The Give And Take of Receiver Sales
So far in 2017, we are seeing an increase in the amount of disposals by NAMA, banks and funds of distressed properties with a purchase price of between €2 million and €15 million. Many of these transactions will involve receivers acting as vendors.
Transactions involving commercial and residential property being sold by receivers often appear attractive as the price may be discounted compared to the open market value. However, it is important to be aware that certain potentially serious pitfalls exist when purchasing from a receiver. The following are some of the key issues to be aware of:
1. The Property is Sold “Warts and All”
A receiver will typically want to sell a property as quickly as possible. If there are issues with the property, a purchaser will inherit these and rectifying them will be a matter for a purchaser post-completion. This means that the property will be sold “warts and all”.
Problems may relate to key issues such as whether the title to the property is good and marketable.
Planning issues may also exist such as the presence of unauthorised development, unpaid financial conditions regarding planning permission (for which a purchaser is liable on completion) or no rights of way existing in respect of adjoining access roads.
Tax issues can also arise. For example, a transaction may trigger an unintended VAT liability on completion for a purchaser.
The worst case scenario for a purchaser is that issues regarding the property are not capable of being rectified post-completion and a purchaser cannot refinance or sell the property.
2. Aggressive Timeframes
A receiver will often insist upon (i) little time being granted to a purchaser to carry out their pre-contract due diligence and (ii) minimal time between signing and completion which further reduces the scope for a purchaser to find out important information about the property.
It is not uncommon for a purchaser to be allowed one week or less to complete pre-contract due diligence before insisting on contracts being executed and a further period of one to two weeks being allowed for completion.
The effect of this is that a purchaser and the relevant architect, tax advisor and solicitor have very little time to carry out thorough due diligence, which increases the risk of a key issue being overlooked or not satisfactorily being dealt with by a receiver.
A purchaser should do everything possible to resist any attempt by a receiver to impose unreasonable timeframes for pre-contract due diligence and insist that sufficient time is given to complete the due diligence process.
3. Receiver Lack of Ability or Willingness to Resolve Issues
Difficulties often arise as a result of a receiver not having historic knowledge relating to the property meaning that they are simply unable to provide responses to certain queries. This would not be the case if a purchaser was acquiring the property directly from the underlying borrower.
If a receiver is willing to address certain queries, it may be necessary to seek information or documentation from the underlying borrower. This may not be forthcoming as the underlying borrower may be hostile to the appointment of a receiver and will often refuse to provide any assistance.
Alternatively, even if a receiver has all the necessary information to hand, he/she may not be willing to respond substantively to queries as to do so could result in further queries and delays to the sale of the property, contrary to the instructions of the entity which appointed a receiver.
This often results in issues remaining outstanding with a purchaser having to decide whether to take the commercial risk to purchase the property and attempt to resolve same post-completion. However, such issues may not be capable of being rectified post-completion.
In deciding whether to proceed, a purchaser should note it is even further removed than a receiver from the original borrower and post-completion it will not have the ability to procure the borrower’s assistance in the same way as a bank or fund.
4. Satisfying Lender or Future Purchaser Requirements
If a purchaser is availing of third party finance, their lender will have to be satisfied with the position regarding the property in order for the monies to be drawn down.
If there are defects with the title to the property, the purchaser’s solicitor will have to qualify title which may mean that a lender is not willing to release funds on foot of this, resulting in the transaction being unable to complete.
This could leave a purchaser vulnerable to a loss of their deposit and even a claim for specific performance of the Contract for Sale.
In addition, receivers will not allow a provision to be included in the contract that completion is dependent upon a purchaser obtaining finance as this does not provide the transaction certainty required.
Even cash purchasers should keep in mind the old saying “the day you buy is the day you sell”. In other words, the property may appear to be good value but if post-completion it cannot be refinanced or sold, it is of limited value.
5. Reduced Purchaser Protection
A receiver’s legal advisor tends to remove many of the standard contractual protections contained in the Contract for Sale to reduce a receiver’s obligations and the protections available to a purchaser. For example, receiver’s solicitors often seek to include a provision that a receiver is not personally liable for any issues arising in relation to the Contract for Sale.
Therefore, a purchaser should resist such attempts by a receiver to include provisions in the Contract for Sale which allow them to opt out of key obligations and limit a Purchaser’s recourse.
While receivers often seek to impose aggressive timelines, provide incomplete information and documentation and remove the normal contractual protections, it is vital that purchasers push back on such measures and take steps to level the playing field.
A purchaser should (i) insist sufficient time be given for thorough pre-contract due diligence to be carried out, (ii) insist that a receiver provides adequate information, documentation and substantive replies to queries raised during due diligence and (iii) ensure the Contract for Sale includes appropriate provisions which protect a purchaser.
If a purchaser takes specialist legal, tax and planning advice from the outset, he or she will be fully aware of all issues and risks attached to the property. Armed with this information, he or she will be in a much better position to decide whether to proceed with the transaction.
This month’s blog was contributed by Chris Connolly, a Partner specialising in Commercial Property in Moran & Ryan, a boutique commercial law firm in Dublin. Chris can be contacted via email at firstname.lastname@example.org or call 01 8725622.
The views expressed in the posts and comments of this blog do not necessarily reflect the views of the Institute of Directors in Ireland. They should be understood as the personal opinions of the author. The content of this blog is for information purposes only and the Institute of Directors in Ireland is not responsible for the accuracy of any of the information supplied.