Property due diligence is incredibly important. Mergers and acquisitions (M&A) are one of the most significant activities that will take place in a business, typically to support future growth and business aspirations.
They can take several forms – from a full business merger, to the purchase of a specific asset or stock.
In almost every M&A transaction, a purchaser will acquire an interest, whether freehold or leasehold, in at least one property asset.
However, such assets are unlikely to be the driving force behind the M&A activity.
If they don’t form a core part of the business post-transaction, in our experience, they can become somewhat forgotten during the due diligence process.
Without effective due diligence, the risks associated with the property assets you’re about to acquire are unknown, unquantified and unmanaged.
This brings with it a number of risks which, without effective property investment due diligence, have the potential to expose your business to significant downstream costs.
Indeed, if problems are discovered after the acquisition is completed, it can negate the commercial benefits you might have gained elsewhere in the transaction.
Some of the most common considerations as part of the property due diligence process include:
When it comes to leasehold properties where you’re a tenant, on what basis will you occupy the premises and does the lease allow for it to assigned to a new company?
What are the terms and obligations under the leases and what does it cost? How long is the lease and can you get out of it if needed?
Are there any lease break options either for the landlord or the tenant which would mean you would need to move? And what liability is there in respect of dilapidations costs?
In the case of freehold properties whereby you inherit ownership of the property itself, issues might include defective titles, easements, restrictions or charges which may limit the use or effect the value of the property.
Technical and legislative advances mean that some buildings are fast becoming obsolete.
Can the building be fully utilised for your use or are there limitations such as poor IT infrastructure?
Does the property have a poor EPC rating and are remedial works needed to bring the property in line with current legislation.
It’s important to establish whether the property you’re acquiring is poorly designed, built or maintained.
Will it therefore require significant expenditure to address defects or harmful materials? Indeed, is it nearing the end of its economic life altogether?