Organizing the transformation and spin-off of corporate real estate with legal certainty

When real estate portfolios are to be transformed or spun off, the economic success depends heavily on the legal preparation. Complex legal issues often arise, particularly when industrial or commercial sites with interlocking uses that have developed over many years are involved.

Commercial and industrial locations are subject to far-reaching transformations due to the realignment of business areas, changes in production and logistics processes and adapted uses. As a result, such real estate portfolios are often reorganized and individual parts of the property are sold. Individual company locations or parts thereof are also regularly affected when parts of the company are spun off.

This often does not involve a complete withdrawal from the sites. Often only parts of a site are affected. The seller and acquirer are then neighbors in the future and use individual site facilities together. Sometimes the divested property must continue to be used and leased back by the seller, either in whole or in part, at least for a transitional period. Such sale and leaseback arrangements are at least as common as the sale and leaseback to mobilize capital previously tied up in the company’s own properties.

An early analysis opens up room for maneuver and accelerates the transaction process. Here are the most important points that should be considered when spinning off real estate portfolios:

1. clarify shared uses and mutual dependencies

If only part of a site is affected, it must first be clarified to what extent the part of the property to be spun off or the facilities and equipment on it must continue to be used by the seller or its group companies. It is also conceivable that the subsequent acquirer will have to use areas, facilities and equipment on the remaining property. Furthermore, it must be carefully examined to what extent there are technical and legal dependencies between the part of the property to be transferred and the remaining property, possibly also to neighboring properties. Joint access roads, supply and disposal lines, access security, technical installations such as for building management systems, alarm and fire alarm systems, parking spaces, possibly even uniform supervision by a plant fire department with corresponding conditions in the building permits, may be considered.

On this basis, a decision must be made on the future necessity of rental agreements or usage and licensing agreements and a concept for the necessary separation and self-sufficiency measures must be drawn up at the beginning of all considerations regarding the transformation or spin-off of company real estate.

2. necessary separation and self-sufficiency measures design

The real estate area sold and any remaining property must be technically and legally functional and usable in its own right. As a rule, the aim is to achieve the greatest possible physical separation (e.g. through structural measures, the creation of separate access roads and supply and disposal facilities). In practice, however, these measures are often very cost-intensive or technically difficult to implement.

When determining the object of purchase, the parties should already find out whether expensive self-sufficiency measures can be reduced by cleverly tailoring the property. Above all, the extent to which legal agreements are sufficient to ensure the functionality of the parts of the site should be examined. Property law offers numerous possibilities for the appropriate regulation of rights of use and toleration rights (such as access and access rights, pipeline rights, etc.) as well as continuing ongoing obligations (such as operating and maintenance obligations for systems and facilities, waste disposal obligations, etc.) and their protection in rem.

3. analyze necessary adjustments to existing permits and official requirements

The planned measures and changes of use must be permitted under building law. Previously approved uses may also no longer comply with the original approval status following a transformation or spin-off of parts of the property. In this case, new permits or changes of use must be applied for. In particular, building permits, including spacing requirements, fire protection requirements, proof of parking space and immission control permits must be checked. If there are cross-site environmental requirements, for example for the remediation of contaminated sites or for groundwater monitoring, or benefits through exemptions, it should be clarified whether and to what extent these obligations or authorizations can be transferred to a purchaser.

4. sensibly allocate implementation responsibilities and costs

Once the necessary structural, technical and/or organizational measures for self-sufficiency have been determined, it must be decided who is to implement them and bear the necessary costs. This should be determined on a measure-by-measure basis, taking into account the interests and implementation competence, future (joint) uses, technical feasibility and any purchase price discounts, etc. Possible obligations to cooperate and tolerate on the part of the other contracting party (e.g. access rights for the purpose of structural changes) must also be taken into account. In the case of sale-and-lease-back scenarios, it should also be clarified to what extent rent reduction rights and other tenant warranty rights due to impairments in connection with the implementation of specific measures are excluded. All of this should be well balanced so as not to unnecessarily burden the subsequent usage phase.

5. define timeframe for implementation of measures

Particular attention should also be paid to the timing of the implementation of the measures. In order not to delay the completion of the transaction, the implementation by the seller will generally not be a prerequisite for the due date of the purchase price or a condition for the transfer of ownership, benefits and encumbrances. If the measures are to be carried out after the transfer of ownership, access and usage authorizations, other toleration obligations and the legal consequences of default and non-performance must be regulated.

Individual contract design ensures successful implementation

The complexity of the points described above makes it essential to customize the contracts to be concluded. The parties should take into account the special features of the location, future dependencies and the planned use after the transformation or spin-off. A wide range of legal instruments is available to ensure that the individual obligations and, if necessary, in rem security, for example through easements, easements of title and encumbrances, are tailored and balanced. Furthermore, the legal consequences of possible breaches of duty should be clearly regulated. This creates a reliable basis that largely minimizes later points of dispute – for example with regard to obligations to cooperate and tolerate or in the event of delays.

By involving legal advisors experienced in this field at an early stage in the analysis and conception of the sale and, if necessary, leaseback transaction, the subsequent contract drafting can be efficient and targeted.

Conclusion

The transformation or spin-off of real estate portfolios that were previously used for commercial or industrial purposes requires forward-looking interdisciplinary planning that covers both technical and legal aspects. A careful portfolio analysis and a well-thought-out self-sufficiency concept prepared by the seller generally accelerate the due diligence and negotiation process considerably. Above all, they form the basis for an individual contract design that takes into account the interests of the seller and the future users of the site and ensures the long-term success of the transaction.