Acquisition of real estate

01-06-2024

Acquisition process

Offer / Accept

If a buyer wishes to engage with a seller for a potential purchase, this usually happens in the form of an offer letter, where the details of the deal, such as price, timeline and transaction structure are presented. The bidder may at this stage also include certain preconditions for the deal. In certain instances, several rounds of bidding and negotiating takes place before the bid is accepted.

Unless explicitly stated otherwise in the offer, an accepted offer legally obliges the parties to complete the deal. Offers therefore usually specify that a letter of intent (LOI) is signed between the parties which is subject to a satisfactory outcome of the due diligence, a signed sales and purchase agreement (SPA), obtaining of all internal/external approvals and the execution of the deed of transfer.

Due Diligence

Once the LOI is signed by the parties, the buyer, assisted by its advisers, will normally carry out a due diligence process, based on documentation and information provided by the seller. This review includes a physical due diligence where the seller instructs building surveyors to examine the property and report on the technical/environmental condition of the building. The due diligence may uncover circumstances that may lead to increased operating costs, which is something the buyer will use in negotiations concerning the final purchase price.

Next to the technical due diligence, a legal due diligence is normally also carried out. Lawyers instructed by the buyer assess any legal liabilities that need to be addressed in the sale and purchase agreement. Legal due diligence typically involves the following steps and aspects:

• Reviewing the title deeds and cadastral records of the property to verify the ownership, boundaries, encumbrances, easements, and any other rights or obligations affecting the property. The buyer’s lawyers also check for any pending or potential disputes, claims, or litigation involving the property or the seller. From the Land Registry, the buyer’s lawyers will verify the title of the seller to the property. Additional details of the registered interests then also need to be retrieved from the Land Registry.
• Verification of the applicable zoning and planning regulations to determine the permitted use, development potential, environmental requirements, and any restrictions or obligations imposed by the authorities. The buyer’s lawyers also verify the compliance of the property with the relevant permits, licenses, certificates, and approvals, and identify any violations, fines, or sanctions that may affect the property or the transaction.
• The buyer’s tax advisers assess the tax implications of the acquisition, such as the transfer tax, value added tax, income tax, and any other levies or exemptions that may apply to the property or the parties. Tax advisers instructed by the buyer will also advises on the optimal structure and timing of the transaction to minimize the tax burden and risks.
• Evaluation of the contractual arrangements related to the property, such as the lease agreements, service contracts, management agreements, insurance policies, and any other relevant documents.
• If the acquisition is structured in the form of a share deal, the corporate entity holding the asset will also be subject to due diligence.

The buyer’s lawyer prepare a due diligence report that summarizes the findings, conclusions, and recommendations of the legal due diligence, and highlights any significant issues, risks, or contingencies that may require further investigation, negotiation, or resolution. The due diligence period normally takes several weeks, which is dependent on the number of properties, the cooperation of the seller and the complexity of issues.

Sale and purchase agreement terms negotiations

At the end of, or in parallel with the due diligence period, the parties will negotiate the terms of the SPA. Some of the commercial and/or legal terms may already have been included into the LOI, subject to further detail and negotiation between the parties.

A SPA for commercial real estate properties in the Netherlands is a legally binding contract that sets out the terms and conditions of the transfer of ownership and possession of the property from the seller to the buyer. While a SPA for commercial properties can also be concluded by means of an oral agreement, the vast majority of SPAs are documented in writing. The SPA typically includes the following specific clauses, among others:

• Identification of the parties, the property, and the purchase price.
• Representations and warranties of the seller and the buyer, such as the legal status and authority of the parties, the title and encumbrances of the property, the compliance with laws and regulations, and the absence of defects or liabilities.
• Conditions precedent and subsequent, such as obtaining of financing, permits, approvals, or consents, the completion of due diligence, or the fulfilment of other obligations by the parties.
• Closing and delivery, such as the date, place, and manner of the transfer of the property, the payment of the purchase price, the adjustment of costs and taxes, and the delivery of the deeds and documents.
• Remedies and indemnities, such as the rights and obligations of the parties in case of breach, default, or dispute, the allocation of risks and liabilities, and the procedures for arbitration or litigation.

A general starting point for the SPA is the as- is-where-is principle, which means that the seller sells the property in its current condition and state, without any guarantees or warranties, and that the buyer accepts the property as such, with all its faults and risks. The as-is-where-is principle implies that the buyer is responsible for conducting a thorough due diligence of the property before closing, and that the seller is not liable for any defects or damages that may arise after closing. However, the as- is-where-is principle is not absolute, and the parties may agree to modify or limit it by including specific representations, warranties, or indemnities in the SPA, depending on the nature and circumstances of the transaction. Usually, the as-is-where-is principle does not apply to the title of the property nor in cases of willful misconduct or intent on the side of the seller.

Nowadays, due to economic circumstances sellers are facing more pressure and competition to attract and retain buyers in a challenging market. As a result sellers are willing to provide more generous representations and warranties to buyers in a SPA, even if they entail more exposure and obligations for the sellers.

There is no set period between signing and completing the transaction, which can also occur on the same date, depending on pre completion actions to be taken between signing and closing.

Completion – notarial system

Any transfer or encumbrance of real estate in the Netherlands requires the execution of a notarial deed, to be executed by a Dutch civil law notary followed by registration of the deed with the Land Registry.

A Dutch civil law notary is a public official who is appointed by the Crown and subject to strict professional and ethical standards. In principle, the notary acts as an impartial and independent adviser to both parties in a property transaction and ensures that the legal formalities and obligations are met. The notary also safeguards the interests of third parties, such as creditors, tax authorities, and the public. However, in a commercial real estate transaction it may occur that the notary is associated with the buyer’s lawyer and as such does act as a party adviser, which is only possible if the seller and the buyer agree to this concept.

One of the main tasks of the notary in a property transfer is to conduct Land Registry checks, which involve verifying the identity and authority of the seller, the legal status and description of the property, the existence and priority of any mortgages, easements, or other encumbrances, and the compliance with any zoning, environmental, or planning regulations. The notary also checks whether the seller is insolvent or subject to any bankruptcy, seizure, or attachment proceedings that could affect the transfer of the property.

Another important task of the notary is to ensure the payment of the purchase price and the settlement of any taxes, fees, or costs related to the transaction. The notary holds the purchase price in a special escrow account until the transfer is completed and registered with the Land Registry. The escrow account is held separately from the assets of the notary and is as such not affected by a bankruptcy of the notary. The notary pays the seller, the mortgage lender, and any other creditors or parties entitled to a share of the proceeds. The notary also pays the transfer tax (overdrachtsbelasting) and the Land Registry fees (kadasterkosten) to the tax authorities and the Land Registry on behalf of the parties.

The Dutch notarial system is widely regarded as reliable, efficient, and secure. The notary is liable for errors or omissions in the preparation and execution of the notarial deed and the registration of the transfer. The notaries are subject to strict ethical and quality standards, and are liable for any errors or damages caused by their acts. The civil law notaries also have a duty of confidentiality and a duty of advice towards the parties. The notarial acts and deeds are considered authentic and conclusive evidence of their content and validity, and are enforceable against third parties.

The notarial system aims to prevent and resolve any legal conflicts or uncertainties in the transfer of property, and to protect the interests and rights of the parties and the public. Furthermore, the notary is obliged to maintain professional indemnity insurance and to contribute to a collective guarantee fund that covers any claims or losses arising from the notary's activities. CMS has several corporate and real estate inhouse civil-law notaries, who are qualified lawyers and are also partner at CMS Netherlands.

Asset vs share deal – civil law aspects

As transactions in the real estate industry grow more complex, they require integrated services that cover legal, tax and notary aspects asking for specific advice. One such area is indirect real estate transactions by means of a share deal, a challenging legal field in which CMS excelled over the past years, offering integrated legal and tax advice.

Civil law aspects

Both a direct acquisition of the property (asset deal) and the acquisition of the share capital of the corporate entity entitled to the property (share deal) are a common manner to structure a real estate transaction in the Netherlands.

An asset deal requires the purchase and transfer of the right related to the property. Not many statutory requirements apply to the purchase agreement (e.g., the purchase agreement does not necessarily have to be in the form of a notarial deed). The actual legal transfer of the property is executed by signing a notarial deed on the transaction date. After signing, the civil law notary will register the deed with the Land Registry. In addition to an asset deal, real estate may also be acquired through the purchase of shares or interest in the legal entity that owns the real estate. The transaction will be effected by way of a share purchase agreement. Transfer of the shares takes place upon the execution of a notarial deed of transfer of shares, to be executed by a civil law notary. No registration at the Land Registry will be required.

Asset vs share deal – tax aspects

While an asset deal is the most common manner of acquisition in the Netherlands, a share deal is often initiated by a seller for reasons of tax optimization, which generally benefits the seller and/or the buyer.

General tax aspects (VAT/RETT/CIT)
Value Added Tax (VAT)

Asset deal

The direct acquisition of immovable property is generally VAT exempt. However, VAT at a rate of 21% is due:

1. on the supply of building land (i.e., land that has not been built on, but is apparently intended to be built on with one or more buildings);
2. on the supply of a newly developed property (i.e., a building that has not yet been used or is in use for less than two years);
3. on the transfer of rights in rem relating to a building land or newly developed property.

Parties can also opt for a VAT taxable transfer (which option can only be exercised if the property is used for at least 90% VAT taxable activities), which can be considered if a VAT adjustment period is pending. When opting for a VAT taxable transfer certain specific formal requirements should be taken into account.

Share deal

The indirect acquisition of immovable property by means of a share deal is not subject to VAT. The historical VAT position (e.g., pending VAT adjustment periods) will be continued and that VAT on costs in relation to the share deal may not be (fully) recoverable.

Transfer of going concern (TOGC)

The acquisition of immovable property in conjunction with the transition of one or more lease agreements generally qualifies as a TOGC for VAT purposes, provided that the buyer continues the operation of the immovable property by means of continuation of the lease(s). This means that such transaction is ‘out of scope’ for VAT purposes (i.e., it is deemed that no supply of goods or services takes place and no VAT becomes due). In the event of a TOGC, the historical VAT position (e.g., pending VAT adjustment periods) will be continued.

Dutch real estate transfer tax (RETT)

Asset deal

RETT is in principle levied on the acquisition of the legal title to and/or beneficial interest in immovable properties located in the Netherlands or real right (rights in rem) to such properties. The standard RETT rate is currently 10.4% (and 2% for owner-occupied dwellings), calculated over the fair market value of the property or – if higher – the purchase price. With regard to right in rem, the RETT base amount will be increased with the capitalized value of future payments (i.e., ground rent or user fees).

Share deal

RETT also becomes due in respect of the acquisition (or increase) of a substantial interest (i.e., an interest of 1/3rd or more) in a legal entity that qualifies as a real estate entity for Dutch RETT purposes. A legal entity with a capital divided into shares qualifies as a real estate entity for Dutch RETT purposes. If each of the following conditions are met at the time of the acquisition (or were simultaneously met at any point in time during the 365 days prior to the acquisition):

1. the assets of the company predominantly (>50%) consist of property (or shares in other real estate entities);
2. at least 30% of the assets consist of immovable property located in the Netherlands; and
3. the property is mainly (i.e., for 70% or more) held or used for development or exploitation purposes.

RETT exemptions

Dutch RETT legislation provides for several RETT exemptions (such as the RETT concurrence exemption and the exemptions for mergers, demergers, and internal reorganizations).

The RETT concurrence exemption (samenloopvrijstelling) generally applies for the acquisition of building land and newly developed property provided that:

1. the transfer of the immovable property is subject to VAT by virtue of law (see also under VAT / asset deal above); and
2. for properties used for VAT taxable activities: the acquisition takes place before or within 6 months after the first use of the property (i.e., before or within 6 months after the first occupation of the property or – if earlier – before or within 6 months after the lease commencement date); or
3. for properties fully used for VAT exempt activities (meaning that the acquirer is not entitled to any recovery of input VAT): the acquisition takes place before or within 2 years after the first use of the property.

According to the Dutch Supreme Court the RETT concurrence exemption also applies to share deals, provided that at the moment of the share acquisition the underlying immovable property qualifies as building land or as a newly developed building that has not been first used and that the concurrence exemption would apply in case of an asset deal.

Cancellation of the RETT concurrence exemption for certain share deals:

As part of future legislation, as of 1 January 2025 the RETT concurrence exemption will be abolished for the acquisition of shares in a real estate company. As a result, the indirect acquisition of building land or newly developed real estate will be subject to RETT at the new rate of 4%, calculated on the fair market value of the building land or new building(s). However, the concurrence exemption remains available if during the first 2 years after the share acquisition the underlying real estate is used for activities that entitle the owner (entity) to VAT recovery of at least 90%.

Dutch corporate income tax (CIT)

Asset deal

A realized capital gain on the sale of a property is subject to CIT at a rate of 19% up to a profit of EUR 200,000 and 25.8% for the excess. The realized capital gain is the difference between the fair market value and the tax book value of a property. After the purchase, the buyer can activate the property on its balance sheet for the purchase price. A property can only be depreciated to the floor value (i.e., 100% of the WOZ value, which is the value of the property yearly determined by the municipality). Depreciation can be applied if the book value of the building is higher than its floor value.

Share deal

A realized capital gain on the sale of a property is in principle exempt from CIT, provided that the participation exemption applies. As the buyer (at the level of the target) continues the lower book value of the property a hidden reserve remains for CIT purposes. This means the buyer is obligated to pay CIT in case of a future asset sale. In this respect it is common that seller and buyer negotiate a discount as compensation for the buyer’s deferred liability to pay tax. The discount is an outcome of negotiations between parties, although a 50/50 split is often agreed upon in the market. After the purchase of the shares, the buyer will activate the participation in the corporate entity at cost. With regard to the property, the buyer will not receive a step-up to the fair market value of the property. Therefore, the depreciation is based on the existing book value (within the aforementioned depreciation restriction for properties to floor value).

Acquisition costs: Required and typical fees

Acquisition costs payable may include:

Investment broker fees

These fees are be subject to negotiation, often a percentage of the purchase price. We further refer to the guide on agents: Guide to Agent Introductions.

Legal fees

Each party will cover its own legal fees. Legal fees are often pre discussed between parties. Different than in other countries, the fees charged by a Dutch civil law notary are not based on a fixed percentage of the purchase price and can be freely negotiated.

Stamp duty

The Netherlands does not levy stamp duty on the acquisition of properties or shares.

Land Registry costs

The Land Registry does charge relative low fees. Registration fees for a transfer or mortgage deed are EUR 165 (2024 rates).

Tax

As described above.