18 Dec Real estate due diligence: considerations prior to property purchase
The purchase and sale of real estate is one of the areas in which Navarro Llima Abogados specialises. For this reason, today we are going to explain the legal concept of “Real Estate Due Diligence”.
Currently, it is considered convenient to know before the purchase what are the physical characteristics of the property in reality, in order not to have to record it later to the acquisition in the Land Registry.
What is “real estate due diligence”?
It is an Anglo-Saxon expression, which refers to the procedure of investigating the property in order to discover possible risks that are not easily visible and that may be detrimental to the interests of the acquirer.
Initially, it was developed for the sale and purchase of companies, but nowadays, the same methodology has been implemented in the real estate sector.
The ultimate objective is to gather as much information as possible in order to analyse the feasibility of the transaction, the reasonableness of the conditions, as well as the effects after the transaction has been executed.
Due diligence procedure in Spain
Currently, Spanish legislation does not include a procedure for carrying out the due diligence process. However, it is advisable that before carrying it out, an agreement is reached to establish the basis of the purchase and sale transaction (e.g. letter of intent), which specifies:
- The duration of the due diligence investigation.
- The buyer’s confidentiality agreement regarding the information received from the seller.
- The commitment not to do business with third parties for the property while the procedure is being carried out.
Once the investigation has been carried out, the buyer will make a decision on the purchase and sale of the property.
What are the lines of action for due diligence?
The scope of this process may be marked by 3 types of lines of action:
- The legal audit: this will be in charge of both an in-depth examination of the title deeds, as well as the fact that the property physically corresponds in practice with what is recorded in the Cadastre. Also, all charges and encumbrances registered in the Land Registry that affect the property or the possible registered leases to which the property is subject.
- The town planning audit: in this process, information is sought about the town planning file, the ITE records, the building book, the plans, photographs and legalisation bulletins of the property, etc. All of this will be important when it comes to finding out if the property is located in a special architectural or urban planning protection zone…
- The tax audit: in which we will try to obtain the exact value of the real estate property, as well as to check if the possible tax affections that concern the property and that are recorded in the Land Registry by marginal note have been paid. Example: if the property was acquired by inheritance, the marginal note states that the property is subject to inheritance tax. We will have to check the effectiveness of such payment in order to be sure that our recently acquired property will not be liable for the payment of inheritance tax of the person who wants to sell it to us.
It is a key procedure, to really know the conditions of purchase of the property, and that Navarro Llima Abogados carries out exhaustively. Prevention is better…