The due diligence phase is crucial to any real estate transaction. When properly drafted in an agreement of sale, it can allow buyers to obtain ample information about a property. Perhaps most importantly, it could give buyers additional negotiation leverage. An unforeseen issue exposed during a due diligence investigation can create an opportunity for a reduction in purchase price or additional purchase incentives. Here are five due diligence items to consider:
1. Access. Consider whether the property you are purchasing has sufficient legal access. Some easements and access agreements may not be recorded, in which case it is important to speak with the sellers regarding the property’s current access arrangements.
2. Stormwater Management. Storm water management facilities may implicate various maintenance and repair obligations set by state environmental agencies. In Pennsylvania, the existence of a property’s post-construction stormwater management facility could mean numerous state maintenance obligations, as well as specific notice and consent requirements for subsequent property transfers.
3. Zoning Overlays. Although a property’s zoning classification is a common due diligence consideration, municipalities often enact overlay zones which impose additional land development and permitting requirements. These overlays may increase a buyer’s requirements or impose additional conditions related to the subdivision and land development approval process.
4. Condominium and Planned Community Concerns. A property often is subject to a condominium or planned community declaration. Some hallmarks of these ownership structures include common areas shared by owners of each property within the condominium or planned community, as well as unit owners’ associations charged with administering the properties and enforcing any regulations. It is important to review any declarations (and accompanying plats) affecting the property to determine the obligations of each owner within the community containing the property. Ask about items like signage permission, shared access, parking and potential amendments or additions to the planned community or condominium.
5. Leases. A lease encumbering a property can be a due diligence nightmare. Leases often contain hidden clauses and rights. A tenant’s right of first refusal could be detrimental for a buyer in any transaction, especially if the right is initially undisclosed and the tenant later refuses to consent to a waiver of that right. It is important to obtain an estoppel certificate from any tenant at the property you are purchasing. These certificates help to ensure the lease you are assuming is valid and enforceable. In the event that a buyer is obtaining financing for its purchase, a tenant, in connection with an estoppel certificate, may also request a subordination and non-disturbance agreement (SNDA). SNDAs subordinate the tenant’s leasehold interest to the buyer’s mortgage, but assure the tenant will not be “disturbed” in its occupancy of the property in the event of a foreclosure of the mortgage. These items require additional negotiation, so be sure to adequately review them during any due diligence phase.
In order to review any of these due diligence items, it is important at the outset of a transaction to ensure the seller discloses all available information and documentation related to the property. Additional investigation may include searching the local recorder of deed’s office, obtaining a zoning compliance letter or engaging an appraiser to appraise the property.
Reilly Noetzel is an associate in Barley Snyder’s Lancaster, PA office, whose practice includes both real estate and construction. Contact him at email@example.com or at 717-399-1561.