In the recent years, the Polish retail properties market went through a difficult period. The coronavirus pandemic and the related social restrictions had a major impact on the financial results of shopping malls. In addition to that, the changing consumer behaviors contributed to a massive increase in online sales. However, the years 2022 and 2023 brought a gradual improvement of the situation on the retail market and, consequently, of the overall climate for investing in real property. Furthermore, alternatives to large shopping malls, i.e. smaller retail parks, have been enjoying growing popularity on the market for several years now; these are often located closer to residential areas and in smaller cities. This sector has been growing dynamically in terms of both volume and the share in the entire retail market in Poland.
Investors interested in purchasing real property on the retail market in Poland should take into account certain significant differences related to the process of acquisition versus standard real property transactions.
Selling such an atypical facility as a shopping mall requires taking into consideration the special nature of this type of transaction, as well as choosing the most optimal model for the transaction. The transaction needs to take into account that its object is a living and functioning organism. This means that the nature of the operations carried out in the shopping mall has to be taken into account, so that the buyer can continue these operations in an uninterrupted manner. This is justified with the interest of the buyer, who wants to acquire not only the right to the land and the building, but also an efficient shopping mall that generates a specific level of profit. This, in turn, is the main element determining the course of actions. That element should govern the structure of the transaction and the agreement of sale itself, without disregarding, however, the need to secure the rights of the buyer, as well.
As for the structure of a transaction of sale of a shopping mall, it should be pointed out that before the final agreement of sale is executed between the parties, several other stages of preparatory nature have to take place.
First, the parties sign a letter of intent specifying the fundamental parameters and the structure of the transaction, such as the duration of the selling process and the process of executing the agreements implementing the provisions of the letter of intent, as well as the price. Simultaneously, in that letter, the seller undertakes not to sell the real property to another entity for a specific period of time and not to offer the real property for sale, so as to make it possible to carry out the arrangements made by the parties and to finalize the process of sale. The signing of a letter of intent usually precedes the next two stages of the process. The first one of these is a due diligence of the entire shopping mall complex. This covers primarily a legal and technical analysis of the real property and the building. Furthermore, all of the issues and the documentation related to smooth functioning of the shopping mall, including but not limited to issues concerning the tenants, have to be analyzed. This aspect is related to another element of a commercial analysis of the object of sale or of a corporate analysis: a situation where the object of sale is an organized portion of a business or shares in the company that owns the shopping mall. Due diligence is highly important not only due to the fact that it allows the buyer to learn, in a comprehensive manner, about the status of the object of sale, but mainly because the result of this process determines whether the transaction will go ahead.
If the result of the due diligence process is positive, the next step is usually a preliminary agreement of sale. However, the market standard allows for changing the sequence of these stages, so that a preliminary agreement of sale is executed first, followed by due diligence.
As for the preliminary agreement of sale itself, it is an initial act binding the buyer and the seller, whereby the seller undertakes to sell the real property to the buyer on the terms and conditions specified in the agreement and the buyer undertakes to purchase the real property on these terms. The preliminary agreement of sale specifies in detail the object of sale, the price, the date by which the final agreement of sale is to be executed, and the conditions whose fulfillment will determine whether the preliminary agreement can be deemed to have been carried out, as well as the manner of fulfilling these conditions. What is more, this agreement lays down the rules of the transitory period, which is intended to ensure that the status of the object of sale remains unchanged, as well as the procedure to be followed if the status of the object of sale does change.
On significant benefit of executing the preliminary agreement of sale in the form of a notarial deed is the possibility of enforcing the execution of the final agreement of sale if the conditions for its execution have been fulfilled. Furthermore, this solution allows for disclosing, in the court documents for the real property, the claim resulting from the preliminary agreement of sale. This claim protects the rights of the buyer, virtually preventing the sale of the real property to a third party on the market until the term of the preliminary agreement of sale has expired. Consequently, it is crucial for ensuring the buyer’s legal certainty.
The contracting process is finalized by executing the final agreement of sale, which is the basis for transferring the rights to the shopping mall from the seller to the buyer and makes the claim for the payment of the price enforceable.
Specifying the terms and conditions of the transaction in an agreement is intended to ensure that the key interests of both parties are secured. In the case of the seller, those are (i) receiving payment for the real property sold, at the same time eliminating any forms of deferred payment, (ii) excluding or limiting the liability for the real property sold, both in terms of dates and subject matter, and (iii) shortening the duration of mutual financial settlements. For the buyer, these interests are (i) purchasing a smoothly functioning shopping mall that generates a specific level of profit and (ii) ensuring that there are no negative changes between the execution of the preliminary agreement of sale and the final agreement of sale and then between the execution of the final agreement of sale and the moment of handing over the real property to the buyer. Furthermore, the buyer’s interest also includes receiving from the seller a guarantee of revenues, allowing for maintaining a certain level of profitability of the mall that existed at the moment of making the purchase decision, that exists at the moment of executing the final agreement of sale, and that will exist for an agreed period of time following the acquisition of the real property.
For the entire structure of a sale of a shopping center, choosing the right object of sale is of fundamental importance since this translates to the form of the agreement that will allow the buyer to make the purchase. The classic way of making the purchase is direct acquisition of the real property. Another variant is the acquisition of an organized portion of a business that is related to running a shopping mall. These two variants are asset deals where the object of sale are specific assets of the seller. Irrespective of those, there is also the option to purchase all of the shares of the seller’s company that is the owner of the shopping mall and carries out operational activities (as long as this is an SPV that manages exclusively the object of the transaction). In such a case, the investor, as the buyer, does not become a direct owner of the shopping mall, but acquires control over it as the sole shareholder of the company owning the shopping mall. This is called a share deal.
The above variants differ not only in terms of the object of sale, but also with respect to the form of the agreement of sale and the form of taxation. If the object of sale is the real property, the parties are required to execute the agreement of sale in the form of a notarial deed and the tax applicable to this type of a transaction is, in principle, the value added tax (VAT), whose rate is currently 23%. Even if the conditions for exemption of the sale from the VAT are fulfilled, parties will often, for a number of reasons, including the possibility of settling the VAT paid and receiving a return of a potential overpayment, resign from this exemption and choose to have the transaction taxed. In turn, in the case where an organized portion of the seller’s business or shares in the seller’s company are sold, the agreement is executed in an ordinary written form with the signatures certified by a notary. In this case, there is no VAT—it is replaced with the tax on civil law transactions (PCC). If the object of the transaction are shares in the seller’s company, the PCC is 1% of the market value of the shares; in the case of a sale of an organized portion of a business, the rate is 2%. Unfortunately, the PCC is not subject to any tax settlement and has to be paid by the buyer directly to the relevant tax office, which often leads to choosing the acquisition of the real property as the preferred form of the transaction.
At the same time, it should be pointed out that the difference between a direct sale of real property (including the building of the shopping mall) and a sale of an organized portion of a business is very slight. The transaction being classified as either of the two could be determined for instance simply by the fact of the seller assigning to the buyer all of the agreements executed with suppliers of utilities and service providers. In turn, considering the significance of the consequences of incorrectly classifying the form of the transaction, especially in terms of the type of agreement of sale and the rules of taxation, the market standard is for the parties to apply for a tax ruling confirming that the standpoint of the parties is correct as regards the structure of the transaction and, as a result, the adopted form of taxation. Receiving a positive tax ruling that confirms the standpoint of the parties is, in principle, a prerequisite for finalizing the transaction as intended.
Other key aspects of an agreement of sale include:
- Forms of securing the payment of the purchase price—the parties usually agree for the funds to be deposited with a notary or, in the case of larger sums, use an escrow account.
- Limiting the seller’s liability—since the seller allows the buyer to carry out a full due diligence process with respect to the object of sale, the parties often exclude statutory warranty, agree on limitations to the duration of liability, or specify a cap for the amount up to which the seller is liable.
- Regulating the transitory period—the parties agree on the concept of a material adverse change, which often entails a decrease in the income on account of tenancy falling below a certain level or the loss of one of the key tenants, and regulate a potential situation where defects are found in the shopping mall, the costs of those defects exceed a specific sum, and certain agreed actions have to be taken with respect to the defects.
- Releasing the collaterals encumbering the real property—the parties agree that the seller will be required to obtain payoff letters from the bank that provides financing to the seller. These letters specify the terms of repaying the amounts due to the bank; once this has taken place, the bank is obliged to release the collaterals, which is done by means of release letters, and, in particular, to agree for mortgages to be removed from court documents.
- Transferring the rights under tenancy agreements—there is no need to specify an additional procedure in this respect since the buyer takes over, by operation of law, as the landlord. However, taking over as the landlord by operation of law will not entail an automatic transfer to the buyer of all of the collaterals established by the tenants; consequently, additional contractual regulations are required in this respect.
- Securing the possibility of a future redevelopment of the shopping mall and its repairs, as well as the use of the mall’s logo, which may be highly recognizable among consumers—the transfer of the seller’s rights to project documentation and logos should be covered by the agreement. Additionally, if the periods of the construction guarantees granted by the contractors who erected the building have not lapsed yet, the agreement needs to provide for their transfer to the buyer.
- Rules of financial settlements following the execution of the agreement of sale—the agreement of sale has to lay down the rules according to which the parties will settle the costs related to the functioning of the shopping mall and the rents paid by the tenants. This issue is especially important in a situation where the sale takes place in the middle of a calendar year. Depending on the nature of the rent, it is important to remember to regulate the rules of settling the rent by reference to the turnover, which is accounted for at the end of the calendar year. In turn, as for the costs settled on an annual or quarterly basis, such as the real property tax or the perpetual usufruct fee, it is standard for the parties to make financial settlements proportionally to the time for which they hold the specific rights to the shopping mall.
- Agreements concerning utilities and maintenance agreements—since a shopping mall is a living organism, there is a need for each current owner to ensure the supply of the relevant utilities and maintenance services. In this respect, the parties carry out an assignment of these agreements (from the seller to the buyer) or decide that only some of these agreements will be assigned in order to ensure the supply of the key utilities and services to the shopping mall.
Clearly, therefore, a sale of a shopping mall is not only a major interdisciplinary challenge, covering areas such as finance, logistics, and operations, but primarily a legal project. The sale of such an unusual facility entails the need to agree on the terms of sale of the land and the building, but also requires for a number of matters to be regulated, including but not limited to the rules of transferring the collaterals for tenancy agreements, construction guarantees, the rights to logos and project documentation, and the agreements for the supply of utilities and for the rules in force during the transitory period to be specified—these apply to the financial settlements with the tenants and the costs incurred in connection with the real property being sold. Precisely regulating all of the necessary aspects related to the shopping mall that is being sold is a key element of the agreement of sale, as this agreement is the basis for providing the buyer with a means not only to efficiently take over a functioning mall, but also to continue the smooth operation of the facility.
By Mariusz Mielczarek, Attorney and Associate, KWKR Konieczny Wierzbicki and Partners