Emily is now going to look at due diligence - what is it, why is it and why does it cost so much?
This piece is aimed at those who work with commercial clients including tax advisers, accountants, finance brokers, and commercial lawyers. We are thinking about commercial clients who own property, possibly their most valuable tangible asset, but whose core business is not real estate.
Advisers – you know what due diligence (DD) is, but do your clients? It is a bit of a buzz expression, but how deep does it go and when does it bite?
Extensive DD hits when our clients are contemplating one of these activities:
- Corporate restructuring
- Business or share sale or purchase
- Refinancing
These transactions may be tax driven or may be about growing the business or moving away from a business. The client will talk it over with their trusted advisers who are likely to be their lawyers, accountants and financial advisers. We want to ensure that our clients know what they are getting into and what preparations they can make to smooth the path.
It is an unfortunate fact that DD is often the single most costly element of the professional fees; but other than on a purchase, the extent of the client's time plus the professional time/cost is largely in the hands of the client.
What is it and How to Control the Cost?
DD for real estate includes classic investigation of title, but it goes beyond checking the title for ownership, necessary rights or adverse covenants and restrictions. Some of the information will be for the lawyer to organise. Mainly Land Registry documents and public searches. The majority, however, will be documents held (or which should be held) by the client – the owner/occupier.
Where the business operates from a leased property, an asset sale/purchase of the business may also require landlord consents (including the consent of any landlord's mortgagee), rent deposit agreements with the buyers and other third-party involvement. Where the transaction envisaged is a refinance secured on the real estate asset, the DD is largely limited to the property, looking carefully at current use, past works, third party tenancies, H&S records, compliance certification, and so on.
If you are advising on refinance or a sale of business or assets, the DD will be a deep dive into every single aspect of the business in addition to its property. The business client, for obvious reasons will focus on the business performance and financial records, but, unless the preparation below has been done, identifying and locating the required documentation will be what takes the time (and cost), especially if there is new third-party finance involved.
Preparation is Key
If you are not the client's solicitor, but you are discussing the intended transaction with your client, we recommend encouraging your client to review the property (and the business) with their lawyer before the decision to refinance, sell, etc.
Preparation does need to be paid for, but if there are missing planning documents, potential dilapidations to be factored in, covenants to be analysed, certificates to be updated, replies to standard form enquiries to be drafted, etc., it will always be cheaper and less stressful to identify and plug these gaps before the matter turns critical.
Advance preparation will benefit the deal by reducing delays, showcasing a well-run business, and limiting the risk of last-minute price haggling.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
