When someone purchases real estate, they generally buy what they see: a completed building with a known condition, existing lease agreements, and predictable income. In practice, however, another type of transaction has become established in which the closing of the purchase is deliberately postponed to a later date—the so-called forward deal. In this scenario, a real estate development project is sold while still in the planning or early construction phase—in some cases, even before a building permit has been issued. What may sound risky at first glance is often the only way for investors to secure attractive properties in sought-after locations. We explain what lies behind this type of contract and what is important when structuring it.
What is a forward deal?
A key feature of a forward deal is that there is a lengthy period between the signing of the purchase agreement and the buyer’s takeover of the property depending on the size and structure of the development project, this can be two years or more. The reason for the delay: The property is not to be transferred in the condition it is in at the time the contract is signed, but must first be developed by the seller. This may involve the construction of a new building possibly following the demolition of the existing structure or an extensive renovation. In some cases, planning permission for the project must even be obtained after the contract is signed.
Legally, this essentially constitutes a real estate purchase with a construction obligation: In addition to the sale of the property, the seller’s obligation to complete the building—and often also to secure its initial lease—is agreed upon. Important from a notarial perspective: Due to the requirement for comprehensive notarization under Section 311b(1) of the German Civil Code (BGB), both the real estate transaction and the construction obligation must generally be notarized. Forward deals are predominantly executed as asset deals, but structuring them as share deals is also possible.
Forward Purchase and Forward Funding: When Is the Purchase Price Paid?
Forward deals come in two main subtypes, which differ in terms of when the purchase price is paid:
In a forward purchase (also known as a forward sale), the buyer pays the entire purchase price only after the contractually required project development has been completed—that is, in a lump sum upon completion. This adheres to the fundamental principle of sales law that payment of the purchase price and transfer of the purchased property occur simultaneously.
In a forward funding arrangement, by contrast, payment of the purchase price is spread out over the term of the contract: The buyer pays in installments as construction progresses, and these installments often accrue interest. This introduces an additional element into the transaction—the buyer not only facilitates the financing of the development phase but effectively assumes it themselves. In this respect, forward funding bears similarities to traditional real estate development models.
How Both Sides Benefit
For the seller, a forward deal primarily means a significant reduction in financial risk. From the outset or at an early stage of project development, the seller has a contractually bound buyer and a fixed—or at least predictable—purchase price. Subsequent marketing risks are eliminated, and the guaranteed purchase price payment provides a significantly stronger negotiating position with lenders: this results in better financing terms and a lower equity investment. With forward funding, payments based on construction progress further minimize the need for debt financing.
For the buyer, the increased risk should—at least in theory—be reflected in a lower purchase price. The buyer can secure the property early on and has the opportunity to influence the architectural design and leasing by incorporating relevant specifications into the purchase agreement. For investors, however, the main reason often lies in the market environment: When attractive existing properties become scarce, forward deals in prime locations are frequently the only way to secure new investments—and to avoid protracted bidding processes with uncertain outcomes.
The downside: Complexity in contract drafting
Structuring the transaction as a forward deal entails a significant amount of additional work in drafting the contract—work that should not be underestimated. In addition to the standard provisions of sales law, other areas must be addressed, particularly those related to contracts for work and services. The contract thus deviates significantly from the statutory model of a sales contract under §§ 433 et seq. of the German Civil Code (BGB): The parties’ list of obligations extends far beyond the exchange of the purchased item for the purchase price and touches on other areas of law, such as private and public construction law. The following applies: The earlier the sale takes place, the more complicated the drafting of the contract becomes.
In particular, the following require clarification: the specification of the intended construction, i.e., the nature and intended outcome of the measures to be carried out, including quality specifications and a timeline; the rights of the parties in the event that the building authorities do not approve the project as agreed; the involvement of contractors and service providers; the handling of warranty issues in the resulting multi-party situation; and the cooperation between the seller and buyer during the development phase.
Stumbling Block Approval: Three Contractual Relationships, Three Interests
The provisions regarding the scope of construction work and the acceptance of the work deserve special attention. In this context, the seller may find himself dealing with up to three parties, each with their own interests: the contractor, whose work he must accept as the client; the tenant, who wishes to take possession of a space that complies with the terms of the lease agreement; and the buyer, whose claims are governed by the purchase agreement. The construction contract, lease agreement, and purchase agreement must therefore be closely coordinated in terms of both content and procedure.
Two examples illustrate how quickly conflicts can arise here: The seller may face a dilemma if the contractor makes a legitimate request for acceptance under the construction contract, but the buyer refuses acceptance based on a veto right under the purchase agreement. Veto rights should therefore only be granted to the buyer in exchange for indemnification against the consequences of an unjustified refusal or delay in acceptance. The relationship between the tenant and the buyer harbors similar potential for tension: For a retailer whose store opening is approaching, speed may be more important than diligence—the buyer, on the other hand, will often prioritize quality and apply stricter standards to acceptance. From the seller’s perspective, the goal in all these scenarios is to avoid divergent judgments, arbitration awards, or expert opinions arising from the various contractual relationships.
Rental Property: The Return on Investment Depends on the Details
If the property has not yet been leased at the time the contract is concluded, leasing strategies and targets must also be established. For the buyer, leasing is typically of central importance, as his expected return depends on it—he should therefore not leave it to the seller’s discretion. Matters to be addressed include the selection of tenants, targets for rent levels and the allocation of utility costs, as well as the structure of the lease agreements—for example, by establishing a standard lease agreement. It is also of great economic importance to specify the extent to which and the form in which the seller may grant tenant incentives, such as rent-free periods or subsidies for renovation costs.
Buyer Protection for Forward Funding
In forward funding, the buyer makes advance payments: The buyer pays as the project progresses but does not receive the property until development is complete. Special contractual provisions are therefore necessary in the event of the seller’s inability to perform or even insolvency.
Appropriate Payment Schedule. First and foremost, the payment schedule should ensure that the property’s appreciation in value aligns with the buyer’s payments.
Rights of Subrogation. It is also advisable to grant the buyer rights of subrogation under the contracts entered into for the project’s implementation—particularly architect, engineer, and construction contracts. These rights enable the buyer to complete the project on their own in an emergency and prevent the property from becoming a construction ruin.
Securing Repayment Claims. Finally, in the event that the project fails and must be reversed, consideration must be given to how the buyer’s claims for repayment of purchase price installments already paid can be secured.
Conclusion
A forward deal opens up opportunities for both sides: The seller secures a buyer and the purchase price early on and improves their financing position, while the buyer gains access to investment opportunities that simply do not exist with existing properties. The trade-off is a significantly higher level of transaction complexity—the legal teams on both sides must be more broadly equipped than when purchasing an existing property, and the purchase agreement, construction contract, and lease agreements must mesh together like gears. This is precisely where it is determined whether the forward deal delivers on its promise.
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