“Due diligence” is a term widely used to define the multitude of actions implied when investigating the subject matter of a transaction before a contract is signed. Due diligence helps a buyer or investor to ensure that the price paid is the right one for the characteristics of the property and that no unforeseen problems with the investment will arise after payment of the price.
In this article we will discuss what verifications are involved in buying property and for what purpose.
First of all, why is Due Diligence necessary?
A thorough analysis of the property and its legal situation can only be a plus for any buyer. There are no minuses to such an investigation other than what it may seem to a casual or inexperienced buyer – an unjustified cost or delay in completing the much desired purchase.
In reality, the clarity that such a report brings and the removal of investment risk brings invaluable added value and an objective overview from professionals trained to see the pluses and minuses down to the smallest detail. We are talking about prophylaxis, prevention, just like in medicine, where it is infinitely simpler and less expensive to do a simple annual analysis than to discover a serious illness years later. This is also the reason why the big deals undoubtedly always have such a report behind them.
What are the objectives of a Due Diligence?
A due diligence is intended to uncover risks that may reduce the value of the asset being transacted and, depending on their severity, either lead to the termination of negotiations or to the drafting of the sale and purchase contract in such a way as to cover these potential risks, for example by introducing guarantees or indemnity obligations.
These checks will also classify the purchaser as a bona fide purchaser who is in a common and invincible mistake, which means that his deed of ownership cannot be annulled in a possible claim.
What is considered in the case of the purchase of a property?
a) The legal status of the property, checking disputes and administrative procedures
b) The existence of encumbrances on the property, as well as any easements or reciprocal agreements concerning the property
c) Existence of rental, lease, etc. contracts on the property
d) The status of the property in the Real Estate Registers,
e) Postal number, history of the trunk, tax role
f) Physical and technical condition of the building
g) Access roads
h) The utilities regime
i) The authorisation regime, where necessary
The above points will be achieved regardless of the quality of the vendor and the use of the building. To these will be added specific checks when the seller is a company (depreciation, entry value, loan repayments/agreement of the creditor bank, agreement of the general meeting for the sale, solvency of the company, etc.) or the property is bought for a particular use (authorisations, utility connections, seismic risk, etc.).
Why pay for a due diligence report when the notary already checks the documents?
We come across this preconception quite often, but it is worth noting that the notary is only obliged to check whether the parties have the capacity to enter into deeds of disposal or whether a historic monument is being sold and will not carry out checks within the scope of those listed above. On the contrary, the sale-purchase contract in authentic form contains phrases that reinforce the idea that the parties know the object of the transaction, have seen the property, know its history and agree to the sale-purchase in the form and condition in which it is found – statements that can sometimes even pose problems for buyers.
Not infrequently the utilities seem to exist, the connections seem functional, the excuses seem credible and the promises – strong.
What really helps, however, is the diligence to do serious due diligence when it comes to a transaction with considerable financial impact for you or your family and not to sign contracts without professional assistance.
Author: Atty. Lavinia Rusu