Why Should You Perform Commercial Property Due Diligence?
When you are in the process of purchasing commercial property, it is crucial that you perform thorough due diligence on the property in question to ensure that it is suitable for you. Any issues with the condition of the property or its compliance with relevant building, planning or environmental regulations could impact your ability to operate your business on the premises, while the absence of the appropriate title deeds and documentation could jeopardise the sale and purchase altogether.
By instructing a specialist commercial property solicitor to perform due diligence on a property you are interested in buying, you can identify any problems early in the conveyancing process, such that they can be addressed with the seller. While your solicitor and the other professionals they commission to conduct surveys and searches will know what to investigate, you need to have an understanding of what due diligence checks should be performed to ensure nothing is missed. Therefore, we recommend maintaining a commercial property due diligence checklist so that you can be confident that all the necessary checks have been made.
Commercial Property Due Diligence Checklist
Whether you are engaged in a straightforward property purchase or you intend to purchase subject to existing lease agreements, there is a significant amount of commercial property due diligence checks that need to be performed before the sale can be completed. In light of this, we have compiled a comprehensive checklist of every aspect of your property purchase that should be investigated during conveyancing.
- Title Searches
Obtaining the title deeds from HM Land Registry is one of the first commercial property due diligence checks that your solicitor should perform. In addition to verifying that the seller has the legal right to transfer ownership of the property, performing title searches will reveal any outstanding mortgages or charges against the property, which will need to be addressed in negotiations.
When you are instructing your solicitor on this aspect of commercial property due diligence, we recommend that you request a Report on Title, which compiles the following information:
- Proof of ownership
- Outstanding mortgages and charges
- Existing and required insurances
- Property boundaries
- Covenants and obligations affecting the property
- Legislation affecting the property
- Required consents for purchasing the property
- Planning Permission
Commercial properties that have been recently refurbished or are currently being renovated need to have the relevant planning permission to ensure they are fit for sale and comply with the conditions of their intended use. Without performing the necessary due diligence checks, your commercial property purchase could be jeopardised.
In addition to investigating the permissions for any existing or ongoing renovations, we recommend that you query whether there are any planning projects in the pipeline that could impact the intended use of the property. Furthermore, you should clarify whether any restrictions apply to the property, such as environmental impediments or a listed status, which may prevent you from developing the property as you intend.
- Condition of the Property
While you should be able to assess the general condition of the property during your own viewing, it is essential that you commission a thorough site survey to reveal whether there are any structural issues or maintenance requirements that need addressing before the sale can go ahead. This survey should interrogate every aspect of the property, from its roof to its foundations, as well as its plumbing, electrics and any other essential utilities.
Any issues raised during this aspect of your commercial property due diligence should be raised in negotiations, such that the necessary renovations can be factored into the terms of sale, or their cost can be subtracted from the asking price.
- Insurance Policies
Depending on the type and intended use of the property in question, there may be multiple insurance policies that need to be in place to enable your business to operate on its premises. In addition to arranging for the relevant insurance policies to be instated from your completion date, your commercial property due diligence checks should determine whether the current premiums are paid up to date and whether any claims have been made against the property that could affect the premiums of future policies.
- Property Value
You need to commission an independent valuation to get an informed assessment of its value compared to similar properties in the same area. This valuation should include information pertaining to the earning potential (in rental yield) of the property, the number of potential customers or tenants in the local area, as well as opportunities to develop the property to increase its market value.
- Legal Documents
Numerous legal documents are necessary for the completion of any commercial property transaction, and your solicitor should seek to obtain and review these as part of their due diligence checks. Any absent documents or outdated regulations could delay or jeopardise the sale, so it is crucial that the following legal documents are accounted for before exchanging contracts:
- Mortgage documents
- Trust deeds
- Business licenses
- Bank statements and business accounts
- Planning permissions and environmental reports
- Commercial Lease Agreements
When lease agreements are being transferred alongside the ownership of the commercial property, due diligence should be performed on the terms of each lease to evaluate how this could impact the value of the property. We recommend that you instruct your solicitor to investigate the following terms:
- Rental payments and reviews
- Termination dates
- Break clauses
- Security of tenure
- Insurance and maintenance obligations
- Transfer charges or restrictions
- Strength of Covenants
In addition to reviewing the lease agreements, your solicitor should scrutinise the tenants bound to these agreements to determine whether they pose any financial risks to your business. A prospective buyer may enquire of the seller:
- Do any of the tenants have a history of late rental payments?
- Do the tenants have guarantors?
- Legislation and Regulations
There are various pieces of legislation and regulations that commercial properties are expected to comply with, relative to their location, type and intended use. Before progressing the conveyancing process, a buyer may instruct its solicitor to request evidence of compliance with the following:
- Building regulations
- Fire and asbestos regulations
- Health and safety legislation
- Energy Act (EPC Rating)
- Landlord and Tenant Acts
- Law of Property Act 1925
- Climate Change Act
Can Newtons Help with Commercial Property Due Diligence?
We hope that our commercial property due diligence checklist has clarified which aspects of your transaction require investigation from your solicitors, surveyors and other legal advisors. At Newtons Solicitors, we have support numerous prospective buyers with their commercial property due diligence, identifying any omissions or issues in order to obtain an accurate valuation and ensure the conveyancing process is performed without delay.
If you require legal advice for an upcoming transaction or you have any queries about commercial property due diligence, please get in touch with us today so that we can lend you our knowledge and expertise.