What do commercial real estate lawyers do? In a sentence, they have to perform extensive research and fine-tune complex contracts to ensure they get the best deal for their client on a property or properties that could well be worth many millions of pounds,
Unlike in some areas of commercial law, after a deal is completed, there's a visible testament to the hard work of the lawyers involved: the property at the heart of the transaction.
"For me, that's what is so attractive about real estate," says Mayer Brown partner Martin Wright. "It's tangible, you can see it and touch it."
"I've worked on a great number of lettings in Canary Wharf and was also heavily involved in the regeneration work in Stratford. I can see those places and know I had a hand in them, which makes me feel my work is real and worthwhile."
Martin qualified as a real estate lawyer in 1988, having enjoyed his time as a trainee in that area. "The 80s was a very exciting time to be working in real estate as there was plenty of money around," Martin says.
Though the country has suffered periods of economic trouble since then, Martin says there are still certain similarities between now and the 80s.
"Currently, there are many smart property entrepreneurs out there; if you look at the Sunday Times Rich List, one of the most dominant business areas is real estate," says Martin. "It's an attractive prospect for people with entrepreneurial flair."
That's not to say the world of real estate has remained unchanged throughout Martin's time in the industry, the biggest change being an influx of foreign clients seeking to invest in British buildings.
While this has introduced certain challenges, the actual work performed by real estate lawyers remains broadly similar, with one key exception.
"The biggest change within the last decade has been that we now often advise clients buying companies which happen to own property rather than buying the property itself," says Martin.
"These companies are known as special purchase vehicle companies and are established solely for the purpose of the real estate deal. This is commonly done for tax reasons, as you pay a much higher rate of tax when buying a property compared to a company."
To learn more about how a real estate deal operates, we asked Martin to talk us through his recent work on the purchase of Waterside House, Marks & Spencer's global headquarters.
Anatomy of a real estate deal
Surveyors recommend a lawyer
When a property is due to be sold, both the seller and the buyer will seek advice from firms of surveyors to determine the value of the property.
As surveyors are only paid on the basis of deals done, they will often recommend lawyers to their client who they trust will get the deal done on the right terms.
Martin "In the case of Waterside House, I was advising Gaw Capital, a Hong Kong-based private equity firm that I've acted for previously. However, my initial contact with them came as the result of a recommendation from a leading property surveying firm."
Seller invites bids
The seller will hold a marketing period of two to three weeks, during which interested parties submit bids. At this stage, lawyers must ensure their client understands the asset they're intending to buy, without performing too extensive due diligence work. This is because their client is unlikely to be interested in spending large amounts on due diligence until their bid has been accepted.
From their due diligence, the lawyers commonly produce a red flag list of important points to be addressed.
Martin "The two to three week period gives our client sufficient time to put together a credible bid. We help them formulate their offer letter, which can often run into four or five pages due to various conditions that apply to the purchase."
Performing due diligence
Once the seller has picked a preferred purchaser, the lawyers working on that bid will begin their investigations in earnest into the asset being bought.
This is done over a course of three to four weeks and runs in tandem with the negotiation of the contracts.
Martin "In this instance, we were dealing with buyers from Korea who were slightly unfamiliar with the intricacies of the London property market. We have to ensure our clients understand exactly what it is they're buying and explain the subtle nuances of the deal to them."
Financing the deal
While one team of lawyers is performing due diligence, another will be negotiating a financing arrangement between the purchaser and the bank or banks lending money to finance the deal.
Martin "Most properties are bought with debt, not necessarily because the purchaser needs to borrow money in order to complete the deal, but because doing so will enhance their financial return."
Although the offer letter will have established certain terms of sale between the two parties, negotiations are still required at the contract stage.
Once a deal is reached and contracts are exchanged, there is now an obligation to buy and to sell, meaning neither party can back out.
Martin "There is no standard form of contract; instead, these transactions are heavily negotiated. The process will normally be finalised within a month of the announcement of the preferred purchaser. As this deal involved a Korean buyer, it took slightly longer to negotiate the contract. This is because the common terms of the contract differed from their own jurisdiction."
Closing the deal
Once contracts are exchanged, the next step is to complete the deal.
This might occur on the same day, or the parties involved may decide to take a period of time, say three to four weeks, to finalise arrangements.
Martin "It should be our goal as lawyers to ensure that there remains a good relationship between the buyer and the seller at the end of the transaction. In this instance, on the completion date, the buyer and seller could smile and shake hands thinking they'd both succeeded in getting a deal they were happy with."
How many lawyers worked on this deal?
"On this deal, we had about 15 or 16 lawyers working on it. For tax reasons, the transaction was structured as the purchase of a corporate vehicle so we needed corporate lawyers involved. We also obviously needed real estate lawyers as they're the ones best placed to negotiate and deal with issues arising from the building's occupiers' requirements (in this case, Marks & Spencer's)."
"We also had tax lawyers involved, as well as planning people (checking issues such as zoning and planning laws) and construction lawyers (making sure the purchaser will have the full range of rights against the original building contractor)."
What work were trainees performing on the deal?
"Trainees were involved in the due diligence process; checking details about the building being bought and reporting back on their findings to more senior lawyers and clients. They also sat in on some of the negotiating meetings for the various contracts being put in place."
"Working on this deal will have given them experience of a very high-level real estate transaction, which should help them decide if they want to do this sort of work when they qualify."
Overseas interest in London's real estate market
The purchase of Waterside House is part of a growing trend of foreign investors seeking to buy real estate in the UK. Last year, 90 per cent of real estate purchases over £100 million in the UK were performed by foreign investors. We asked Martin Wright for his thoughts on what might be motivating this influx of overseas investment.
"London has a lot of top quality "trophy" buildings which make for very attractive investments as purchasers know they're buying a well-built, well-designed, clever building."
"It's important for a building owner to have a reliable tenant who will still be around in 10-15 years as you're reliant on them paying their rent. In London, we have a lot of big, healthy companies operating out of very good buildings."
"More than most countries, the UK property market is very transparent and is backed up by a legal system that inspires confidence in people. We're often rather nonchalant about the status of English law, but it's worth remembering how highly regarded it is outside of the UK."
A safe haven
"There is currently volatility in many areas of the world, and whenever that happens people will seek a safe haven for their money. We've recently seen an increase in the number of Brazilian private individuals buying real estate in London, and it's not too long ago that a lot of rich Greeks and Italians were buying homes here also."