The Only Constant Is Change: Use of ‘Anticipatory Contracting’ in Real Estate Restructuring Deals
In life (as in business), as Heraclitus said, “the only constant is change.” In today’s fast-paced economy, this axiom should be kept in mind during contract negotiations, especially in a bear market.
Case law can be ambiguous, as it is constantly evolving and adapting to new situations, insights, and practices. COVID-19 may have been an unforeseen circumstance in leases (link in Dutch) (giving the tenant the right to demand rent deduction), but the same may not apply to a real estate investor who wants to renegotiate a purchase price. Whether COVID-19 is an unforeseen circumstance in a sale and purchase agreement (SPA) is yet unclear.
Therefore, present market circumstances call for “Anticipatory Contracting”, i.e., anticipating business risks, providing legal solutions during negotiations, identifying problems before they arise, and not relying on templates. Businesses should constantly assess and reassess the contractual risk-allocation (or lack thereof) during negotiations. We’ve seen a seller’s market changing into a buyer’s market almost overnight, between signing of the letter of intent (LOI) and signing of the SPA. Be conscious of that. And when one does commit – be it via an LOI or a more binding contract – exposure should be hedged before committing. Dated templates used in previous transactions may not cover all eventualities.
Here are three concepts to consider in this respect:
Material Adverse Change clause (MAC clause): not all SPA templates in the Dutch Real Estate industry contain a MAC clause, use of which may provide a general safety net for parties who want to allocate the risks presented by negative business or economic developments that occur between the signing and closing of an agreement. But a MAC clause is a double-edged sword, as the other party may use it to get out of the deal.
Stipulate specific situations that do not qualify as legal grounds for either party to abort the transaction or change the conditions.
Consider hedging or insuring certain foreseeable risks, such as interest rates and building costs. Liabilities can be insured (W&I insurance). And M&A insurance advisors/brokers can advise how to structure securing insurance. The financial and insurance products available today are sophisticated and geared to real estate industry demands.