Due diligence of real estate are one of services provided by Capital Legal Law Firm. Commercial real estate transactions in Poland have been popular with investors for many years. In 2020 alone, the value of transactions amounted to more than 5 billion euros, and in periods before the COVID-19 pandemic, the amounts were about 30% higher. Global macroeconomic trends and Poland’s economic outlook assume an intensification of commercial real estate transactions, especially in the warehouse and industrial-logistics sectors profiled for e-commerce. In addition to the warehouse market, there is also a growing supply of apartments for institutional rent, smaller buildings and retail parks.
Real estate due diligence – who needs it?
However, due to the high transaction prices of commercial real estate, numbering in the millions of zlotys, every commercial real estate transaction should be preceded by a multi-faceted real estate due diligence (also known as real estate due diligence). Real estate due diligence is a process designed to collect and verify a range of information about a property in order to identify potential risks associated with the acquisition of the property and identify opportunities to minimize or remove them.
Legal audit of real estate – the purpose of the study
The primary purpose of conducting a real estate due diligence is to provide information and documents to a potential real estate buyer so that he can make the right business decision, including whether it is possible to conduct a planned investment on the property, whether the planned transaction is profitable for him, and whether it meets his planned business objectives.
It is worth noting, however, that from the investor’s point of view, the purpose of a real estate due diligence is not always necessarily to definitively determine whether he should enter into a transaction or not. This is because the conclusions of a real estate due diligence often lead to the identification of legal factors that could potentially reduce the price of the property during negotiations with the seller. It is therefore important that a due diligence of a property accurately identifies any irregularities and legal concerns, which can be directly reflected in the buyer’s negotiating position and lower the final transaction price.
Property legal status audit – how can we help you?
- due diligence audit – we will perform a comprehensive analysis of the legal status of the property, taking into account the business assumptions of the transaction, the type of property being audited and any other economic and legal conditions you indicate,
- due diligence audit report – at the end of the real estate legal audit process, we will prepare a report covering the legal issues we have analyzed and indicate the identified legal problems related to the property, along with recommendations on how to remove the legal problem and what legal risks it poses to the investor,
- transactional documentation – we will prepare transactional documentation related to the real estate transaction, taking into account the results of the legal research, with a view to safeguarding your legal interest,
- transaction negotiations – we can also assist at every stage concerning the negotiations in order to reach a legal consensus and draft optimal transaction documentation,
- post-transaction activities – we will also help you fulfill all legal and disclosure obligations related to the real estate transaction.
Real estate legal audit – what is verified in a real estate due diligence?
While the scope of any real estate legal audit varies primarily depending on the type of property being audited – a different scope will apply to an office property in the city center and another to a logistics center outside the city – certain legal areas should be verified in any real estate due diligence. In practice, a legal audit involves undertaking a number of analytical steps relating to the following issues, among others:
- the seller’s legal title to the property – one of the primary purposes of a real estate legal audit of the property is to confirm first and foremost whether the entity disposing of the property has legal title to it, enabling it to enter into a contract with the entity acquiring the property. Legal problems related to title can, for example, occur when the alleged owner of the property is a corporation that has not properly obtained the corporate approvals granted. In this case, the warranty of public faith of the land register will not protect the buyer.
- examination of the land and mortgage register (claim rights and restrictions) – in addition to the issue of auditing the title to the property (section II of the land and mortgage register), a thorough review of the other sections of the land and mortgage register maintained for the property should also be carried out. Section III of the land and mortgage register may contain entries regarding rights, claims and restrictions on the property, for example, easements, mentions of pending enforcement proceedings involving the property, claims for transfer of ownership in a preliminary agreement concluded in the form of a notarial deed, or other rights of third parties. It should also be noted that in a situation where there are entries in section III of the real estate mortgage book relating to third-party claims against the property, the possibility of their deletion from the mortgage book should be subject to legal examination before the conclusion of the planned transaction.
- land register (mortgages) – section IV of the land register contains information about mortgage encumbrances on the property. In a situation where the property is encumbered by a mortgage, then it is the buyer, not the seller, who is liable for the obligations arising from the mortgage. Often, in the course of the transaction, the property is released from mortgage encumbrances by satisfying existing claims of the mortgage creditor.
- statutory right of first refusal – often the subject of real estate transactions is land that has been acquired from the State Treasury or a local government. In this situation, a legal audit of the property should also include verification of whether there is a statutory right of pre-emption of the property, and if so, when the State Treasury or a municipality can exercise it.
- extract and extract from the land register – verification of the extract and extract from the land register makes it possible to confirm whether the content of the entries disclosed in the land register maintained for the property corresponds to the actual state disclosed in the register. In addition, a real estate due diligence should also include an analysis of what land makes up the property. For example, in a situation where it is agricultural land, it is then necessary to obtain the appropriate consent from the public administration.
- planning conditions – if the property the investor plans to acquire is located in an area where a local zoning plan is in effect, the property audit should include an analysis of whether the planned investment will comply with the provisions of the local zoning plan. This is because the plan determines the purpose for which the property can be used, for example, in a situation where the plan provides for the construction of industrial facilities, as a rule it is not possible to build a development project in the area. The local zoning plan usually also contains other requirements that must be met by the investor, for example, in terms of the building intensity ratio or limits on the cubic capacity of buildings. However, if a local development plan has not been adopted for the area where the property is located, the provisions of the decision establishing the development conditions for the property should then be verified as part of the property audit. According to the Law on Spatial Planning and Development, the zoning decision establishes the conditions for changing the use of the land through the construction of a building structure.
- legal documentation related to the construction process – in a situation where an investor plans to purchase a property that has already been developed with a building, it is then necessary, first of all, to obtain from the seller a set of documents related to the construction process. In particular, the legal examination of the property should include administrative decisions related to the property, such as building permits, occupancy permits and (possible) demolition permits. It is also important that as part of the audit of the property, verification should be made that all the documents submitted have been stamped with seals confirming their finality, or that orders have been issued confirming the finality of the decisions.
- accession of the new owner to the lease relationship – in a situation where an investor plans to acquire a property under which leases have been concluded (e.g. an office building), as a rule, the investor then enters into the rights of the existing landlord. In this situation, before concluding the transaction, it is in the investor’s interest to audit the lease agreements. As part of the audit, all contractual provisions should be verified, particularly in the context of the rights and obligations of tenants and landlords. It is also necessary to confirm, among other things, whether the agreements were concluded by authorized persons on the tenant’s side, and to analyze the security of the landlord’s claims against the tenant for non-performance or improper performance of the obligations imposed on the tenant by the lease agreement. The above issues are only a part of the issues subject to auditing of rental agreements in the process of real estate acquisition.
Real estate due diligence – what do you gain by cooperating with us?
- we have been successfully advising domestic and foreign entrepreneurs for many years, we have conducted a number of due diligence studies of properties with a high level of complexity, including shopping centers, office buildings, warehouse halls, industrial buildings, retail parks, production halls, etc.
- we have a wealth of experience and expertise gained through completed transactions, including in cooperation with renowned international law firms,
- we understand the business needs of clients,
- we combine theoretical legal knowledge with a practical approach to the business client,
- we provide services at the level of international law firms, including in English,
- we offer flexible financial terms tailored to the client’s needs.
Real estate due diligence – how much does it cost?
The cost of conducting a legal audit of real estate largely depends on the type of property being audited. As a rule, the conduct of a legal audit is billed at a flat rate for the preparation of a comprehensive audit, including conclusions and further recommendations. However, if the client is interested in a narrower scope of cooperation, for example, verification of specific legal issues, then we propose billing based on an hourly rate.
Property legal status audit – how to start cooperation with us?
If you are interested in conducting a real estate due diligence or have any questions about the process – contact us by email and indicate the issues you are interested in. Write to us and we will respond to your message within a maximum of 24 hours.