Due diligence is the process and efforts a purchaser uses to inspect real property in order to be informed as to the details of the asset being purchased. Purchasers who fail to undertake a thorough investigation risk purchasing property that does will not serve their best interests or needs. For example, the property may have an environmental defect, a zoning issue or other encumbrance. This risk can be reduced or eliminated by utilizing various types and degrees of due diligence investigations. Some fundamentals that should be investigated in every case are:
SURVEY AND TITLE REVIEW
One of the most important tools available to a purchaser is a current title report issued by the title company. This report will confirm the current property owner and will also confirm the proper legal description. The purchaser’s attorney will also review the exceptions to and exclusions from title, which are rights previously retained by third parties. Some exceptions and exclusions include: (1) covenants and restrictions affecting use of the property (2) easements giving third parties access or use of the property; (3) development agreements; and (4) special assessment districts. All this data can let the purchaser know if the Property is suitable for the intended use.
This aspect of due diligence consists of purchasing retaining an architect or building inspector to assess the structural and mechanical integrity of the property, to assess the need for major repairs, replacements or deferred maintenance items as well as to advise the purchaser regarding the general suitability of the property for the purchaser’s intended use.
ENVIRONMENTAL RISK ASSESSMENT
It is advisable to undertake a minimal level of environmental testing (commonly referred to as a “Phase I”). Phase I environmental assessments are conducted by licensed environmental professionals who will determine whether there are “recognized environmental conditions”. If the Phase I results warrant further investigation, a Phase II with more invasive testing will be recommended.
CONTRACTS SURVIVING THE PURCHASE
Certain service contracts, leases or other agreements may survive the purchase of the property. Purchaser and their attorney should carefully review these documents to ensure there is agreement with the seller as to how these agreements will be handled at closing. Purchaser may want the seller to terminate some agreements and purchaser may wish to assume the obligations and rights under other agreements.
Due diligence can be as simple or complex as the situation requires. To ensure proper due diligence, you should consult with professionals who understand these issues. Ultimately, being as informed as possible will allow for the best decisions regarding the purchase of a commercial property.
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