Due Diligence in Commercial Property Sales: Seller and Buyer Concerns

There are risks inherent in purchasing property, and buyers are not expected to purchase blindly. Many jurisdictions have unique laws that affect real estate transactions. In addition to title searches, some jurisdictions, such as Florida, have liens, fees, and permit violations that are attached to properties rather than individuals, which necessitates a municipal lien search as part of the closing process.

Buyers want to ensure that taxes and insurance are up to date, as well as review compliance with current zoning rules and property codes. If problems are uncovered, or if the buyer plans on making any changes to the property, including its use, then additional permits and business licenses may be required. For an income-producing property like an office building or apartment complex, a thorough review of the lease payment history will shed light on the orderly and predictable flow of rental income.

The challenges and issues that face sellers during the due diligence process are addressed less often. Most landowners understand that they may be liable for injuries to others that occur on their property. Often, these individuals will be third-party contractors (e.g., environmental inspectors, engineers, or architects) engaged by a buyer. If these parties are injured on-site, the seller may incur costs and liability exposure.

Occasionally, one party may seek to change the property's zoning or permits to make the property more marketable or increase its value. While the property is off the market there is no guarantee that the transaction will close without the flexibility to sell the property for a higher price if the market changes. If the potential buyer obtains these changes, the property may be unfit for other uses.

Although most due diligence is limited to investigations of the property in its current condition or feasibility, buyers may seek to improve the property before closing or engage third parties to plan future improvements. Those situations may entitle third-party contractors to "construction liens" if they are not fully paid for their work. This creates a risk to a seller because construction liens attach to the for-sale property, even though the seller never contracted with the lien claimant and has no duty to pay them.

Listen as our authoritative panel addresses the need for buyers and sellers to complete due diligence before closing on a property. The panel will discuss how to navigate those issues to avoid these potential pitfalls and ensure that a transaction goes from signature to closing without unexpected problems.