Real Estate legal audit: purchase and sell with safety– Civil –
Real Estate Due Diligence is an exhaustive revision of the legal status of a property, as well as the various aspects and legal consequences of its acquisition or transfer. The result of this revision is a report in which, mainly, identified contingencies are stated along with the recommendations suggested by the legal team in order to solve them.
In order to conduct the revision appropriately, there are two important points that need to be taken into consideration:
- Who is the receiving subject of the report and what is their position in the intended transaction, with the aim of adapting the content to their interests.
- What is the legal business intended for the property, in order to best determine the consequences of its transfer or acquisition, and draft the most appropriate clauses for its management.
Secondly, in order to create the report, information will need to be gathered from the property as well as the subjects who will intervene in the transaction. The transferring company -in case of a legal person- must give the legal team access to all the information available regarding the property and the entity itself. All the documentation and information that is unavailable will have to be fulfilled by consulting with Public Records, Administrations, etc.
Then, once all the documentation has been gathered, the report will be created with its contents focusing mainly on:
- Situation of the intervening companies: Whether the positions of attorneys and administrators who will intervene are properly registered, and the company is not undergoing any special situation that might compromise the transaction.
- Description of the properties: Check if the public record description matches the physical description of the property.
- Property deeds: Whether the title deeds to the property held by the selling part are properly registered.
- Urban situation: in regards to the urban situation, it will depend on the type of property. In case of a land pending urban planning, the report will focus on the development instruments that may affect it, the state of the urbanization works, etc.
- Third-party rights, leasing agreements, occupational status, charges: Leasing contracts and the conditions agreed upon them are vital to the acquirer; not only from a profitability standing point, but also for the amount of responsibilities the lessor has assumed in those agreements, which the new holder will be subjected to. It will also be particularly important to find out if the lessees hold or have relinquished their preferential acquisition right, by means of pre-emption or redemption.
- Owner’s community: The most relevant is the debt situation since, due to direct responsibility, the same debt may be contracted by the buyer. The Home Owners’ Association statutes ought to be examined as well, in order to determine whether any limitations regarding the property apply.
- Permits, authorisations and licenses: The existence of a first occupation license is crucial. The lack of said license can thwart the acquisition of a property, not only due to its fiscal exposures – when purchasing housing, it is used to determine the appliable VAT- but for the difficulties that would be faced to market the property afterwards.
- Contracts of services and supplies: This is a minor but still necessary information for the subsequent management of the property.
- Environment: In the same vein as the urban situation, it will depend on the type of property. In the case of land, it should be examined with the assessment of technicians who have visited the property in order to determine if there are any signs of contamination.
- Insurance and certificates: It must be checked if the property has the mandatory insurances required, if there is any loss or any claim in progress, the damages covered, etc.
- Contracts with third parties and employees: The properties may have been the subject of a private sale contract that must be resolved prior to the transfer. On the other hand, the existence of employees directly linked to the real estate must also be analyzed in order to minimize a possible business succession.
- Existence of litigation: The litigiousness of the property is a factor that can affect its subsequent commercialization. As such, it is imperative that the owner provides all the information regarding ongoing procedures or sentences relapsed in relation to the property.
- Taxation: At this point the taxes that affect the estate are analyzed, especially the debt that may exist in relation to the Real Estate Tax, since the tax quota has a real effect on the property. The amounts generated by the transfer are also analyzed, such as the municipal capital gain or the indirect taxation of the transaction (VAT – TPO – AJD), examining whether the requirements for the operation of the taxpayer’s investment mechanism are met.
As we have previously indicated, the result of this analysis is contained in a report that allows the recipient to learn about all the contingencies that affect the property and the transmission, thus being able to make a decision about the convenience of the transmission or acquisition of a property. The content of said report will determine the content of the subsequent contract, if any, of sale, since a broader knowledge of the state of the property affects the scope of the guarantees.
At MES ADVOCATS we have extensive experience in the preparation of real estate legal audits for both transferors and purchasers, whether legal persons or individuals. Contact our professionals for counsel on the services that may be to your best interest.