The role of due diligence in commercial property transactions
Anyone who has ever bought a property, be it a residential or a commercial property, knows that their solicitors have to conduct a due diligence process before contracts are finalised. The due diligence process is absolutely essential and, when it comes to commercial property, thorough due diligence can make all the difference between success and profitability and financial disaster.
Getting the full picture
A commercial building can come with serious issues and commitments which need to be resolved, if possible, or at least known about and understood before anyone buys it. For a start, is the building structurally sound? Are there tenants in the building? If so, under what terms? Are they up-to-date with their rent payments? Have any alterations or structural changes been made to the building or any part of it? If so, were the appropriate permissions, licences and planning approvals obtained? Are any developments being planned in the immediate vicinity and, if so, when? What is the nature of the legal title to the building? Is it a freehold or is it held under a head lease? If the latter, who are the freeholders? Have there been any insurance claims made in respect of the building? If so, what was the nature of the claim and what was the outcome?
These are just a few common issues that tend to arise with commercial properties but there are always a lot more and they vary according to the nature, location and age of the building. For some perspective, the standard pre-contract enquiry form for commercial property runs to over 50 pages. Missing even one question or issue can have very damaging consequences.
It is hardly surprising, therefore, that the due diligence process for a commercial property is usually a complex process with many moving parts that can take a considerable amount of time. Due diligence in commercial real estate involves not only solicitors but also, usually, accountants, surveyors and structural engineers too. But there is a way that prospective sellers can make the process quicker, easier and less costly in terms of time and money.
Online data rooms in commercial property transactions
Since most documents nowadays are in electronic format, or capable of being scanned into an electronic format, this has made possible the development of online data rooms. Essentially, these are online spaces to which all documents can be uploaded and open for inspection by anyone with access to that room. If an online data room is used efficiently, it can save an enormous amount of time and hassle. It is the seller’s responsibility to upload all the relevant documents to the data room and all sellers should ensure that:
- All the relevant documents are uploaded in good time and avoid last-minute additions if possible;
- No documents are missing;
- All documents are labelled correctly and accurately;
- All documents are in a structured order; and
- Documents are all in the right place.
It is in the seller’s best interests to make life as easy as possible for the buyer’s advisers, by ensuring that they create a comprehensive and well-ordered online data room.
In effect, sellers are well advised to carry out their own due diligence as soon as they decide to put the property on the market and maybe even earlier.
Due diligence can make or break the deal
Even the most willing and enthusiastic property investors can be soured if the due diligence process proves to be too difficult, too costly or throws up too many problems or issues that they were not aware of beforehand. DIsorganised or incomplete records will lead to delays, extra cost and frustration. It may cause the buyer to decide to renegotiate the price. Additionally, missing documents can raise suspicions that the sellers are trying to hide something. That may not actually be the case, but the suspicion, once raised, can be difficult to quell.
This is not good news for the seller. If a property sale falls through, that gets around and the property can soon find that it has earned a bad reputation. Even if the sale goes ahead anyway, the seller may have to accept a reduced price from a jaded buyer or investor. This is why it is worth it for sellers to carry out their own preliminary due diligence and thus greatly reduce risks and uncertainties.
Get your ducks in a row early
If you own commercial property and you are thinking of selling it, then enlist the help of an experienced commercial property solicitor, ideally before it goes on the market. A good property solicitor can help to identify any potential problems at an early stage when there is time to address them. They can also help to ensure that the due diligence process goes as smoothly as possible, prepare a due diligence checklist and that the online data room is complete and clear.
For further information and trusted legal advice regarding commercial property, get in touch with us at Carlsons Solicitors.