Due diligence for real estate M&A transactions in India

Due diligence

Legal due diligence

Describe the legal due diligence required in the context of a real estate business combination and any due diligence specific to a real estate business combination. What specialists are typically involved and at what point in the transaction are the various teams typically brought in?

The legal due-diligence exercise primarily focuses on determining whether the seller has a clear and marketable title to the immovable property proposed to be acquired or that forms part of the real estate-related business combinations. A title search, typically for a period of 30 years, is conducted on the immovable property to ascertain the title flow of the property.

Additionally, the title search will also involve searching for litigation, winding-up petitions or insolvency petitions or any acquisition proceedings or any restrictions under government directions on the immovable property or the seller from the available records. In cases of the purchase of a company by the purchaser, legal due diligence is also undertaken to cover the aspects related to the seller’s corporate structure, business compliances, approvals and permits, existing key or material agreements, intellectual property rights, financing arrangements, employees and litigation to which the seller is a party.

Other than the lawyers, the legal due diligence experts involved, particularly in real-estate transactions, are technical consultants to review the approvals and to physically check compliance of the construction with these approvals, and tax consultants to assess the most beneficial structure of that acquisition. Most of the diligence experts are usually involved after signing of the non-binding agreements or term sheets.

Searches

How are title, lien, bankruptcy, litigation and tax searches typically conducted? On what levels are these searches typically run? What protection from bad title is available to buyers, and does this depend on the nature of the underlying asset?

Typically, a title search of a property is undertaken by reviewing the records maintained by the revenue authorities concerning the title of the land. Further, searches are also conducted in the office of the sub-registrar of assurances to verify the registration status of the title documents through which the title of the land has been transferred. Regarding the lien or charges on an immovable asset owned by a company, a search is undertaken on the online records maintained by the Ministry of Corporate Affairs to verify any charges registered by the company. Concerning bankruptcy and litigation, there are no central repositories that exist at this time. To check any litigation on the seller of the property, a search can be conducted on the websites of courts that have an online judgment information system.

Further, under the Insolvency and Bankruptcy Code 2016 and the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations 2017, public companies registered as information utilities with the Insolvency and Bankruptcy Board of India are empowered to accept and maintain records on the debts and liabilities of persons, assets over which security interests have been created, balance sheets and cash-flow statements, and records of default, among other things, from financial and operational creditors.

If the purchaser is unsure as to whether the seller has a clear and marketable title to the immovable property, the purchaser may consider mitigating the risk by asking the seller to rectify any discrepancy in the title before its transfer to the purchaser, or the purchaser can take indemnities from the seller.

Representation and warranty insurance

Do sellers of non-public real estate businesses typically purchase representation and warranty insurance to cover post-closing liability?

Warranty and indemnity insurance is uncommon in India and is mostly availed in instances involving offshore transactions. Further, premiums for such insurance are also high.

Review of business contracts

What are some of the primary agreements that the legal teams customarily review in the context of a real estate business combination, and does the scope vary with the structure of the transaction?

Some of the primary issues that legal teams scrutinise in real-estate transactions concerning immovable properties include the:

  • review of title documents and the flow of title, including the revenue records maintained with the local registrars;
  • payment of government and municipal dues;
  • review of the financings including all security documents to check if the immovable property has been encumbered;
  • regulatory licences or permits restricting or regulating the transfer of title;
  • underlying maintenance or other service contracts, if any;
  • contract related to the maintenance of the plant and machinery installed in the property; and
  • determination of the amount of stamp duty and registration fees payable in relation to the lease deed.