Due diligence for real estate M&A transactions in Poland

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?

In most cases the legal due diligence covers: the legal and factual status of the real property; the process of the construction of the buildings, together with all related contracts; regulatory issues (such as administrative decisions or zoning plans); contractual relations; environmental, employment and litigation issues; and insurance policies. In share deals, the legal due diligence also includes verification of all corporate issues and existence of change-of-control clauses. Regardless of the legal due diligence, it is a common practice that separate technical, tax and financial and sometimes also environmental due diligence is conducted by purchasers.

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?

Information on title to real property and encumbrances established thereon is disclosed in the land and mortgage register, which is publicly available and accessible online. To access this data, a specific number is required, which is typically disclosed by the owner in the due diligence process. The data on actual status of real property is also available in a separate land and building register, access to which is available only if a legitimate interest is proven (in practice, a power of attorney from the owner is submitted). As regards bankruptcy or liquidation proceedings, relevant information is disclosed in the publicly available National Court Register and verified each time. There is no public evidence of litigation or tax matters. Litigation issues are verified based on information and documents provided by the target, while tax and other public levies are checked with official certificates, which are issued upon filing a relevant motion.

In asset deals, protection from defective title is ensured through the principle of public credibility of real estate provided by the land and mortgage register, meaning that if the seller of the property is entered in the land and mortgage register as the rightful holder, it may effectively transfer title to the property to a good-faith purchaser even if, in fact, it is not the legitimate owner. Another instrument of protection is title insurance, which is commonly used in case a purchaser identifies some issues with the title (these are usually issues with previous acquisitions of the real property) and expects to be secured against existing or potential third parties’ claims.

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

In medium and large transactions, both representations and warranties insurance (typical for share deals) and title insurance (typical for asset deals) are standard in Poland. Representations and warranties insurance is applied with indemnification clauses (securing identified risks), while title insurance is commonly used if a purchaser identifies some issues with the title (these are usually issues with previous acquisitions of the real property) and expects protection against existing or potential third parties’ claims.

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?

The contracts reviewed within the due diligence process depends on type of real property involved in a transaction. For developed commercial properties (either warehouse, retail or office premises) it is typical to examine the following: agreements on historical acquisitions of the real property; lease, sublease or tenancy agreements; agreements (such as easements) establishing legal title to use service media; agreements with media and service providers; and other agreements concerning the property, such as a property and facilities management agreement. If applicable, these contracts may also include agreements on the establishment of a perpetual usufruct right, assignment agreements and any construction-related agreements, such as those with architects and those related to development. In hotel deals, in addition to agreements securing title to use the real property, management agreements, tenancy agreements and franchise contracts (particularly if the hotel is being operated under a third party’s brand) are also common. The contracts to be reviewed are similar in asset deals and share deals; however, some specific provisions are of particular importance in share deals, including change-of-control and assignment clauses.

Law stated date

Give the date on which the information above is accurate.

20 January 2021