Friday Letter See you in court

The opening lyrics to The Beatles’ classic, With a Little Help from My Friends, are as follows:

What would you think if I sang out of tune,

Would you stand up and walk out on me?

In property investing, the answer to this question is increasingly “yes” for buyers of real estate who fail to see eye-to-eye with vendors on valuations. But are we now entering into an era when law suits will follow after the collapse of a deal?

Ordinarily, when two parties to a deal fail to agree terms, it is the end of the matter. With a polite “thanks, but no thanks”, the two sides part on good terms and often leave the door open to future deals should the opportunity arise. But in at least one situation in Europe, this has not been the case. Instead, a frustrated seller is suing the erstwhile buyer.

Earlier this year, before the credit crunch, Jelmoli Holding, a Swiss group, entered into talks to sell a portfolio of real estate to an Israeli-led consortium of Blenheim Properties, Delek Global Real Estate and Delek Belron International. According to a press release issued by Jelmoli, the price had been “contractually” agreed at CHF3.4 billion ($2.9 billion; €2 billion). But post-credit crunch, the buyers decided to call off the deal. On 25 October, London-listed Delek said in a statement it had taken the decision due to “the change in, and continuing uncertainty of, the global commercial property market.”

Fast forward to this week, and Jelmoli says it has commenced legal action against the consortium for the entire headline price. In a statement issued from Zurich on Wednesday, it said: “The purchasers’ refusal to close marks an event of abuse that is unheard of in Switzerland.”
A spokeswoman for the consortium said she was aware of the statement on Jelmoli’s website, but added the syndicate had received no notification of legal proceedings. “When we do, we will respond accordingly,” she said.

Until then, real estate investors anywhere in the world are left to ponder the potential implications.

That two parties can fall out so spectacularly (and publically) is a jolt to the system, and maybe a surprise, but it could also herald a new climate in which market participants turn to the law to sort out their differences. Doing deals has certainly become harder now that there is a mismatch of expectations between buyers and sellers of real estate amid the current uncertainty. There are more reasons than before the summer to walk away from a transaction, failure to secure the borrowing terms anticipated before the close being one of them.

Whether there will be a proliferation of law suits remains to be seen, but one thing is clear: rather than falling out and having to prepare for a day in court, it is always better to work towards a peaceful resolution – with a little help from your legal counsel if necessary.