How to sell an industrial estate

Selling an industrial site is a crucial step for any business owner. It's not just about finding a buyer and agreeing a price - it's also crucial to choose the right form of transaction. The seller basically has two options: either to sell the property directly (an asset deal) or to sell a stake in the company that owns the property (a share deal). Both options have their advantages, disadvantages and legal specifics which can significantly affect the course and outcome of the transaction. In this article, we will explain the differences between an asset deal and a share deal, point out common mistakes real estate agents make and show how the right legal setup will save money, reduce risk and ensure a smooth transaction.

Author of the article: ARROWS (JUDr. Jakub Dohnal, Ph.D., LL.M., office@arws.cz, +420 245 007 740)

Asset deal vs. Share deal: What's the difference?

Asset deal means a classic outright sale of a property. The seller directly transfers the ownership of the industrial property to the buyer, who then becomes the new owner registered in the Land Registry. Simply put, the owner of the premises changes - the seller's company sells the asset (the premises) and the buyer (company or individual) buys it into his ownership.

A share deal, on the other hand, refers to the sale of the company (or a share in it) that owns the industrial estate. The seller does not transfer the property directly, but his shares or stock in the company holding the property. Thus, after the transaction, the legal owner of the property remains the original company, but its ownership structure changes - the buyer gains control of the company (typically 100% of the shares) and thus indirectly of the site. Economically speaking, the buyer is the new "owner" of the premises, as he disposes of the company's assets through his control of the company.

Example - difference in practice: imagine that Mr. Novák owns the company Novák s.r.o., whose only asset is the production area. The asset deal occurs if Novák s.r.o. sells the premises directly to the buyer (e.g. Investor a.s.) - Novák s.r.o. gets paid and the premises change ownership in the land register. A share deal would be if Mr. Novák instead sells 100% of the shares in Novák s.r.o. to Investor a.s. - Novák s.r.o. continues to own the premises, but the new owner of the company (and thus the premises indirectly) is Investor a.s.

Main advantages and disadvantages of the asset deal

In an asset sale, the property itself is transferred from the seller to the buyer. This entails several significant advantages and disadvantages from a legal and commercial point of view:

Simpler object of purchase

The object of the transaction is only the real estate. The buyer does not assume any obligations of the seller other than those directly related to the premises (e.g. the landlord's obligations under existing leases, easements, etc.) This gives the buyer the assurance that he is not buying a "rabbit in the bag" - he avoids hidden debts or problems of the selling company. Practically: if the selling company had other activities or debts, they stay with it and the buyer only deals with the purchase of the premises.

Direct ownership and control

The buyer becomes the direct owner of the property registered in the Land Registry. He does not have to deal with the structure of the seller's company or its management. After the transfer, the buyer has full control over the premises and can dispose of it according to his needs (run production in it, rent it out, sell it on, etc.) without any connection to the original company.

Administration and contracts

For simple transactions, the documentation may be less complex - a good property purchase agreement is sufficient. On the other hand, if related items (e.g. machinery, inventory) or contractual relationships (e.g. contracts with suppliers, project documentation) are transferred along with the premises, all this must be dealt with contractually. This may be several contracts or the sale of part of the business (plant) under the Civil Code. This complicates the whole process and requires careful preparation.

Tax implications for the seller

The income from the sale of the property is subject to taxation. The selling company will pay income tax on any profit (the difference between the sale price and the book value). A non-business individual may be exempt from income tax under certain conditions (e.g. if he/she has owned the property for more than 5 years). VAT: For the sale of premises, it is necessary to correctly determine whether it is subject to VAT or exempt from it. If the sale is exempt from VAT (typically for older properties after the time test has expired), the seller cannot potentially claim an input VAT deduction - this can be a disadvantage.

Time and transfer process

Ownership of the property only passes on registration with the Land Registry. Several weeks or months may elapse between the signing of the contract and the final entry (the Land Registry has statutory time limits). During this time, it must be contractually settled who bears the costs of running the premises, who collects any rent, etc. An asset deal therefore requires a certain patience and a thorough set-up of the conditions during the interim period. Previously, there was also a disadvantage of a 4% fee (property acquisition tax) payable on the purchase of the property - but this has been abolished as of 2020.

Liquidity of the seller's company

If the selling company has no assets other than the premises, it will be left with essentially only cash (the purchase price) and any small liabilities after the sale. The company itself no longer has a business or assets, and the owners often have to decide what to do with it - sometimes it faces liquidation or an empty company sale. While this is not a direct disadvantage of an asset deal, it is an aspect that the seller has to deal with (whereas in a share deal the seller passes the company and this solution on to the buyer).

The main advantages and disadvantages of a share deal

In a share deal, the shares of the company that owns the industrial property are transferred. This process is more akin to a traditional merger and acquisition (M&A) and carries different advantages and risks:

Complexity of the transaction

The object of the purchase is not just the real estate, but the entire company. In addition to the premises, the buyer takes over all other assets and liabilities of the company - including those unrelated to the premises. This is a crucial difference: the price may include, for example, the balance of accounts, the vehicle fleet or receivables and at the same time debts, liabilities from business contracts, employees, possible legal disputes, etc. For the buyer, this means a broader risk that needs to be carefully examined. On the other hand, the buyer acquires the company as a functional unit.

Maintaining continuity

The clear advantage of a share deal is that the company owning the property continues to exist without change - only the shareholder changes. All rights and contractual relationships associated with the property remain intact. For example, if there is a long-term lease running on the premises, the same company remains the landlord, just with a new owner. The same applies to any permits, licences or service contracts - there is no need to transfer them to the new owner. The buyer thus gets a "ready-made" structure: a company that has the necessary permits, history and relationships, which can facilitate further business (typically, the developer gets a company that it would otherwise have to set up).

Speed of transfer of ownership

Ownership of a share in a company usually passes at the time the share/share transfer agreement becomes effective. There is no need to wait for the Land Registry as the property does not change hands - the company remains the owner. This can save time and administration associated with the Land Registry. Note, however, that for the transfer of shares in an LLC, a formal decision and registration of the change of shareholder in the Commercial Register is required, which requires notarial registration. Even so, the change is often quicker than waiting for the land registry.

Tax and accounting effects

VAT does not apply to the transfer of shares (the sale of shares is not a taxable transaction for VAT purposes). Also, a previously key advantage - not paying tax on the acquisition of real estate - will no longer apply after the abolition of this tax from 2020. From an income tax perspective, a share deal can be beneficial for the seller if he meets the conditions for the exemption of income from the sale of the share (e.g. the company has owned the subsidiary for more than 12 months and has a shareholding of more than 10%, or the individual has held the share for more than 5 years). This means that the gain on the sale of the business may be tax-free in certain circumstances - a significant plus. Conversely, the buyer may appreciate in the future that by purchasing the business, they also gain its accounting history and can continue to depreciate the value of the property (not incurring a new cost of the premises as they would in an asset deal).

More complicated due diligence

In a share deal, a detailed legal, financial and tax due diligence of the company being bought is necessary. The buyer has to check the accounting, contracts, employees, litigation, technical condition of the premises, environmental burdens, etc. Risks hidden in the company can be contractually treated (e.g. by seller's guarantees, contractual penalty or price adjustment), but they have to be uncovered first. This will make the process longer and more expensive, as experienced lawyers, auditors and often experts need to be involved. Without this, the buyer may take over the company with a problem (e.g. a tax debt or defective title to the land).

The need for a good quality contract

A Share Purchase Agreement tends to be more extensive and complex than a real estate purchase agreement. It has to cover a wide range of areas - it has to define how the company's debts will be dealt with, what guarantees the seller gives about the state of the company, what will happen if hidden defects are discovered after the transfer (e.g. additional tax or legal dispute), and how the handover of the company will take place (e.g. handover of documentation, changes to the statutory bodies, etc.). All this again requires the involvement of lawyers specialised in commercial law and transactions.

Advantages for the seller

For the owner of the company (the seller), a share deal can be attractive in that he sells the company "with everything else" and does not worry about anything else. He gets rid not only of the real estate but also of any worries associated with the company. If the industrial estate was the only major asset of the company, the seller does not have to deal with the liquidation of the empty company - the buyer simply takes over. The seller will then collect the purchase price for the share and can focus on other projects. Of course, it must provide the buyer with warranties about the state of the company, but after the agreed period of time and if there is no breach of these warranties, the seller will "bail out" of the whole thing, both capital-wise and management-wise.

Why do real estate agents often flounder on share deals?

In practice, we find that real estate brokers tend to be experts in selling real estate, but selling entire companies (share deal) is somewhat outside their specialty. This can lead to mistakes if they try to sell an industrial estate in a share deal without sufficient knowledge. Where is the problem?

• Improper preparation of the transaction: the broker often advertises the property and prepares the terms of the sale as if it were an asset deal. However, in a share deal it should be made clear at the outset that the company is the subject of the purchase, not just the property itself. What is often missing is a Letter of Intent that sets the parameters of the transaction - for example, allowing the buyer to conduct due diligence and reserving exclusivity of negotiations. Without this, misunderstandings can arise: the buyer thinks he is buying the premises, but subsequently discovers that he is to buy the whole company, which he may take as a fundamental change in the situation.
• Underestimating due diligence and documentation: unfortunately, some brokers underestimate the due diligence of a company. They may say, " The company does nothing but own the property - there's nothing to deal with." But even a dormant LLC may have liabilities (e.g., outstanding loans, unfinished books, unresolved contracts with energy suppliers, potential environmental burdens on the property, etc.). Brokers also often do not have all the necessary documents - extracts from registers, financial statements, information on employees, etc. This does not give the buyer the full picture. Poorly set up contractual documentation is another risk: a one-size-fits-all share transfer agreement without detailed warranties and penalties can put both buyer and seller at risk in the future.
• Ignorance of legal obligations: the sale of a company entails various formalities that a broker may not be familiar with. For example, the general meeting of the company must approve the transfer of the shares (if required by the articles of association), the change of ownership is entered in the commercial register, and in the case of an a.s., any registered shares and their transfer must be dealt with. A broker is usually not able to arrange these steps - a lawyer or notary is needed for this. It happens that the broker brings the deal to the point of signing a simple contract, but does not ensure notarial entries or court notifications, and the deal is then tied up.
• Omission of other contexts: for example, contracts with third parties. In an asset deal, the seller may have to deal with third party consents to transfer certain contracts or licenses (if they are not automatically transferred). In a share deal, this is not the case, but again, the opposite may occur - some company contracts may contain change of control provisions that give the other party the right to terminate the contract if the ownership of the company changes. The broker is often unaware of such things, and unless a lawyer points them out, the buyer may be unpleasantly surprised after taking over the company (for example, an important customer terminates the contract because he or she does not agree to a change of ownership of the company).

In summary, a real estate agent is an expert in the real estate market, but the legal and financial aspects of a share deal may be beyond his or her competence. This is not a criticism - everyone has their own expertise. However, it is a mistake for a seller to rely solely on a broker for a transaction that is in the nature of a business sale. It is wiser to also engage an experienced attorney specializing in business transactions from the outset to complement the broker and oversee all the essentials.

How can a law firm help?

Involving a law firm from the outset of planning a sale greatly increases the chances of a smooth and safe transaction. Experienced attorneys can save both the seller and the buyer time, money and, above all, avoid risks. What exactly is their benefit?

Strategic decisions and deal structure

An attorney can help analyze whether an asset or share deal is more advantageous in a particular situation. They will take into account legal, tax and commercial aspects - and can sometimes recommend alternatives (e.g. selling part of the plant as a compromise). The important thing is to make the right decision before the offer to investors is launched and to adjust the next steps accordingly.

Legal due diligence

A law firm will provide a thorough legal due diligence of the property or company being sold. In the case of an asset deal, it will check in particular the legal status of the property - ownership, pledges, easements, construction documentation, environmental burdens, lease agreements, etc. In the case of a share deal, it will add a review of the entire company - corporate documents, contracts, disputes, employment contracts, accounting legal compliance, etc. The aim is to detect potential problems in advance. The attorney will then recommend how to deal with the findings (e.g. correct errors in the land registry, pay debts, clean up the company from non-core activities).

Quality contractual documentation

Based on the findings of the review, the attorney will prepare or revise contracts to protect the client as much as possible. For an asset deal, he or she will draw up a contract of sale for the property with a clear definition of the area to be transferred, the price, payment terms, the resolution of the period until registration in the Land Registry and guarantees for the condition of the property. For a share deal, it prepares a share/share transfer agreement that includes detailed representations and warranties of the seller on the condition of the company, provisions for indemnification (indemnification) of the buyer in case of latent defects, a mechanism for possible adjustment of the purchase price (e.g. according to the financial statements as of the date of transfer) and other necessary provisions. The lawyer will ensure that the contracts are in accordance with the law and the agreement of the parties and do not contain loopholes that could cause a dispute later on.

Management of the whole process and negotiations

A transaction for the sale of a premises can have many steps - from the initial agreement to the Letter of Intent, due diligence, arranging financing (if the buyer is taking out a loan), to signing contracts and settlement. A law firm can act as a project manager for the transaction - setting up a timeline, monitoring terms and conditions, coordinating with notaries, appraisers, banks or tax advisors. During negotiations with the counterparty, the attorney defends your interests - he or she knows where to push and where to back off to make the deal balanced. An experienced lawyer will also recognize potential "red flags" in the negotiations (e.g., the buyer's unwillingness to provide a deposit or suspicious delays) and advise on how to respond.

Safe settlement and transfer

Attorneys will ensure that the transfer of money and property or interest occurs safely - typically suggesting the use of a lawyer's escrow or notary's escrow for the purchase price. This ensures that the seller gets paid only after it is certain that the buyer will get what he has (registration in the Land Registry or Commercial Register). At the same time, the buyer does not risk sending money before acquiring the property. The lawyer will prepare all the proposals for entry in the Land Registry or documents for the Commercial Register and take care of their submission. After the deal is closed, he can help with other steps such as handing over the documentation, changes to contracts (e.g. amendments to lease contracts notifying the change of ownership of the property), etc. This ensures that the whole process runs smoothly and formally.

Stories from practice: when things are done right and when they are not

Story 1 - Selling without lawyers and a bitter awakening: the owner of a manufacturing site decided to sell the company that owned the site, relying only on the services of a real estate agent. The real estate agent found a foreign investor and negotiated the sale in the form of a share deal. However, without thorough due diligence and a good contract, the owner discovered after a while that the investor was withholding part of the purchase price. Why? After the takeover of the company, hidden debts came to light - the former company owed for the removal of past environmental burdens. However, there were no guarantees in the contract and no mechanism to resolve such matters. Therefore, the investor did not pay part of the price, citing the seller's breach of duty. The whole matter ended in a long dispute in which the owner lost a substantial sum. Lesson: If the seller had had a lawyer from the beginning, he would have insisted on proper due diligence and contractual treatment of environmental risks - either the price would have been reduced or the liability would have been resolved differently. Nothing would have prevented the deal, or it would have been better not to go through with it.

Story 2 - Smooth progress with legal support: Another client of ours, a company that owned a logistics facility, was considering selling. Together we analysed the situation and concluded that a sale by way of an asset deal would be more appropriate - the buyer was an investment fund that did not want to take over the operating company, just the property. The legal team prepared the transaction: we had an estimate of the price prepared, discovered a minor problem with the land area in the land registry (which we corrected before the sale), and negotiated an escrow account with the buyer for a secure settlement. The purchase agreement dealt in detail with the handover of the site and the allocation of costs pending the transfer. As a result, the transfer went smoothly - the buyer received a clean property with no legal defects and our client was paid the full purchase price on time. Both parties were satisfied and the deal went quickly, without any nerves or subsequent surprises.

Conclusion.

The sale of an industrial property, whether in the form of an asset deal or a share deal, is a complex process where the world of real estate and the world of commercial law meet. The decision on which path to take should be made taking into account all the legal, tax and commercial implications. As our examples show, underestimating the legal details can be costly. Conversely, with expert guidance, the optimal deal setup can be achieved - minimizing taxes and risks, while making the entire sale faster and simpler.

A law firm specializing in real estate transactions and acquisitions will provide invaluable support from the initial consultation to the final signings. Our experienced lawyers will help you choose the right structure for the sale, guide you through the jungle of legal obligations and negotiate terms that protect your interests. That way, you avoid unnecessary risks and the deal goes smoothly.

If you want to sell (or buy) your industrial site with the confidence that you won't forget anything important, contact us. We'll be happy to answer your questions, guide you through the process and ensure that your transaction is a success - with all the benefits that the right legal solution offers. Let the professionals help you and turn your deal into a worry-free success story!