Main Agreements and Risks
A real estate purchase (right) agreement, which must be completed in a notarial deed, is often used to acquire a property. While this approach is still widely used, the acquisition phase may also be carried out via various forms of contracts:
If the property is held by a real estate company (or is transferred to such a company before sale), ownership of the property may also be transferred by purchasing shares in such a company through a share purchase agreement (see chapter on Private Share Deals). In contrast to a traditional real estate purchase agreement, such an agreement does not need to be signed and often has various tax and legal implications.
If the property has already begun to be developed, it might be acquired in conjunction with the existing real estate development project through a project purchase agreement. Such an agreement may be reached at different phases of development, such as once the construction permit is issued. Such an agreement might take the form of a standard notarized real estate purchase agreement or if the property is held by a real estate corporation, a share purchase agreement (not necessarily to be notarized).
Another option is to enter into a development agreement, which includes both the seller and the buyer in the operation’s success. A profit-sharing (i.e., earn-out) provision is often included in such an agreement to compensate the seller because the property’s price may not completely represent its potential. An earn-out clause compares the expenditures invested by the buyer for project development to the market worth of the property once completed at completion of a real estate development project.
Subsequently, the profit margin is distributed between the seller and the buyer, ensuring that both parties benefit from the project’s success. Finally, such a method entails determining a variable price for selling the property. Like any other real estate transaction, a development agreement may be included in a conventional notarized agreement or a share purchase agreement (which does not have to be notarized). It can involve the purchase of an existing property.
The primary risks of the acquisition phase are legal (e.g., if constraints are not considered, particularly in the event of public law legislation restricting the purchase and/or use of the real estate at stake) and economic character (e.g., poor market valuation). As a result, all of the agreements mentioned above need due diligence and the implementation of appropriate protections, particularly about the guarantees provided (if any) by the seller. For example, we often see combinations of the aforementioned earn-out terms and warranty agreements that guarantee the buyer a particular minimum rent revenue by the seller over a certain period.
Public Law Planning Agreements
A public law planning contract is a contract between a public institution (for example, a municipality or a canton) and a private entity that deals with planning and zoning issues. Such contracts may be seen, for example, in the conversion of industrial wastelands into residential and commercial zones and the supply of infrastructural amenities and compensation for zoning added value. Such contracts are frequently restricted because the rule of law constrains public institutions and (ii) negotiating power is usually unequally allocated between the state/public institutions on one side, and the private parties engaged on the other.
Planning Agreements with Architects and Engineers
The initial stage in planning is to envision the project. Under a planning agreement, a single service provider performs the design work for regular projects, such as an architect. An arrangement of this kind often includes construction management throughout the project’s execution.
Design contests are generally held for bigger projects to determine the best architectural and design approach. While formal agreements with the different bidders are not required for design contests, clear guidelines governing the selection process and possible awards for the competition winners must be developed. In most circumstances, the winning bidder is subsequently employed to carry out the planning via an arrangement known as a planning agreement. Once the planning is complete, administrative actions are necessary to get a construction permit.
A change in municipal planning may be required for bigger projects. Given the legal complexity of building projects and the legal protection afforded to interested third parties, the time and legal hurdles involved in obtaining such administrative authorizations should not be underestimated. Once the construction permission has been obtained, thorough planning must be completed, generally under the terms of the planning agreement.
Instead of contracting separate planning agreements with the many specialists (architects, engineers of all types, and other professions depending on the nature of the project) participating in large-scale projects, it is feasible to complete a general planning agreement. Under such an arrangement, the general planner agrees to conceptualize the whole project and engage its specialists to complete the planning.
Real estate development requires a large investment (often several million CHF), with return on investment typically occurring many years after the funds are spent.
As a result, only a few real estate developers can complete property with their own money. Investors often give the funds (mainly banks/insurance firms acting on behalf of investment funds, pension funds, or sovereign wealth funds) through equity investment agreements. Financing is often arranged via loan and securities agreements backed by mortgages. Foreign financing must be properly verified from a legal standpoint well in advance since stringent limitations may apply under the so-called Lex Koller (see chapter on Acquisition of Real Estate, section 4).
The construction is carried out by the execution of contractor agreements, which may be of several types:
The project developer and several vendors sign into individual contractor agreements. Each of these providers just provides its services and is therefore not accountable for the overall project execution. Entering into such contracts requires a substantial level of coordination and monitoring on the project developer.
A general contractor contract is made with a “main contractor,” who will engage several subcontractors to do the task. Depending on its structure, the general contractor may do specific tasks on its own or outsource all tasks to subcontractors. In any case, the general contractor is still liable to the project developer for the subcontractor’s work.
A complete contractor agreement is similar to a general contractor deal, but it also covers the services of an architect and engineer. As a result, the total contractor is responsible for both the design and implementation of the real estate development project.
The most significant hazards throughout the building process are both practical (e.g., delays in planning, coordination among numerous contractors and subcontractors) and legal (e.g., unexpected increase in costs, defects, claims from unpaid subcontractors). To avoid risks, the agreement must be properly designed and give suitable safeguards for the project developer as much as feasible.
Bank guarantees, insurance requirements, and fines for poor performance are examples of such safeguards.
Real Estate Management Agreements
Once the real estate development project has been completed, its upkeep and administration must be addressed. Various agreements, such as asset management agreements, property management agreements, and facility management agreements, are in play. The differences between asset management, property management, and facility management agreements are difficult to define. Still, it is generally understood that an asset manager would focus on property administration (e.g., lease conclusion). A facility manager would be in charge of practical and technical aspects, with the property manager falling somewhere in between.
Furthermore, numerous service or maintenance agreements will be put into with third-party suppliers to guarantee the building’s proper functioning (e.g., elevator maintenance, electricity, heating, water supply, etc.).
Agreements for Sale or Lease
An exit of the investor and/or the owner is possible at any stage of the real estate development. The property and project, respectively, can be sold on the market either as a whole (under a conventional real estate purchase agreement or under a share purchase agreement) or as small units with the formation of a condominium. Legally, sales to foreigners must be rigorously scrutinized well in advance since strong limitations may be imposed under the so-called Lex Koller.
If the property is to be leased, traditional commercial or residential lease agreements are signed. In Switzerland, residential and commercial leases are subject to tight legal limits, including rent regulation and tenant termination protection. Therefore, the developer is well advised if he is aware of the framework established by the necessary rules of Swiss tenancy law and considers it from the beginning of each real estate development.