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Home | News & Case Studies | Property Corporate Wrapper Transactions: Process, Pitfalls and Practical Insights
By Dov Black, Head of Corporate and Avi Barr, Head of London Property and Secured Lending
The acquisition of property through corporate vehicles, commonly known as corporate wrapper transactions, continues to be a popular structure in real estate deals. This approach offers potential tax advantages and flexibility for future disposals, but requires careful navigation of both corporate and property law considerations. In this article, we examine the key stages, potential pitfalls, and practical considerations from both corporate and property perspectives.
Understanding Corporate Wrapper Transactions
A corporate wrapper transaction involves the purchase of shares in a company that owns real estate, rather than directly acquiring the property itself. This structure can offer stamp duty land tax (SDLT) savings compared to a direct property purchase, as share purchases attract stamp duty on shares at 0.5% of the total consideration rather than the higher SDLT rates applicable to property transactions.
Key Stages in the Process
Initial Due Diligence
From a corporate perspective, comprehensive due diligence on the target company is essential. This includes:
- Review of corporate documentation, including articles of association, shareholders’ agreements and the target company’s statutory registers and Companies House filings. A key point in the corporate due diligence is evidencing that the seller or sellers have full title to the shares in the target company which are being sold and that there are no third parties who might claim to have a right to any shares in the company’s capital.
- Investigation of any other assets or liabilities which the target company may have other than in respect of the property. This could include, for example:
- Contractual liabilities and obligations.
- Liabilities to current or past employees.
- Tax liabilities.
From a property angle, key considerations include:
- Title investigation and property specific searches
- Raising enquiries with the outgoing shareholders
- For occupied properties, review of occupational leases and tenant covenants
- Environmental risks and planning permissions
- Reviewing any existing loan documents
Transaction Structure and Documents
The sale and purchase of the shares in the target company is undertaken pursuant to the terms set out in the share purchase agreement (commonly referred to as the SPA). The SPA will include:
- Details of the purchase price, any adjustments to be made to this (for example, a completion accounts adjustment) and how and when this is to be satisfied.
- Provisions in terms of completion of the transaction and, where relevant, provisions dealing with the period between exchange and completion. In contrast to property deals, most share purchase transactions proceed on the basis of a simultaneous exchange and completion.
- Warranties and, where appropriate, indemnities in respect of the target company, its business and assets.
- A tax deed of indemnity to address historical tax liabilities.
- A limitations schedule which will set out agreed limits on the seller’s liability under the warranties, indemnities and tax covenant.
Alongside the SPA, a share purchase will also require a number of ancillary documents which will need to be agreed and signed up for completion, for example:
- There will usually be a disclosure letter prepared by the seller’s solicitors formally disclosing matters against the warranties, this is one of the key ways in which a seller will protect themselves from future claims.
- Any existing security over the target company will generally need to be released and the existing lender asked to provide a deed of release to evidence this.
- Stock transfer forms are required to legally effect the transfer of the shares.
- There will usually be letters of resignation to change the directors of the target company, notifications on changes to its PSCs (persons with significant control), waivers of claims given by the sellers and board minutes to approve the various transactions.
- Solicitors’ undertakings will be agreed between the lawyers acting for the seller and the buyer to deal with the flow of funds on completion which may include dealing with cash in the company which it is agreed will be added to the purchase price and/or using part of the consideration to pay off third party loans or director loans.
Property considerations include:
- Property specific warranties and indemnities which may need to be included in the SPA.
- Review of lending security arrangements (it is often the case that where personal guarantees have been given that lenders require replacement personal guarantees from the incoming shareholders)
Common Pitfalls and How to Avoid Them
Corporate Risks
The key point to bear in mind when undertaking a corporate wrapper purchase is that you are buying the target company “warts and all” together with all and any assets or liabilities it might have. This is why it is important to carry out full corporate due diligence and to negotiate appropriate warranties and indemnities in the SPA to set out who bears the risk in respect of both any identified risks and also any unknown risks.
Other corporate issues which may be of relevance include:
- Structuring the purchase price – where you buy a company you effectively buy a balance sheet position as at the date of completion. Whilst probably more relevant when purchasing a trading company, it may be appropriate to include an adjustment to the headline price by reference to the cash, debt and level of working capital in the target company as at completion.
- Taxation issues – it is important that any buyer seeks proper tax advice both in relation to the structure of the deal and to the financial due diligence and investigations in respect of the target company’s tax affairs. As lawyers, we would anticipate the tax advisors wanting to review and have input into the SPA. Tax advice is also important for a seller.
- Risk between exchange and completion – share purchase transactions are usually exchanged and completed simultaneously as having a gap between exchange and completion raises issues as to what happens if there is a material change to the target company’s assets or business between exchange and completion. Whilst this is obviously usually less relevant where the only asset held by the company is a property, it is something which may still need to be considered.
- Change of control provisions in key contracts – this is something which will be investigated as part of the corporate due diligence. Depending on the importance of the contract, third party consent may need to be sought as a condition to completion.
Property Specific Risks
- Title defects: These may be harder to remedy in a share purchase as indemnity insurance is harder to obtain where there is no property purchase
- Environmental issues: Historical contamination liability remains with the company
- Tenant defaults: Where the company is deemed to have waived breaches, the incoming shareholders will be bound by the company’s actions
- Planning breaches: Outstanding enforcement actions or conditions
Practical Considerations
Due Diligence Coordination
Success depends on close coordination between corporate and property teams. Our experience shows that early identification of potential issues allows for appropriate structuring of the transaction and warranty or indemnity protection. We also always recommend introducing suitably skilled and qualified accountants to handle the financial and tax due diligence elements as early as possible. The early involvement of the professional team allows sufficient time for thorough enquiries to be raised and the replies to be properly considered.
Tax Structure
Early tax advice is crucial to ensure the structure achieves intended benefits while managing risks.
Case Study
The BBS Law corporate and property teams acted for an existing client on a corporate wrapper transaction in respect of a target company holding a freehold commercial property which was subject to an occupational lease.
Our due diligence exercise identified that the target company held a second property which our client did not want to purchase and which the seller therefore agreed to transfer into its own name. In order to ensure that our client did not inherit any historic liabilities in respect of this second property, we included specific indemnities in this respect in the SPA.
The deal proceeded on the basis of a split exchange and completion as our client wanted to secure planning permission for the site before proceeding to completion. Due to delays in achieving planning, there were several extensions to completion requiring a number of variations to the SPA before the transaction completed, over a year after the date of exchange.
As is common on a share purchase transaction, the seller wanted to include excess cash in the target company as part of the purchase price. We therefore agreed undertakings and a direction letter with the seller’s solicitors to allow monies in the target company to be used to fund part of the completion proceeds.
During the period between exchange and completion, the client secured funding for the completion payment and the corporate and secured lending teams therefore needed to work closely together to ensure that funding was in place once planning was achieved, and the client was ready to complete.We were pleased to bring this matter to a successful conclusion for the client and to be able to use our knowledge and expertise to navigate a number of roadblocks along the way.
Conclusion
Corporate wrapper transactions require careful navigation of both corporate and property law considerations. Success depends on thorough due diligence, appropriate structuring, and close coordination between advisers. Early identification of potential issues allows for appropriate risk management and protection mechanisms to be put in place.
While these transactions can offer significant advantages, the complex interplay between corporate and property elements requires experienced legal guidance to ensure both immediate and long-term objectives are met.
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