Purchasing or leasing commercial real estate can be a complex and intricate process. To ensure you’re making a sound investment and avoiding costly surprises, due diligence is crucial. This involves a thorough investigation and analysis of the property before committing to a deal.
What is due diligence?
Due diligence is the process of gathering information and analyzing a commercial property to understand its full potential, risks, and value. It aims to:
- Minimize financial risks by identifying potential issues like liens, zoning restrictions, or environmental concerns.
- Identify potential physical defects to the property to determine whether repairs should be covered by the seller.
- Ensure accurate property valuation by understanding income potential, operational costs, and necessary repairs.
- Negotiate fair deals by gaining leverage based on discovered information.
Why is due diligence essential?
Thorough due diligence protects you from unexpected financial losses and ensures informed investment decisions. It provides valuable insights into the property’s suitability for your intended use and empowers you to negotiate better deal terms with the seller/landlord.
Obligations for the Buyer?
A Buyer’s due diligence obligations vary from state to state. Generally, the Buyers’ obligations are as follows:
- Investigation: The buyer has an obligation to conduct a thorough investigation of the target company or asset. This includes reviewing financial statements, contractual agreements, legal documents, environmental reports, and other relevant information.
- Disclosure: The buyer has the right to request information from the seller. This information should be complete and accurate to enable the buyer to make informed decisions.
- Good faith: The buyer should act in good faith throughout the due diligence process. This means being honest and transparent with the seller and providing all necessary information.
- Confidentiality: The buyer should keep all information obtained during due diligence confidential. This information should not be shared with any third party without the seller’s consent.
- Negotiation: The buyer has the right to negotiate the terms of the transaction based on the findings of due diligence.
- Define objectives: Clearly define your goals for the property and tailor your due diligence strategy accordingly.
Obligations for the Seller?
Like a Buyers’ obligations, a Sellers’ obligations likewise vary from state to state, but generally consists of the following:
- Disclosure: The seller has an obligation to disclose all material information about the company or assets. This may include any known risks, liabilities, or issues.
- Cooperation: The seller should cooperate with the buyer’s due diligence efforts. This includes providing all requested information and making key personnel available for interviews.
- Accuracy: The seller should ensure that all information provided is accurate and complete.
- Timeliness: The seller should respond to the buyer’s inquiries promptly and efficiently.
- Negotiation: The seller should be prepared to negotiate the terms of the transaction based on the findings of due diligence.
- Compliance with Laws and Regulations: Both the buyer and seller must comply with all applicable laws and regulations during the due diligence process.
- Professional Standards: Both parties should act in accordance with professional standards and ethical guidelines.
- Fairness: Both parties should treat each other fairly and avoid any misleading or deceptive practices.
Due diligence obligations can vary significantly depending on several factors, including the nature of the transaction, the size and complexity of the parties involved, and the relevant legal and regulatory landscape. Consulting with legal and financial advisors is crucial to understanding your specific obligations and ensuring compliance.
Our firm regularly represents clients involved in purchasing and selling commercial properties on the front end, as well as clients who find themselves engrossed in disputes over issues that arose during a commercial real estate transaction. Common disputes include disclosure issues, material breach, and bad faith claims.
If you find yourself involved in such a dispute, or if you have a commercial transaction that requires legal review, please don’t hesitate to contact Lawrence Graham or another experienced attorney at Manning Fulton.