What is the usual legal due diligence process that is undertaken when acquiring commercial real estate?

Real Estate

Germany Small Flag Germany

For asset sales of commercial registered real estate, the buyer's lawyer will typically:

  • review the title documents (i.e. a copy of the Land Register for the property, any encumbrances on title, the building charges register and any other public charges and confirmations from the relevant authorities regarding certain public law issues and outstanding charges or contamination);
  • where the property is subject to leases, review the leases (though the extent of this review will depend heavily on the nature of the property and why the buyer is buying the property);
  • raise enquiries and make document requests to the seller, which ask about disputes, boundaries etc., and through bespoke enquiries arising from the buyer's lawyer's wider due diligence; and
  • request information from public bodies to ascertain issues arising from the location of the property including contamination, planning approvals etc.

The buyer's lawyer's due diligence process can take several weeks (particularly as some of the key searches can take a number of weeks to be produced) and is expensive as sellers do not generally give buyers warranties regarding the state of the property or on compliance of laws. In certain cases (such as where the seller is selling complex or numerous properties via a competitive bid process), the seller may decide to instruct its lawyers to prepare a due diligence pack including searches in order to speed up the sale process or to avoid numerous bidders having to carry out the same due diligence.

Where a property is sold by way of a transfer of the entity or structure through which it is held, the process is typically the same but with additional due diligence in respect of the relevant entity or structure. In transactions of this type, the seller will typically only give relatively limited warranty protection on the entity or structure and little or no protection in respect of the property itself.

Where the purchase of a property is financed by external debt, the lender will usually require a standard industry form of report from a law firm on which it may rely.

Ireland Small Flag Ireland

Investigation of title is a matter for counsel acting for the buyer and/ or the lender. There is no market standard form of reporting used. The principle of caveat emptor (let the buyer beware) applies in Irish law.

Enquiries are raised of the seller pre-contract. Pre-contract enquiries are not standardised (except those relating to VAT). Once a contract is in place, standard form enquiries are raised. In practice, these are often raised pre-contract and there is a move toward making this standard conveyancing practice in Ireland.

Searches are undertaken by counsel acting for the buyer and/or lender. They are carried out in government and local government offices to check the ownership of a property, what liabilities, charges or burdens might affect it, the status of the seller and to obtain details relating to planning. Generally the results of searches can be obtained within 24 hours save in the case of planning searches. The results of a planning search can take from between 1/2 days and 2/3 weeks to obtain depending upon the location of the property. The costs vary depending upon the property location and the title.

Sellers do not generally provide any warranties cover in relation to legal title other than on planning matters/chattels/statutory notices but they may be liable for material misrepresentation or non-disclosure. Where the transaction involves limited or no investigation of title being carried out on behalf of the buyer/ lender, it may be agreed that a suite of warranties be provided by the seller including as to the legal title of the seller to the property.

Mexico Small Flag Mexico

Due diligence process in commercial real estate transactions is usually carried out by counsel acting for the buyer with the support from technical teams in environmental matters. It typically includes an environmental study and a title report. For title reports a search in the public registry is made. The search and report product of the due diligence process usually covers the following standard enquiries:

  • Permits, licences and authorizations required for the real estate
  • Material agreements with respect to real property, including project and corporate financing and collateral agreements
  • Limitations on land use imposed by zoning ordinances, urban development regulations, governmental authorities (eg. concessions, federal zone limitations, etc.), or private agreements (usufructs, easements, etc.)
  • Liens and encumbrances affecting the real property, as well as pending claims against the real property by third parties (generally identifiable through a certificado de libertad de gravámenes)
  • Limitations or requirements according to covenants over real property
  • Agrarian or “ejido” interests (generally identifiable through a certificado de no afectación agraria)
  • Municipal assessments for public improvements and property taxes
  • Existence of condominium regimes or owners’ associations
  • Rights of third parties in possession (eg. adverse possession)
  • Long-term leases
  • Unpaid taxes and utility charges, fees or rights (eg. water and electricity)

Due diligence process includes counsel’s opinion on different records and other elements necessary to ascertain any potential risks for the transaction. Moreover, it is appropriate to perform technical assessments on the real estate prior to closing the transaction to ensure compliance with Mexico legislation (eg. environmental, geological, and topographical due diligence). Costs associated with due diligence include notary public fees and costs associated to the appraisal of the property, public registers and archives duties where relevant documents are obtained from.

Due diligence is always recommended for commercial real estate and the forms will vary depending on the characteristics of each transaction; although there are no specific forms, buyers require between 30 and 120 days to carry out the due diligence process.

Sellers of commercial real estate usually provide limited warranties, which are related to: (i) legitimate ownership and title over the real property (marketable title at closing); (ii) absence of liens and encumbrances; (iii) payment of real estate taxes and utility charges or fees; (iv) absence of environmental liabilities; and (v) absence of false statements or material facts. Therefore, buyer’s due diligence process is essential to determine the legal and physical condition of the real estate and assess risks efficiently.

Additionally, under civil law the buyer is protected with a statutory indemnity (“saneamiento para el caso de evicción”). If buyer is evicted due to a judicial decision arising from a third party claiming superior rights over the land (eg. absence of seller’s title), buyer is entitled to recover damages from the seller.

The Netherlands Small Flag The Netherlands

Please provide a summary of the legal due diligence process that is undertaken when acquiring commercial real estate in your jurisdiction, including covering the following:

  • what types of searches (if any) are undertaken and what do they reveal, are there material costs associated with these searches and how long do they typically take to obtain?

The buyer’s advisors perform a due diligence investigation and a survey of the state of repair of the real estate. The legal due diligence is usually carried out by a legal due diligence team consisting of lawyers and (candidate) civil-law notaries.

The legal due diligence usually covers the following four aspects:

  • Title, which part of the due diligence is usually carried out by candidate civil law notaries. Customary searches for this part of the due diligence are the land registry searches, including cadastral excerpts, mortgage register excerpts, name searches and review of the acquisition deed, cadastral map and title deeds or deeds regarding encumbrances on the real estate apparent form the cadastral and mortgage register excerpts;
  • Lease, also including side letters and riders and the review of (the transferability of) bank guarantees;
  • Zoning, in particular whether the use of the real estate complies with the requirements of the applicable zoning plan, that is publicly available at www.ruimtelijkeplannen.nl; and
  • Permits, in particular environmental permits.

Real estate transfer tax and VAT with regard to transfer of the real estate and/or lease is also often covered, which part of the due diligence is then performed by tax lawyers.

The form of the report is usually discussed with the buyer. The customary form for a due diligence report is a brief summary of key issues, indicating the risk and including recommendations for the buyer. Executive summaries with a more detailed description of lease agreements and title are customary as well, although high level reports only summarizing red flags are also often provided.

A question usually raised with the seller during the due diligence process is to confirm that the seller is entitled to the legal and beneficial ownership of the real estate. A split between the legal and beneficial ownership is not necessarily apparent from the Land Registry. Market practice is a seller's warranty in that respect. Further, the Q&A process is an important part of the due diligence.

Norway Small Flag Norway

This is a short summary of the legal due diligence process for real estate transactions:

  • It is most common for the law firm representing the buyer to send a request list to the law firm representing the seller. Some request lists contain both requests for documents and questions to the seller, sometimes even asking for assessments and evaluations. This is not always accepted by sellers that prefer to limit their scope of responsibility.
  • Generally, the seller will offer a professional and digital data room solution, containing both documents and a Q&A section that is continuously updated. The status of the data room at the opening date varies a lot, and it is still a common experience in the Norwegian market that the seller underestimates the scope of work that is necessary in a professional due diligence process.
  • There is no market standard form of reporting, but we experience several similarities between the reports from different law firms. In general, reports contain an executive summary with major findings and a more detailed part of the report with findings and recommendations, when applicable.
  • All legal due diligence investigation is made by the counsel, no notary or other public authority is directly involved, apart from providing information requested by the seller or buyer.
  • One of the reasons for the widespread use of the standard contracts in the Norwegian market is that it simplifies the transaction process, including due diligence investigations, when the structure and content of both the acquisition contracts and the lease contracts are well known from before. This includes a set of warranties covering ownership, legal title and other fundamental elements of a real estate company.
  • The investigations typically cover corporate law matters, tax and VAT to encumbrances, contracts for acquiring the property, lease agreements, zoning plans and other public law issues and disputes. In larger real estate company structures, these investigations can be comprehensive and thus also constitute a material cost to the transaction. We find it common that the investigations are simplified, i.a. when buying a company owning shopping centres only a representative part of lease contracts are examined.
  • Furthermore, in recent years we have seen that transaction insurance has been used as a strategic tool to simplify the due diligence process, i.a. in transactions that cover a broad spectre of companies and properties.

Romania Small Flag Romania

A legal due diligence exercise undertaken in view of real estate transactions involves checking the following main areas: (i) validity of ownership title; (ii) lack of (unpermitted) encumbrances, including restrictions imposed by legal provisions (e.g. related to archaeological sites); (iii) urbanism parameters, validity of construction permits and related endorsements (if the real estate includes buildings or is purchased in view of further development); (iv) validity of operating permits for carrying out future business activity (e.g. fire permits, sanitary permits, etc.).

The validity of the seller’s ownership title over the real estate is confirmed by checking the seller’s current title and the archive of all titles leading through all transfers in the property chain back to the original owner or back in time to a period in relation to which no claims could reasonably arise. This is because any potential nullity/flaw in a deed in the chain of ownership may reverberate on the validity of the seller’s current ownership title.

Russia Small Flag Russia

There is no standardised market form of due diligence report in Russia. Normally, a legal due diligence is performed by the purchaser’s legal counsel. For various reasons, a mere search in the Realty Registry is far from sufficient for obtaining a full and reliable picture of the real estate. As a rule, when a legal due diligence report is produced, the information subject to analysis is both collected from publicly available sources, e.g., the Realty Register, and provided by the sellers in accordance with questionnaires produced by the purchaser’s legal counsel.

The key elements of legal research normally cover:

  • Good title to the property;
  • The chain of titles to the property;
  • Encumbrances and limitations over the property.
  • Reservation of land for public needs;
  • The land category and permitted use of the property;
  • Claims and litigations;
  • Compliance with spatial planning regulations;
  • Construction regulatory requirements;
  • Utility infrastructure and connection to utility networks;
  • Free access to public roads;
  • Sanitary, infrastructure and other protection zones (industrial facilities, historical legacy, airfields, power lines, high pressure gas pipelines, etc.);
  • etc.

Sometimes sellers arrange for their counsels to produce a vendor due diligence report, the main purpose of which is to give a buyer a general (positive) legal overview of the property concerned. As a rule, a vendor due diligence report is not a substitute for a full buyer’s legal due diligence exercise.

Sweden Small Flag Sweden

The legal DD normally includes all company and real estate information and any information on disputes or litigation and similar matters, excluding tax and VAT, financial issues and technical or environmental issues (unless it concerns disputes or similar issues). Typically, M&A and real estate lawyers conduct the legal DD. There is a great variety in scope and thresholds, as well as reporting format, depending on the individual client’s needs. Usually, international investors and Nordic institutions request full DD, while Swedish real estate companies and private investors normally complete parts of the DD themselves, with their own personnel. Other specialists involved, except for lawyers, are accountant firms, corporate finance houses and technical or environmental consultants. Normally, more thorough DD activities are initiated at quite a late stage of negotiations, after agreement on exclusivity or some kind of cost coverage by the seller, since DD will drive costs for the buyer.

On certain occasions, the seller initiates vendor DD, in order to introduce and organise the data room in an effective manner and in order to reduce the need for buyer DD, but more often in order to clean up the company or property documentation or information to be presentable to investors.

Information on title, bankruptcy, litigation etc. is normally found in the data room presented by the seller, as supported by representations and warranties relating to the accuracy of the data room information and independent searches by the buyer in public registers or information. Title issues rarely occur regarding commercial properties in Sweden. The Land Registry provides online information on title to real estate, supported by the government. In addition to this, full DD is normally conducted with regard to title to shares with uncapped representations and warranties by the seller to support this position.

Switzerland Small Flag Switzerland

There is no market standard process or form of reporting for the legal due diligence in respect of the acquisition of commercial real estate.

The due diligence process is conducted by counsel to the purchaser, generally with the assistance of the notary who will act for the signing of the deed of sale.

The starting point of a legal due diligence on commercial real estate is the review of the full excerpt from the land registry regarding the specific plot. Such excerpt and its appendixes will provide all the information in respect of such specific plot, notably regarding the ownership, the size of the land, the implantation of the building(s) constructed on such land, any easement (in favour of neighbours for example), encumbrance (in particular mortgages registered in favour of banks or financing institutions) and liens.

If the construction of the building(s) on the plot is relatively new (less than five years), the due diligence process will also extend to the review of the contracts between the seller and the architect, engineers and construction companies that participated in the construction work, as all guarantees still existing with such contractors will generally be transferred to the buyer. In the case of new construction, the seller will also be required to provide a copy of the construction permit and of the permit of use which is delivered at the end of the construction work by the competent authority or by the architect (depending on the Canton). Should the plot be located in a region classified by the competent Cantonal authority as potentially at risk in respect of pollution and contamination, the seller may be requested to provide specific reports in respect of certain types of pollution and/or contamination.

On the other hand, if the acquisition of the commercial real estate consists of a bare plot of land with the intention to construct building(s) on such plot, the due diligence will also consist of - generally together with the architect in charge of the construction project - the full review of all laws and regulations applying to the plot, in particular in respect of zoning, construction, road, sanitary and safety regulations. Restrictions in such respect may apply and do not appear on the excerpt from the land registry.

Finally, the due diligence will also cover the review of all the lease agreements entered into by the seller with the tenants of the building, as well as all insurance agreements, as all such agreements will be transferred to the buyer with the sale of the real estate. Certain maintenance agreements linked to integral parts of the building may also pass, if not terminated, to the buyer with the sale of the real estate and will therefore need to be reviewed.

If the acquisition of the real estate is made through a share deal, a comprehensive due diligence will be conducted on all other aspects of the legal entity that has been acquired.

Apart from counsel’s fees and specific reports on potential contamination (the costs of the reports are generally paid for by the seller), there are no material costs for the conduct of a legal due diligence on a real estate.

Turkey Small Flag Turkey

It is not mandatory however purchasers usually prefer to conduct due diligence of legal, financial, environmental and technical matters concerning the transaction, especially regarding real estate property acquired for investment in industrial and commercial activities, and high-value property. Due diligence typically involves analysing:

  • Public registries to verify title and charges on the real estate.
  • Leases over the real estate (including the lease term and its enforceability, grounds for early termination, rental payments, rent reviews and other obligations).
  • Zoning plans of the land at the relevant municipality.
  • Any licences over the real estate at the relevant municipality, such as construction licences.
  • Town planning rules applicable to the real estate, status of licence granted to operate the property, and compliance of licences with town planning rules.
  • Tax obligations of the property.
  • Environmental aspects of the real estate.

The outcome of the due diligence review facilitates whether to realize the acquisition, and determining the seller’s representations and warranties, should the transaction proceed.

Brazil Small Flag Brazil

In order to acquire a commercial real estate safely, buyer must conduct a due diligence to be sure that the acquisition will neither be questioned by any third party nor disregarded by potential allegations of fraudulent conveyance or fraud against creditors. The reason therefore is that the registration of the property in the real estate record is a presumption that admits adverse evidence.

There are no specific and consolidated regulations about the procedure of due diligence concerning purchase and sale of a real estate and its limits. Apart from some innovations under Law No. 13,097 of 2015 (which determines the concentration of all the acts in the real estate record, whose application, however, is still under discussion), there are only sparse provisions and understandings from scholars and Court decisions, which, jointly, establish standard market practice to the minimum cautionary measures to be adopted in the legal due diligence.

Accordingly, at a standard due diligence on commercial realty transactions, it is advisable that the potential buyer, assisted by counsel, check the entire documentation of the property, owner and further – depending on the case – of the previous owners and the companies in which such individuals or legal entities (owners and predecessors) are involved as partners or managers, to check the legal situation. The list of documents and its extension will depend on the nature of transaction, as well as on the risk that the buyer is willing to take.

In summary, the due diligence consists in researching and obtaining certificates that show the result of assessment in the general files during a certain period (which usually ranges from 10 to 20 years, depending on the type of the transaction and the risk undertaken by the buyer). In other words, the certificates will attest whether there are or not any lawsuits, liabilities, debts, restrictions, liens and/or encumbrances.

Considering that such documents are issued by public authorities, there is a cost for their issuance (except for some certificates that can be issued by the internet). However, considering that the public bodies in each location establish their own fees, the amounts vary widely and usually one may have to retain a service renderer to help in the obtainment of documents.

Likewise, the deadlines to obtain the certificates are different from one location to the other, as well as from each public body, so that there is not a determined period of time – as a rule – for the completion of the due diligence. In any case, parties usually establish an average of 30 days to submit the documents and certificates.

As real estate due diligence already involves the analysis of information encompassed in the documents related to the property, preparing a set of questions will only make sense during referred assessment (when and if any inconsistency emerges from the certificates and/or information provided and for which clarifications are necessary).

Once the analysis is concluded, if the buyer identifies any relevant liabilities and/or debts that are able to impact the sale, it is possible for the seller to offer some guarantee to comfort the buyer about the status of the sale, in order to ensure that said liability and/or debt will not have adverse effects on the transaction. However, it is important to point out that, in Brazil, there is not any legal provision specifically setting forth such guarantee with the purpose of securing the ownership of propriety.

United States Small Flag United States

For transactions involving the sale of commercial real estate, the investor's lawyer would typically review, as part of due diligence, and/or assist with commissioning the following:

the real estate records and other state and city governmental records through a title report prepared by a title insurance company;

a survey of the land and improvements located thereon;

a zoning report or zoning letter;

an environmental report (commonly referred to as a "Phase I" environmental site assessment); leases (if the property is subject to leases – though the extent of this review will depend on the nature of the property and why the investor is purchasing the property); and any other material contracts relating to the property.

The due diligence process performed by the investor's lawyer can take several weeks (particularly as some of the key searches can take a number of weeks to be produced) and is relatively expensive as most sales are on an "as-is" basis. As such, sellers give limited representations regarding leases, services contracts and some other property related matters but do not generally give purchasers warranties regarding title to the property, the condition of the property or its compliance with laws. In certain cases (such as where the seller is selling complex or numerous properties via a competitive bid process), the seller may decide to assemble many of the relevant due diligence materials in order to speed up the sale process, ensure that all bidders are equally up to speed, and to avoid the same due diligence from being carried out several times (which could disrupt tenants at the property or the seller's employees).

In many cases, the purchase and sale agreement will provide for a due diligence contingency period which is when most of the legal and non-legal due diligence will take place. During that period, the investor has the right to terminate the purchase and sale agreement for any or no reason and, in such event, will receive a return of any deposit monies previously posted. When market conditions favor the seller, however, such periods are shorter or may even be eliminated.

In the case where a property is sold by way of a transfer of the direct or indirect ownership interests of the property owner, additional due diligence is performed in respect of the relevant entities that are to be purchased. In such transactions, the seller would typically give representations and warranties on the constituent entities with much fewer representations or warranties on the property itself.

United Kingdom Small Flag United Kingdom

For asset sales of commercial registered real estate, the buyer's lawyer will typically:

  • review the title documents (i.e. a copy of the Land Register for the property, any land agreements noted on the title and, if the property is leasehold, the lease and other ancillary documents);
  • where the property is subject to leases, review those leasehold interests (though the extent of this review will depend heavily on the nature of the property and why the buyer is buying the property);
  • raise enquiries of the seller using both standard industry forms (known as the Commercial Property Standard Enquires or "CPSE"), which ask about disputes, boundaries etc., and through bespoke enquiries arising from the buyer's lawyer's wider due diligence; and
  • raise searches of public bodies, utility providers etc. to ascertain issues arising from the location of the property (e.g. to check that the building has all necessary planning consents).

The buyer's lawyer's due diligence process can take several weeks (particularly as some of the key searches can take a number of weeks to be produced) and is expensive as sellers do not generally give buyers warranties regarding their title, the state of the property or on compliance of laws. In certain cases (such as where the seller is selling complex or numerous properties via a competitive bid process), the seller may decide to instruct its lawyers to prepare a due diligence pack including searches in order to speed up the sale process or to avoid numerous bidders having to carry out the same due diligence.

Where a property is sold by way of a transfer of the entity or structure through which it is held, the process is typically the same but with additional due diligence in respect of the relevant entity or structure. In transactions of this type, the seller will typically only give relatively limited warranty protection on the entity or structure and little or no protection in respect of the property itself.

Where the purchase of a property is financed by external debt, the lender will usually require a standard industry form of report from a law firm, which is known as the City of London Law Society Certificate of Title ("CLLS Certificate"). The CLLS Certificate comprises numerous statements about the property's title, the nature of any occupational leases, statutory compliance and disputes. For example, the CLLS Certificate will state that the property is not subject to a compulsory acquisition order. If a statement is untrue, the firm producing the CLLS Certificate will make an appropriate disclosure. In order to produce a CLLS Certificate, the law firm will have had to carry out the legal due diligence steps mentioned above. In bid scenarios and/or where the title is very complex, the seller's law firm will often produce the CLLS Certificate. In most other cases, the CLLS Certificate is produced by the buyer's law firm.

Bulgaria Small Flag Bulgaria

Usually the buyer of a real estate located in Bulgaria will commission a lawyer to conduct a thorough due diligence for the property. There is no obligatory form of that due diligence, but it often takes the form of a due diligence report (DDR). The DDR includes the results from the conducted checks in various publically available registers (court register, Land register, registered pledges, commercial register, cadastral map and registry, etc.), and if the seller participates in the process- analysis of his/her contractual obligations towards third parties based on the provided private legal documents.

Upon executing the notary deed the notary official will check the property rights of the seller based on the presented documents for ownership title and whether these have been duly registered into the Land register. In case of legal persons, the notary will also verify the right of their representatives to dispose of/acquire the real estate in the name of the company.

There are multiple searches that are undertaken by the buyer:

  • searches in the Land register, including review of the title history of the property and whether the ownership rights of the seller can be justified based on consecutive transfers between the former predecessors.
  • requesting a Sketch/ Cadastral map and Excerpt from the Cadaster register for the property. The Sketch/ Cadastral map and the Excerpt are issued by the Agency of Geodesy, Cartography and Cadastre within 3 or 7 business days and cost between 5 -40 BGN depending on the legal status of the land. The Sketch/ Cadastral map is used to verify the legal status of the property, its designation, and way of use and building parameters. The Excerpt from the Cadaster register shows the registered owners of the property as per their title documents registered in the Land register.
  • Requesting a Certificate for entered incumbencies over the property. The Certificate for incumbencies is issued by the Register agency within 8 hours, 3 or 7 business days. Associated costs – 25 BGN, respectively 10 or 5 BGN.
  • Requesting a Certificate for registered pledges with respect to the property. This Certificate is issued by the Central Register of the Registered pledges. Associated costs 7-10 BGN per page of the certificate issued.
  • Requesting a Certificate for existing restitution claims – issued by the regional administration bodies or the agricultural land commission within 3 or 7 working days. Associated costs – 23 or 15 BGN.
  • Requesting a Certificate for the identity of the land– sometimes one and the same land is marked with different numbers in the cadastral parcel and this certificate is need in order to establish which land is subject to sale – issued by the Agency of Geodesy, Cartography and Cadastre, within 7 days; fee - 20 BGN.
  • Searches in the court case registers regarding pending proceedings against the seller and his/her property; free of charge.
  • Searches in the commercial register regarding the status of the seller, its enterprise, annual accountancy reports, insolvency or liquidation proceedings, registered pledges on its shares etc. – free of charge.

For some of the above described searches and certificates the buyer needs cooperation from the seller, as sometimes only the latter is entitled to receive the information about the property. Further, the seller is asked to provide a tax declaration for the property, from which unpaid property taxes are evident. The seller is also asked to deliver a declaration that he/she/it is paying the purchase price with lawfully obtained funds in compliance with the Measures Against Money Laundering Act.

In the last 10 years, under the influence of foreign legal practices it has become more common for sellers to provide representations and warranties. However, these don’t have any specific legal importance under Bulgarian law, unless tied together with a contractual penalty obligation or with a termination clause. Usually representations and warranties in the meaning of the Anglo-Saxon legal system will be included in the preliminary or final contract and if breached, will trigger a contractual penalty, if such is envisaged.

It should be noted that Bulgarian law explicitly provides for monetary compensation (along with the back payment of the price) to any buyer, who has been forced to leave the property because of eviction ( in case of in rem rights of third persons).

France Small Flag France

Real estate due diligence will be commonly performed by the French notary appointed by the purchaser for the purchase of the property, who is considered the legal guarantor of the transfer deed efficiency to the benefit of the purchaser and the certainty of its ownership.

Searches will be made at the Land Registry to know the conditions of the previous transfer deeds and the easements and encumbrances registered on the property. These will take between a few days and a few weeks, to obtain (depending on the location of the property) but are usually already ordered by the vendor’s notary when the data room process is initiated and will be updated between signing and closing.

Several other searches are legally prescribed on behalf of the vendor on the condition and history of the property (e.g. asbestos diagnosis for buildings erected before 1997, termites’ survey, statement describing the technological and natural risks relating to the property, if any, energy efficiency audit, etc.), which shall be provided by the vendor as part of the data room.

Notary’s due diligence will cover all real estate matters (e.g. ownership, planning permissions, easements, etc.), including, when applicable, construction guarantees and insurance coverage but will usually exclude the rental and operating situation, which will be reviewed by the purchaser’s legal team and/or advising lawyers.

Technical and environment surveys will also be ordered, separately, by the purchaser.

The market practice and clients’ common expectations tends to normalise the contents of the reports without imposing any formal standard.

Hong Kong Small Flag Hong Kong

The following is a summary of the legal due diligence process that is undertaken when acquiring commercial real estate in Hong Kong:

  • The purchaser's solicitors will normally conduct legal due diligence (rather than by a counsel or a notary).
  • The purchaser's solicitors will carry out a land search at the Land Registry and obtain copies of the title deeds for inspection. Searches at the Land Registry cost HK$10 per lot searched and results can be obtained instantly. They will then usually request the vendor's solicitors to deliver the title deeds (usually original copies) for inspection under an undertaking to return those title deeds upon demand and to keep them in safe custody. The purchaser's solicitors will cross check those title deeds against those registered in the Land Registry.
  • The purchaser's solicitors would also request additional information to be provided by the vendor's solicitors e.g. whether there are any unregistrable documents such as tenancy agreements or trust arrangements.
  • If there are any defects in the title, such as missing documents, unregistered documents or suspected unauthorized building works or other encumbrances, the purchaser's solicitors may raise requisitions. The vendor's solicitors will need to respond to, or help rectify those deficiencies in order to prove good title. If requisitions are unsatisfactorily answered or the defect(s) on title is/are not remedied, the purchaser will usually have reserved a right to annul the transaction in the sale and purchase agreement.
  • The purchaser's solicitors may also engage a surveyor to inspect the physical condition of the property, identify whether there are any unauthorized building works, ensure that all of the fixtures and equipment expressed to be sold are in fact existing and functional, and also obtain an opinion on the price of the property.
  • The purchaser's solicitors may also write to the management company of the property to check for any outstanding management fees or breach of terms of the deed of mutual covenants or management agreement by the vendor.
  • The purchaser's solicitors may also write to relevant Government authority for any outstanding payment of Government rent and rates payable by the vendor.
  • The purchaser may inspect the property to see whether the property is subject to unregistrable interests such as any tenants, licensees or occupiers occupying in or the property and/or to check the physical condition of the property and the fixtures, fittings and furniture.
  • If the property transaction is to be effected via a share sale, then corporate due diligence may be also necessary.
  • There is no market standard form of reporting or standard form of enquiries raised by purchasers.
  • Vendors will also customarily be asked to represent and warrant in relation to the legal title and conditions of the property.

Spain Small Flag Spain

The normal procedure for acquiring a property, especially when dealing with complex transactions, tends to commence with certain preliminary agreements reflected in a document known as a carta de intenciones (letter of intent). Through such document, the parties, without binding themselves, state their will to enter into negotiations, outline the timeframe and the terms of the due diligence process. Despite the fact that letters of intent are usually prepared as non-binding documents (except for certain specific clauses such as, for example, those on exclusivity, confidentiality and non-competition), the breach of such preliminary agreements may give rise to pre-contractual liability for the party which unjustifiably breaches the agreements and causes damage to the other party which was relying on a future agreement.

Subsequent to the letter of intent, it is common practice for the buyer to carry out an audit on the property, to review legal, technical, environmental, commercial aspects, etc., depending on the type of real estate asset in question.

The legal audit of a property is based both on the documentation provided by the seller, usually through a virtual data room, as well as the verifications made by the buyer's lawyers in public registers, city councils, cadastral registers, etc. It generally covers the following aspects:

  • title and charges;
  • lease agreements;
  • third party rights;
  • condominium of owners;
  • urban development aspects: planning status and licences;
  • contracts related to the property (construction, supplies, maintenance, insurance, services, etc.);
  • judicial or administrative proceedings related to the property;
  • municipal taxes;
  • payment of service charges and other costs.

In certain cases (such as when the seller is selling complex or numerous properties via a competitive bid process), the seller may decide to instruct its lawyers to prepare a due diligence pack including searches in order to speed up the sale process or to avoid numerous bidders having to carry out the same due diligence.

Where a property is sold by way of a transfer of the entity or structure through which it is held, the process is typically the same but with additional due diligence in respect of the relevant entity or business (including all corporate, tax, employment, intellectual property matters, contracts with third parties, financial issues, etc.).

Notwithstanding the due diligence which the buyer may carry out, it is standard practice for the seller's legal responsibility (which only covers title and hidden defects) to be replaced by a series of contractual representations and warrantees provided by the seller in respect of contingencies which may arise subsequent to the sale, based on events which take place prior to the transfer date of the property. Such representations and warranties are often qualified by the information disclosed during the due diligence process and also limited as regards the term and amount.

Updated: December 11, 2017