Five reasons why you should carry out pre-purchase legal due diligence on any property transaction
Just as buying a home is a major investment for the average person, buying business property is a major investment for a company. Property transactions take a great deal of time and money to complete, and require the buyer to take the utmost care not to do the equivalent of stepping on a rake. This is why we recommend that buyers carry out pre-purchase due diligence, including legal due diligence, on any potential property transaction. That being said, it would make sense for all property owners where such a property is on the larger and more expensive side to carry out their due diligence before the sales process even begins. This will also give the seller a better understanding of the nature of the property that is to be sold.
Business property in Estonia has a large number of varying functions and levels of quality, and many such properties may originate from very different time periods. There are also many different ways in which business property may be purchased. In addition to what could be classed as ‘normal’ property transactions it is relatively usual, particularly so in the case of business properties, for a potential purchaser to buy an interest in the company that owns the property. Although, in this case, it is important that legal due diligence also be carried out in relation to the company that is going to be purchased, the main emphasis is still on property-related due diligence. After all, it is still the property that is the main cash flow generator for the company in question, as well as being its primary asset.
In Estonia, information relating to property (above all, legally-significant information) is generally available in public registers. The main public registers which contain information relating to property are the land registry departments of the courts and the construction register. In addition to these, various planning registers and the document registers of local government authorities are also publicly available. In certain cases, you will also need to consult various archives in addition to public online registers.
What is pre-purchase legal due diligence?
To minimise any risks which may relate to the property that is to be purchased, it makes sense for the buyer to carry out, as thoroughly as possible, their own pre-purchase due diligence process, with legal due diligence included, in regard to the property that they intend to buy. Legal due diligence will provide answers to most of the questions that could arise, primarily in connection with plans concerning the location of the property and building permissions (such as, for example, how many storeys they may be allowed to build, are there any rights or claims that have been established for the benefit of the plot or which may be encumbering it, are there any tax risks that could be related to the purchase of the plot, and so on, if the transaction is to be treated as a company transfer).
As mentioned earlier, and depending upon the nature of the property that is to be the subject of any purchase attempt and the aim of the investment, due diligence may include various areas of work. In addition to carrying out legal due diligence it may also make sense to carry out a technical due diligence on the building. When buying a business property any potential purchaser would be wise also to carry out commercial and financial due diligence on the property in question, and add environmental due diligence to that list as well, as a means of extending the full coverage of protection when it comes to certain forms of property.
Five reasons why you should carry out pre-purchase legal due diligence on a property
Carrying out pre-purchase legal due diligence on a property will help the buyer to:
- clarify the legal status of the property that is to be the target of a purchase attempt
- minimise any risk, whether tax-related or any other kind, which may be connected to the transaction
- make meaningful decisions for a successful transaction
- agree on the essential conditions of the sales agreement
- reduce the risk of potential disputes arising
In order to be able to avoid any unpleasant surprises it makes sense for the buyer to invest their time and, if needed, also their money in terms of carrying out due diligence on the property in question. TRINITI has provided advice about numerous major investments involving property, and has invested a great deal of the time and commitment of its staff when it comes to developing its team. Whether you are contemplating a property investment, looking for more information about this area, or seeking a solution for your problem, please do not hesitate to contact us. TRINITI offers first appointments and initial advice free of charge.