Proper Due Diligence is Critical When Purchasing Real Estate

When purchasing improved or unimproved real estate, whether residential, commercial, industrial or mixed-use, performing proper due diligence is of critical importance to insure that the purchaser is truly getting the benefit of the bargain.  Ideally, the diligence process begins by building into the purchase contract, among other things: (1) a due diligence/inspection period of sufficient length within which the purchaser can thoroughly investigate the property; (2) a corresponding right to raise objections to certain defects and to ask that the Seller cure the same; and (3) the ability to terminate the purchase contract during the due diligence period and receive a return of any earnest money deposit if the purchaser is unsatisfied with the results of its investigations.

In addition to key diligence matters such as reviewing current title and survey work pertaining to the property to confirm ownership, liens, judgments, restrictions and/or encroachments, it is important (particularly when purchasing improved non-residential property) that the purchaser perform sufficient environmental due diligence.  Hiring a qualified environmental consultant to perform a thorough environmental site assessment provides the purchaser (and any lender financing the purchase) with peace of mind regarding whether the subject property and/or surrounding parcels have matters of environmental concern.  As some environmental laws/regulations hold any and all owners, occupants and operators of property liable for contamination, regardless of the cause or party responsible, performing sufficient environmental due diligence prior to closing is critical.  Environmental due diligence is much less expensive than remediation/clean-up costs, and performing environmental due diligence prior to closing can sometimes provide a purchaser with certain defenses to liability.

It is also important for the purchaser to confirm that its intended use of the property is permitted by the property’s existing zoning classification and/or entitlements.  Even if the current use of the property (or adjacent parcels) is consistent with the purchaser’s intended use, this does not mean that the zoning classification for the property allows that intended use as a matter of right.  Zoning due diligence should also include confirming the property’s parking, lot size, and setback requirements.

Performing a physical inspection of the property and the improvements/structures located thereon is also prudent.  However, proper due diligence means more than a simple visual inspection of the property, and should include a review of the plans, specifications and permits relating to existing improvements, as well as inspecting the structural, mechanical, plumbing, electrical and HVAC systems, testing for mold and/or asbestos, and (if applicable) confirming ADA compliance.

If you are purchasing property which is subject to existing leases, proper diligence includes a thorough review of all lease agreements and an updated rent roll, as well as obtaining estoppel letters from the Seller/landlord and the tenants to verify that all leases are in good standing and that the information contained therein is true and correct.

As you can see, navigating the minefield that is the due diligence process can be a daunting task, but a critically important one.  Therefore, a prospective purchaser should consult with an attorney with experience in this area.  If you have any questions regarding these or any other real estate matters, please contact Joshua Pope or another attorney in MPBA’s Real Estate Department.

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