Q: I am thinking about purchasing a commercial property, but I want to know as much about the property as possible before going through with it. What should I consider? Do I have a time period to analyze the property? What if I decide I no longer want to purchase the property due to my findings?
A: When entering into a commercial property transaction as a buyer, it is important to include a Due Diligence clause in the letter of intent and the purchase and sale agreement. A Due Diligence clause allows time for the buyer to obtain background knowledge about the property. The clause is often broadly worded to allow a wide range of investigation. Typical information obtained and reviewed during Due Diligence include, but are not limited to, title review, environmental testing, survey, appraisal, inspection or property condition assessment, and review of town records. It is a buyer’s base line for ownership and allows the buyer to make an informed decision whether to purchase.
Properly drafted, the Due Diligence clause is a contingency allowing the buyer to terminate the purchase and sale agreement during the Due Diligence time period. The generality of buyer’s right to terminate the transaction during Due Diligence depends on the negotiations between buyer and seller. Language defining buyer’s right to terminate ranges from requiring a specific reason, such as only based on environmental testing results, to the buyer being able to terminate “for any reason, or for no reason at all.” The latter provides buyer the most general right to terminate by not having to provide seller any reasoning for terminating the agreement. The total length of the Due Diligence time period differs from thirty, sixty, or ninety days, although it can be longer or shorter if necessary and agreed upon. The amount of time allocated to the Due Diligence period is dependent on the negotiations between the buyer and seller, the complexity of the property, and the amount of Due Diligence that needs to be completed prior to closing.
The Due Diligence period begins per the terms of the purchase and sale agreement, usually on a specific date seller is to provide buyer with all Due Diligence documents in the seller’s possession. From there, the buyer will conduct their own Due Diligence on the property. How in depth a buyer’s Due Diligence is depends on the type of property, the buyer’s plans with the property, and what seller agrees may be done on the property. The buyer must also consider their budget since extensive testing and review of a site can be costly.
After reviewing all of the Due Diligence information the buyer has obtained, the buyer can then make an informed decision on whether or not they would like to move forward with the purchase of the property. It is important to note the date Due Diligence expires so that buyer does not miss their chance to terminate the agreement by notifying the seller within the given time frame, if they so choose.
Know the Law is a bi-weekly column sponsored by McLane Middleton. Questions and ideas for future columns should be emailed to knowthelaw@mclane.com. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.