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The Role of the Real Estate Leasing Lawyer in a Merger and Acquisition Agreement with a Representations and Warranties Policy

Historically, whenever the targeted assets in a merger and acquisition transaction include leasing rights to real estate, a leasing attorney has the opportunity to provide valuable services to the client in that merger transaction. and acquisition. Leasing lawyers educate buyer clients on the current status of the leased real estate, transactions, rights, obligations and liabilities of the target and help them plot options after closing. When representing sellers, leasing attorneys help their clients respond to due diligence requests, evaluate and negotiate buyer-proposed seller representations, and develop the content of the disclosure schedule. For many years, these roles remained largely unchanged. Over the past decade, however, the growing popularity of representations and warranties insurance policies has prompted even the most secure leasing attorney to consider whether (and if so, how) his or her role changes if the merger and acquisition transaction in question includes an RWI. Politics.

This article provides an overview of the most commonly accepted purposes of an RWI policy and an overview of the RWI policy underwriting process. Next, a discussion ensues regarding issues that real estate leasing lawyers should be particularly mindful of in carrying out their role in such a transaction.

RWI Policy Overview

Generally speaking, an RWI policy provides a pool of funds from which the insured can obtain recovery if a seller’s representation and warranty in the purchase agreement of a merger and acquisition transaction is inaccurate and that inaccuracy hurts the buyer. In many cases, the parties to the M&A agreement have adopted an RWI policy to replace a holdback of a portion of the purchase price intended to provide the buyer with assurance that there are accessible funds. from which the buyer claims post-closing indemnity (if any) against the seller could be satisfied.

RWI policies allow either the buyer or the seller to be the insured, but currently it is more common for the insured to be the buyer. [For this reason, this Article will focus on a buy-side policy.] An RWI policy contains a set of conditions and other terms that determine if, under what circumstances and to what extent the insured can recover. And, the R&W underwriting process usually runs in parallel with the due diligence process of the M&A transaction.

Because an RWI policy depends primarily on the inaccuracy of a representation and warranty in the purchase agreement in question, RWI underwriters and their attorneys focus significantly on the language of these representations and warranties and on accompanying disclosure schedules. RWI’s underwriters and their attorneys are also seeking to discern whether it appears that the buyer and its advisers (including its real estate leasing attorneys) have conducted a thorough due diligence exercise and, given the nature of the purpose of the M&A transaction, otherwise appropriate and whether the seller appears to have responded appropriately to the buyer’s requests for due diligence.

With respect to an RWI policy in respect of which the purchaser will be the insured, RWI underwriters wish to obtain and review copies of the written due diligence reports of the purchaser and its professional advisers. In real estate leasing, it is common for these reports to include lease summaries and reference to any red flags that have arisen during these reviews (for example, if lease documents are missing, if any lease terms are expiring soon, or if any agreement-collection process seems cumbersome or may trigger reclamation rights from the landlord). In buy-side transactions, the buyer also grants the underwriter and its advisers access to the data room of the M&A transaction, so that the underwriter and such advisers can browse (or take a closer look) the documents that it contains. RWI underwriters also typically conduct an often lengthy conference call with the proposed insured, their advisors, and the underwriter’s attorney during which they discuss in a narrative manner the due diligence performed by the proposed insured, the results of those ci and the progress of the transaction and identify any material outstanding issues.

Overview of the subscription process

Typically, a buy-side RWI policy underwriting proceeds as follows: (A) the buyer engages an RWI policy broker who invites underwriters to bid on whether to underwrite the RWI policy, (B ) underwriters conduct an initial review of the then available draft agreement documents, financial statements and business overview of target and respond to this bidding opportunity, (C) buyer appoints one of such underwriters as the underwriter of the RWI policy and pays them a non-refundable underwriting fee, (D) the underwriter begins their review of the purchase agreement, disclosure schedules, data room and due diligence documents, (E) the underwriter guides the buyer and his advisers through this lengthy underwriting conference call, (F) the underwriter provides the buyer and his advisers (through policy broker RWI) with a list of q follow-up questions and, in many cases, a list of proposed exclusions to the policy, and (G) thereafter, all parties involved work to close these follow-up questions (including via review by the underwriter and his or her advocate for successive drafts of the purchase agreement and schedules and/or due diligence report updates) and negotiate proposed exclusions and, in some cases, other language in the RWI policy.

Tips for handling rental issues with an RWI policy

Real estate leasing lawyers performing their work on an M&A transaction involving an RWI policy should keep the following in mind:

  1. The “Agreement” is now comprised of two agreements: (a) the M&A Agreement and (b) the RWI Policy Negotiation. This reality may lead the leasing lawyer to meet more frequently with his M&A transaction manager and to have to switch gears between monitoring the M&A agreement (from one part) and the follow-up of the negotiation of the real estate conditions of the RWI police (on the other hand).
  2. When acting as a buy-side leasing attorney, remember that the RWI underwriter will focus on representations and warranties that are offered by the seller and that during the underwriting conference call you may be asked to describe what due diligence you performed for each specific representation and warranty to confirm that they were accurate. This reality may lead you to attempt to narrow down some of the representations offered and, with respect to the remaining representation, to ensure that you are actually performing due diligence on every statement that may be subject to due diligence. If the representations and warranties offered in the purchase agreement are broader than the due diligence you have performed, the underwriter may, after the underwriting call, seek to fill that gap with one or more follow-up questions. Or, Subscriber may propose that, for purposes of the RWI Policy, such non-diligent statements be deemed deleted. Worse still, the underwriter could offer an RWI policy exclusion on related liability.
  3. When you are a buy-side leasing attorney, when performing your due diligence, keep in mind that the RWI underwriter is more likely to consider the resulting written documents (such as your Q&A follow-up and due diligence from your law firm) as helpful and professionally drafted if you do not appear to have failed to follow up on due diligence questions that the seller has not fully answered. You will assist your client by fully answering as many questions as possible prior to the underwriting conference call, so that such a conference call does not become cumbersome or invite further scrutiny of your client’s due diligence exercise. . Underwriters are aware that some due diligence questions may not be answered by the time your written materials are produced (or even by the time of the underwriting call), but you should not take this as an invitation not to close. as many due diligence questions as possible before the underwriting conference call.
  4. Among the topics on which RWI policy underwriters focus most is whether it appears that the parties to the agreement will have obtained, at the time of entering into the M&A agreement, all consents to assignment or change of control. And, real estate leases are among the target assets that most often require an analysis of the consent to transfer/change of control and which require the obtaining of consents. Keep this in mind as you approach the subscription call, as you will likely be called upon to update the subscriber on how the consent analysis and collection process is going.
  5. Real estate inquiries from an RWI policyholder often include a few questions that are a bit more “business” than “legal”, and if you know they might be asked of your client, you can help your client to prepare to answer it. . Underwriters often ask if anyone on the buy side has visited the site and, if so, what was the visitor’s overall impression of the condition of the leased premises. Underwriters may also request a very brief overview of the general condition of inventory (if any), equipment and furnishings in the leased space.
  6. With respect to environmental due diligence, be prepared to provide the RWI policyholder with justification of the extent of due diligence that has been performed or, alternatively, why no such due diligence has been performed. As you can imagine, most underwriters are required to significantly limit potential hazardous materials exposure to the RWI policy. Moreover, the insurers for whom they underwrite policies almost certainly place great importance on these issues when they periodically check underwriters’ records. If you can respond in a professional manner (even if only briefly, for example in the case of leased space that is clearly used only for typical office purposes) to the underwriter’s questions regarding environmental issues, it will be probably appreciated.

Real estate leasing attorneys who perform a buyer-side due diligence exercise that is reasonably broad in scope to cover all desired seller-side representations regarding leasing matters, who professionally describe that scope and the results of that exercise during the underwriting conference call, and who assist the M&A Transaction Manager by answering any follow-up questions and negotiating resulting exclusions will greatly facilitate the client’s journey to closing the M&A transaction and placing in place the desired RWI policy.