:

3.2.1 De Minimis Amount. No Buyer Indemnified Party shall make any claim for indemni-fication under Section 3.1 [with certain exceptions] with respect to any occurrence or matter (or any series of related occurrences or matters) relating to the Assets or the Business that involves total Losses of less than _____ hundred thousand dollars ($__00,000) (the “De Minimis Amount”) arising out of the same occurrence or matter (or any series of related occurrences or matters).

3.2.2 Threshold Amount. No indemnification shall be payable to any Buyer Indemnified Party pursuant to Section 3.1 [with certain exceptions] with respect to any occurrence or matter relating to the Assets or the Business, unless and until the total of all Losses for which the Sellers would otherwise have an indemnification obligation under Section 3.1 exceeds ___ million dollars ($__,000,000) in the aggregate (the “Threshold Amount”), whereupon the Buyer Indemnified Party may claim indemnification only for the amount of such Losses, or portion thereof, in excess of such Threshold Amount. For the avoidance of doubt, if the amount of Losses with respect to an occurrence or matter (or series of related occurrences or matters) exceeds the De Minimis Amount, the Buyer Indemnified Party may apply the total of all such Losses in determining whether the Threshold Amount has been met.

3.2.3 Maximum Amount. Notwithstanding anything to the contrary provided in this Agree-ment, [with certain exceptions] in no event will the aggregate indemnification obligations of the Sellers pursuant to Section 3.1 exceed ______ million dollars ($__________).

3.2.4 Disregard of Materiality Qualifiers. For purposes under this Article III of determin-ing whether any breach or inaccuracy of a representation or warranty has occurred, or the amount of Loss related thereto, in connection with the assertion of an indemnification claim under this


Article III, such determination shall be made without regard to any qualifier as to “material,” “ma-

teriality,” or “material adverse effect,” as expressly contained in such representation or warranty.

Section 3.3 Exclusive Remedy. The Parties acknowledge and agree that, subject to, the assumption

of the Assumed Liabilities in Section__ and the retention of the Retained Liabilities in Section__ , the

indemnification provisions set forth in Section 3.1, and the termination rights in Section__ contain, and

shall be, the exclusive remedies of the Sellers, the Seller Indemnified Parties and their respective Affiliates,

on the one hand, and the Buyer, the Buyer Indemnified Parties and their respective Affiliates, on the other

hand, with respect to the transactions contemplated by this Agreement. Without limiting the prior sentence

and except as otherwise provided in this Agreement, each Party hereby waives any claim or cause of action

pursuant to common or statutory Law or otherwise (including any claims under any Environmental Laws)

against each other Party and its Affiliates with respect to Losses of any nature whatsoever that relate to this

Agreement or are attributable to the Assets, the Business or the Assumed Liabilities, whether arising before,

on or after the Effective Time. Each Party agrees that the previous sentence shall not limit or otherwise

affect any nonmonetary right or remedy which any Party may have under this Agreement or otherwise

limit or affect any Party’s right to seek equitable relief, including the remedy of specific performance for

nonmonetary relief.

Section 3.4 Limitation of Damages. NOTWITHSTANDING ANYTHING CONTAINED TO

THE CONTRARY IN ANY OTHER PROVISION OF THIS AGREEMENT, THE PARTIES AGREE

THAT THE INDEMNIFICATION OBLIGATIONS OF EACH PARTY, INCLUDING OBLIGA-

TIONS FOR ASSUMED LIABILITIES AND RETAINED LIABILITIES, AND THE RECOVERY

BY ANY PARTY OR INDEMNITEE OF ANY LOSSES SUFFERED OR INCURRED BY IT AS

A RESULT OF ANY BREACH OR NONFULFILLMENT BY A PARTY OF ANY OF ITS REP-

RESENTATIONS, WARRANTIES, COVENANTS, AGREEMENTS OR OTHER OBLIGATIONS

UNDER THIS AGREEMENT, SHALL BE LIMITED TO ACTUAL DAMAGES AND SHALL NOT

INCLUDE OR APPLY TO, NOR SHALL ANY PARTY OR INDEMNITEE BE ENTITLED TO RE-

COVER, ANY INDIRECT, CONSEQUENTIAL, SPECIAL, EXEMPLARY, PUNITIVE OR OTHER

SIMILAR DAMAGES (INCLUDING ANY DAMAGES ON ACCOUNT OF LOST PROFITS OR

OPPORTUNITIES OR BUSINESS INTERRUPTION OR DIMINUTION IN VALUE) SUFFERED

OR INCURRED BY ANY PARTY OR INDEMNITEE, EXCEPT TO THE EXTENT SUCH LOSS-

ES ARE IN THE CONTEXT OF AND DEMANDED IN A THIRD-PARTY CLAIM.

DEFINITIONS

“Easements” means easements, licenses that are in the nature of easements (rather than in the nature

of leases), rights-of-way, servitudes, surface use agreements, leases (other than Real Property Leases), fran-


chises, permits and similar agreements granting the right to use real property for pipelines, utilities or other facilities or services necessary for the operation of the Business and the Assets.

“Encumbrance” means any mortgage, pledge, lien, encumbrance, encroachment, servitude, burden, charge, deed of trust or other security interest.

“Permitted Encumbrances” means and includes:

(a) liens for Taxes or other charges or assessments by any Governmental Authority to the extent that the payment thereof is not in arrears or otherwise due or is being contested in good faith and by appropriate proceedings; provided that: (i) no lien will attach to any of the Assets during such contest; and (ii) such amount shall in all events remain the obligation of the Sellers;

(b) encumbrances in the nature of zoning restrictions, building and land-use Laws, ordinances, orders, decrees, restrictions or any other conditions imposed by or pursuant to any agreement with any Governmental Authority or other Person; provided, however, that the same individually and in the aggregate do not materially detract from the value of the Assets as currently used or materially interfere with the current operation or use of the Assets or the Business;

(c) any lien or title imperfection with respect to the Assets created by Buyer or resulting from any act or omission of the Buyer;

(d) the express terms of the Assigned Contracts, the Easements and/or any Encumbrances or title exceptions expressly set forth in [Schedule B/Schedule B-Section II of] the A/B Title Com-mitment or the A/B Survey or otherwise made available to Buyer by posting in the Data Room (with respect to real estate documents only, only those documents that are posted in the ascribed real estate folders in the Data Room numbered as ______________) or are described in any of the Schedules attached hereto;

(e) all agreements, leases, instruments, documents, liens, licenses, encumbrances or other title excep-tions that are described in any of the Schedules attached hereto, shown on [Schedule B/Sched-ule B-Section II of] the A/B Title Commitment or the A/B Survey, or posted in the Data Room (with respect to real estate documents only, only those documents that are posted in the ascribed real estate folders in the Data Room numbered as _________________) or through the electronic access maintained by the Title Company or are described in any of the Schedules attached hereto;

(f) undetermined or inchoate liens or charges constituting or securing the payment of expenses that were incurred incidental to the conduct of the Business and materialmen’s, mechanics’, repair-men’s, employees’, contractors’, operators’, warehousemen’s, barge or ship owner’s and carriers’ liens or other similar liens, security interests or charges for liquidated amounts arising in the Ordi-nary Course of Business incidental to the conduct of the Business, securing amounts the payment


of that is not delinquent and that will be paid in the Ordinary Course of Business or, if delinquent, that is being contested in good faith and for which a foreclosure sale of the Assets cannot occur within ten (10) days; provided that the Sellers shall be responsible for, and shall promptly pay when due, all amounts finally determined to be owed that are the subject of such contest;

(g) any Title Defect which individually involves less than _____ hundred thousand dollars ($__00,000) to remedy, excluding any Title Defects which relate to: (i) a valid and currently existing and enforce-able option to purchase, right of first offer or right of first refusal vested in a Third Party with re-spect to the Real Property; or (ii) lack of access to or from such Real Property;

(h) any matter of public record (other than real property records), including zoning laws, which Buyer could have discovered through the exercise of reasonable due diligence;

(i) any liens or security interests created by Law or reserved in leases, easements, licenses, rights-of-way or other real property interests for rental or for compliance with the terms of such leases, easements, licenses, rights-of-way or other real property interests, provided payment of any debt se-cured is not delinquent or, if delinquent, is being contested in good faith in the Ordinary Course of Business with any action to foreclose or attach any of the Assets on account thereof properly stayed;

(j) all defects, irregularities and Encumbrances that are: (i) imposed by the terms and conditions of any Permit affecting the Business; (ii) imposed by the terms and conditions of any Transaction Document; or (iii) waived in writing by Buyer; and

(k) all Encumbrances that will be released or removed at or prior to Closing; and

(l) any Title Defects which are not objected to by Buyer pursuant to Section 1.3.1.3. provided, however, that none of the foregoing clauses (a) through (i) shall include Encumbrances relating to or securing indebtedness for borrowed money.

“Title Policies” means Owner’s Policies of Title Insurance on the form customarily used either in the State of Texas or the state in which the Business Unit C Real Property are located as of the Closing Date (naming the Buyer as the insured) and insuring that, after the Closing, the Buyer has fee simple title to all of the Owned Real Property, subject only to the Permitted Encumbrances, and a valid leasehold interest in all of the Leased Real Property.

Appendix 3

Notes on Appendices1. Appendices contain selected language adapted from two PSAs from non-real estate M&A transac-

tions. Both were “bid deals” in which due diligence was to be completed before the buyer submits its “highest and best” bid. Appendix 1 is for an entity transfer and Appendix 2 is for an asset transfer.


2. Appendix 1:

a. Section 1.1: Some of the property needs to be stripped out of the entity (the “Company”) prior to closing. The Seller or an Affiliate will need to assume obligations relating to the assets being transferred. This isn’t necessary for an asset transfer transaction.

b. Section 2.1(a): Representation regarding all of the real property interests owned by the Com-pany. Buyers wants to know that these are the only real property assets of the Company. Con-trast Section 2.1.2.1 of Appendix 2 regarding these being all of the real estate assets being used primarily in connection with the Business.

c. Section 2.1(b): Representation regarding title to the Real Property. Contrast Section 2.1.1 of Appendix 2.

d. Section 2.1: Knowledge qualifier: Generally the “knowledge group” consists of high-level of-ficials who are unlikely to have much personal knowledge of the Real Property. Often this is tempered by a duty of reasonable inquiry.

e. Section 2.1: Permitted Encumbrances qualifier: See the very broad definition of Permitted Encumbrances.

f. Section 2.1(c): This is only representation regarding condition of Real Property, with a high Threshold Amount qualifier.

g. Section 3.1: Indemnification from Losses is the only remedy other than specific performance and injunctive relief, excluding indemnification regarding liabilities assumed by the Seller re-lating to assets stripped out of the Company.

h. Section 3.1: Losses is an aggregate concept as to all of the Assets and the Business. It is not property specific.

i. Section 3.1(b): De Minimis Amount: Losses below the De Minimis Amount are not entitled to any indemnification and don’t count toward the Threshold Amount. The De Minimis Amount is for each individual item or aggregated items that arise out of the same or related facts, events or circumstances.

j. Section 3.1(b): Threshold Amount: Aggregate Losses below the Threshold Amount are not entitled to any indemnification.

k. Section 3.1(b): Maximum Amount: Aggregate Losses above the Maximum Amount are not entitled to any indemnification.

l. Definition of Permitted Encumbrances: A. Stark contrast to the very specific approach in a typical real estate transaction. B. Subparagraph (b): Exclusion for laundry list of items that do not materially detract from

the value of the Property as currently used or materially interfere with the current opera-tion of the business of the Company. Note emphasis on “currently” or “current”.

C. Subparagraph (d): Items described in title commitments: This is typical of “bid deeds” where real estate due diligence is done before signing PSA. Buyer should have limited this to items in Schedule B (Texas) or Schedule B—Section II (ALTA).

D. Subparagraph (d): Items posted to the data room: Contrast subparagraphs (d) and (e) of the definition of Permitted Encumbrances in Appendix 2, which refers to specific places in the data room, where one would expect to find real estate assets.


E. Subparagraph (f): Any matter of public record: Contrast subparagraph (h) of the defini-tion of Permitted Encumbrances in Appendix 2, which excludes real property records.

3. Appendix 2: a. Section 1.1: In an asset deal, need to describe the assets being transferred. Note need to dis-

tinguish from the landlord’s and tenant’s interests in leases and the grantors and grantee’s interests in easements. Pipeline easement rights are very important to energy related assets.

b. Section 1.2: How to deal with leases, contract rights and the like that are non-transferable without consent of the counterparty. The “back-to-back” contract approach often used for material non-real estate contracts generally doesn’t work in the case of real property leases and easement rights that are non-transferable. NOTE: In entity deals, where the assets themselves are not being transferred, “change of control” provisions in underlying leases, easements and contracts often trigger a need to obtain consent of the counterparty.

c. Section 1.3: Title and survey matters: Different approach for certain assets for which title com-mitments and surveys had been obtained vs. assets added to the transaction shortly prior to the PSA and for which Buyer had some title objection rights (with limited termination rights).

d. Section 1.3.2(c): Here, Sellers and Buyer negotiated a division of the cost of the title policy premium, but they failed to clarify whether the split applied to the entire premium or only the premium for the base title policy. Division of cost for title insurance is typically negotiated and local custom does not play the same role as it does in typical real estate transactions. In the entity transaction in Appendix 1, there was no condition relating to issuance of title insurance and no agreement on the part of the Seller to bear any of the cost.

e. Section 2.1.1: No representation regarding title to Real Property and Easements. Here, the parties agreed to have title insurance and split the cost. No such provision in the entity transac-tion in Appendix 1 regarding title insurance, and a representations regarding title was viewed as necessary.

f. Section 2.1.2: Representation regarding these being the only Real Property interests used PRI-MARILY in connection with the Assets and the Business. Where Sellers retain assets in the general vicinity (or even adjacent), it is often difficult to determine in what business are they primarily used. Buyer wants to know that these are the only Real Property interests it needs to acquire in order to operate the Business. NOTE: In this case, the Sellers retained an adjoining tract on which they operated a business that was somewhat co-dependent on the line of busi-ness that was sold. Therefore, it was necessary to create a Reciprocal Easement Agreement for the myriad of easements back and forth that had never been documented.

g. Section 3.1: General indemnification provisions. Similar to Section 3.1 of Appendix 1. h. Section 3.2: Limitations on indemnification: Note that here, in contrast to Section 3.1 of

Appendix 1, the De Minimis Amount can be applied in determining whether the Threshold Amount has been reached.

i. Section 3.2.4: Materiality Qualifiers: Essentially materiality qualifiers are disregarded in de-termining the Buyer’s entitlement to indemnification. The higher the Threshold Amount, the easier it is for the Sellers to agree to dispense with the materiality qualifiers.

j. Section 3.3: Exclusive Remedy: Similar to Section 3.1(e) of Appendix 1. Note here that the parties specifically addressed environmental liability because these are energy-related assets.


k. Definition of Permitted Encumbrances: A. Subparagraphs (a) and (d): Liens for taxes and inchoate liens: Note the focus on absence

of a pending foreclosure sale. An item may be contested in good faith and yet the asset could be lost through a foreclosure proceeding.

B. Subparagraph (d): See comment re Appendix 1.

Appendix 4

Top Ten Reasons for Getting a Real Estate Lawyer Involved Early in Non-Real Estate Transactions

10. An early introduction provides ample time to understand the transaction and to identify and resolve issues.

9. An early introduction offers access and an opportunity to draft/revise the governing document to include relative terms/protections (to avoid “You repped to WHAT?”).

8. An early introduction permits you to ask for directions before you are lost in real estate Hades.7. At the outset, understand the import of the real property associated with the transaction and act

accordingly—you can avoid eating crow for dinner: “The real property is not really essential to the deal [oops]…..”

6. Title insurance, surveys, and timing really do matter. 5. You can impress clients with YOUR knowledge of relevant real property issues—or know when to

keep your mouth closed….4. Even if the real property is not “material,” clients can be exposed to significant, unplanned for li-

ability.3. Real estate lawyers will prepare or review/revise governing documents, real property conveyance

documents, title commitments and policies and due diligence—oh, my!2. Real property is a unique asset – real estate lawyers use appropriate due diligence to discover the true

value. And the number-one reason for getting a real estate lawyer involved early in non-real estate transactions….

1. We help make the firm good!

10. An early introduction provides ample time to understand the transaction, to identify and resolve issues.

When real estate lawyers are introduced to a transaction in its early stages, they serve a fundamental part in the project management of the transaction. Early involvement enables real estate lawyers to identify issues and to work quickly to resolve the issues or offer alternatives.

It is important for the real estate lawyers first to understand the nature of the transaction. The trans-action may involve, for example, an asset purchase, a stock/equity purchase, a merger, a conversion from one entity to another, the formation of a limited liability company or other business entity, or a joint venture. The transaction may involve a financing component where lenders are primarily focus-ing on the creditworthiness of the borrower or sponsor and the real property is merely part of the


collateral package. Conversely, the finance project could be for project development where the real

property may be integral to the transaction. Other non-real estate transaction scenarios may relate

to public/private partnerships, public offerings/private placements of equity or debt, or portfolio

purchases of underperforming loans/distressed debt.

Real estate lawyers can not only assist with all of these types of transactions, but also can help iden-

tify, based on the type of transaction, the importance of the real property involved in the transaction

and the nature of the due diligence appropriate to the transaction.

Experienced real estate lawyers who have been involved in non-real estate transactions understand

their supportive roles. Real estate lawyers will not try to convert the transaction into a real estate

transaction, because it is not, but will identify key issues which relate to the real property portion of

the transaction. Real estate lawyers may also analyze or approach the non-real estate transaction dif-

ferently than non-real estate lawyers and, as such, promote distinct roles and objectives for the trans-

action. However, real estate lawyers need to be, and generally are, aware of the clients’ approach to

the transaction in order to tailor their role and involvement accordingly.

Lead lawyers to a non-real estate transaction who recognize the distinct role of real estate lawyers as

part of the transaction team, utilize and incorporate real estate lawyers in the transaction. Real estate

lawyers may subtly tout their expertise and their value to a non-real estate transaction to non-real

estate lawyers.

9. An early introduction offers access and an opportunity to draft or revise the governing document to include relative terms/protections (to avoid “You repped to WHAT?”).

Real estate lawyers can assist in the drafting or revising of the governing document to include real

property-related terms and provisions. Real estate lawyers will determine the lead lawyer’s/client’s

overall approach to the transaction by reviewing key provisions of the governing document. In do-

ing so, real estate lawyers will become aware of the general format of the document, notice drafting

particulars (for example, if “materiality” is limited or defined in one provision so as not to repeat

materiality qualifiers in other provisions) and focus on the use of consistent terms.

Specifically, real estate lawyers understand representations and warranties and typical indemnifica-

tion provisions related to real property. They are guided by the type of transaction and the nature of

the real property. In certain transactions, buyers receive representations and warranties regarding the

current and past state of the target company (either from sellers in a stock purchase or from a target

in an asset sale or merger). On the other hand, sellers generally provide limited indemnification for

breaches of representations and warranties, and usually as the sole remedy for damages suffered by

buyers. Experienced real estate lawyers understand representations and warranties in essential real

property transactions and can offer reasoned responses to proposed representations and warranties.


In addition, real estate lawyers understand the relevance of various types and limits of indemnifica-tions relating to real property. For example, sellers may agree to indemnify buyers for any damages resulting from a real property-related incident, e.g., zoning violations. Real estate lawyers can ana-lyze assorted indemnification provisions and provide relevant insight. Such provisions may include de minimus thresholds (for example, no claim less than $10,000), deductibles or baskets for cumu-lative indemnification claims (no claims unless total of all damages exceeds $250,000); or caps on the overall indemnification claims (for example, sellers would have no liability greater than x% of the purchase price) — all of which can be scrutinized by real estate lawyers in connection with the transaction.

Real estate lawyers can expose nuances of the relationship between the realities of real property representations and warranties and the applicability of proposed indemnifications. In addition, real estate lawyers can assess the associated risks and offer guidance on balancing them.

Real estate lawyers can also advise on post-closing covenants, purchase price adjustments, and other portions of the transaction which include real property. In all cases, real estate lawyers should, and would, become acquainted with the tone of the governing document and draft appropriate revisions (incorporating defined terms, etc.) to the governing document for the non-real estate lawyers’ review. Non-real estate lawyers certainly can appreciate the practical approach of real estate lawyers who take the initiative to draft revisions in accordance with the tenor of the governing document. Such drafting would include any and all necessary real property provisions or revisions using consistent definitions and usage covenants and providing track-changes or compared versions of the governing document.

8. An early introduction permits you to ask for directions before you are lost in real property Hades.

Real estate lawyers understand that different levels of due diligence exist in assessing any real prop-erty connected to a transaction. In addition, real estate lawyers’ experiences permit them to recog-nize that different levels of due diligence may be required, based on the overall importance of the real property to the totality of the transaction. First and foremost, real estate lawyers work with lead lawyers and the client to evaluate and clarify the value of the real property and the significance of the real property to the transaction. Once the real property is evaluated, a due diligence plan, con-sistent with the import of the real property to the transaction, can be discussed and put into place. If the real property is “boot collateral” to the transaction, the depth of the due diligence may not be great. However, if the real property is a main driver in the transaction, then real estate lawyers would suggest a comprehensive due diligence plan. Similarly, if the time period allotted for due diligence is short, the real estate lawyers and lead lawyers may need to discuss an abbreviated due diligence plan and focus attention on the most valuable assets.

Real estate lawyers also offer critical value by identifying existing agreements which may affect the real property involved in the transaction. For example, consider the relevance of: financial covenants in current debt facilities which may restrict the use or transfer of the real property; commercial leases


which may prohibit the assignment of the interest therein without consent; and mineral rights or sur-face use agreements which may encumber the real property. Once identified, the real estate lawyers can advise on methods by which best to address and resolve related issues.

7. At the outset, understand the import of the real property associated with the transac-tion and act accordingly--you can avoid eating crow for dinner: “The real property is not really essential to the deal [oops]….”

Real estate lawyers will analyze the real property, whether owned or leased, and determine the level of due diligence necessary to reveal and assess real property matters. For example, real estate lawyers can evaluate and determine the importance of the real property to the business of a target company and assist in identifying the value that a buyer may ascribe to such real property.

Real estate lawyers can use the experience they have gained in dealing with different types of assets to assist in evaluating the real property which is subject to the transaction. Different types of assets may include energy assets (power generating plants, refineries, storage facilities, pipeline/gather-ing lines, transmission and distribution lines). Non-energy infrastructure assets, such as toll roads, transportation facilities, and stadiums/arenas are also subjects of typical real property transactions but may also be the subject of non-real estate transactions. Likewise, dealing with hospitals, surgical centers, medical office buildings and other health-related assets fall within the experience of many real estate lawyers.

Similarly, real estate lawyers also have familiarity with commercial leases and can offer insight as to the significance of leased property as it relates to a specific transaction. For example, real estate lawyers can identify and evaluate leases which contain change-of-control or anti-assignment provi-sions, landlord consent provisions where market rental rates may have dramatically moved since the original date of the lease, and sale-leaseback/leveraged lease situations where a landlord’s remedies may be more oppressive than a typical lease.

6. Title insurance, surveys [and timing] really do matter. Real estate lawyers understand the need for strong project management, including the necessary lead

time for due diligence related to the real property. Real estate lawyers have expertise in arranging for title insurance, surveys, and other due diligence items, and are cognizant of the lead time related to such items. Not only are real estate lawyers aware of the time involved in obtaining and reviewing title insurance commitments and surveys, but they also are aware of the need of explaining the ne-cessity of title commitments, title insurance and surveys. Real estate lawyers can coordinate the due diligence necessary to examine the real property and to identify (and resolve) substantive issues.

In addition, real estate lawyers will review and explain title issues which may be identified in title commitments and surveys and explain the impact of any such issues to the transaction, including the justification for obtaining title insurance. Also, real estate lawyers will identify, plan and coordinate due diligence and its timing, including resolution of any issues revealed by such due diligence. Their


experience permits them to incorporate the timing not only for the due diligence inspections, but also for

resolution of issues uncovered during the due diligence.

5. You can impress clients with YOUR knowledge of relevant real property issues—or know when to keep your mouth closed….

Because of their familiarity with real property transactions in general, real estate lawyers can break

down the real property aspects of a non-real estate transaction in a manageable and informative way.

Real estate lawyers view a “real property deal” with the same lens, regardless of whether it is pre-

sented as a traditional real property transaction or contained within a non-real property transaction.

Such view is tempered only by the significance, or lack thereof, that the real property plays in the

non-real property transaction. Based on their relevant experience, real estate lawyers will facilitate

discussions so that their clients outline the necessary steps and minimize timelines for due diligence

and other related actions.

4. Even if the real property is not “material,” clients can be exposed to significant, un-planned for liability.

Acquisition of real property assets, even if not material to the transaction, can expose a purchaser

to significant and unplanned for liability. For example, environmental issues affecting real property

can present significant and long-term liability to a purchaser. As such, real estate lawyers will work

with environmental lawyers on the team from an early stage to evaluate such potential liability. The

lawyers will discuss and inform their clients on the necessity for an environmental site assessment or

assessments, as the case may be. Part of any evaluation would include the past and present use of the

real property and any violations issued, whether or not cured, relating to the real property. Clients

need to understand the potential liability associated with contaminated properties, including the

need for a baseline date for both indemnification and liability purposes.

Similarly, acquisitions that involves leased real property may expose clients to significant liability. Ac-

cordingly, the term of each lease should be evaluated, as well as prohibitions contained in leases with

respect to transfer of the real property, use of the real property and other related issues.

3. Real estate lawyers will prepare or review/revise governing documents, real prop-erty conveyance documents, title commitments and policies and due diligence—oh, my!

Real estate lawyers are well equipped to handle all parts of a transaction. As discussed earlier, real

estate lawyers can review and revise, where necessary, key definitions and provisions of the govern-

ing document to address representations and warranties, covenants and conditions, and indemnities

related to the real property. Real estate lawyers may also prepare and review schedules containing

real property information, monitor the information received in due diligence and communicate reso-

lutions to discovered issues.


A non-real estate lawyer can rely on real estate lawyers to:

1. Prepare all real property-related documents, including:

(a) conveyance documents;

(b) assignment documents;

(c) leases, easements, licenses covering space/facilities that one party owns and the other needs the right to use; and,

(d) deeds, easements and the like to separate assets into those assets to be transferred and those assets to be retained:

(i) e.g., separating generating assets from transmission assets in connection with energy deregulation

(ii) e.g., separating assets of a line of business/products in a refinery/chemical plant from assets used for other lines of businesses/products

2. Advise in the context of possible corporate “moves” of the assets from one affiliate to another; and,

3. Advise on allocations of conveyance fees, transfer taxes, mortgage taxes and itemized taxes.

2. Real property is a unique asset — real estate lawyers use appropriate due diligence to discover the true value.

Real property is a unique asset which may be an important part of the value of a transaction, and matters discoverable with appropriate due diligence can significantly impact that value. Real estate lawyers appreciate and recognize the importance of due diligence. As such, real estate lawyers un-derstand the timing issues and will not permit the real property portion to delay the transaction. Real estate lawyers understand the consequences associated with the failure to plan and manage due diligence inspections and achieve resolutions. They are well versed in all aspects of a real property transaction and will ensure significant lead time for all real property matters.

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