The Art of Due Diligence in a Real Estate Contract

Posted by Charles H. Van Horn on

In this blog, we will introduce one important component often seen in a real estate purchase contract. We will present this concept from the perspective of the buyer, but the counter-perspective of the seller’s role also plays into these concepts. 

Due diligence: As the name suggests, this provides a buyer an opportunity to examine precisely what is being purchased. The scope of due diligence varies widely depending on the type of transaction, the sophistication of the buyer, and a variety of other circumstances. In examining (or drafting for that matter) a due diligence provision in a purchase contract, due consideration must be given to what is to be examined and how long each examination will take. Consider how long is legitimately needed to adequately examine the conditions of the property. For instance, in a straight forward purchase of a residence, a week to 10 days is a fairly typical timeframe. The examination of commercial land can be substantially more complicated, and oftentimes will necessitate varying degrees of environmental analysis, geological studies, site plan work to determine what can be built on the particular parcel, and much, much more. 

An additional part of due diligence includes whether the purchase contract will be conditioned on the property’s zoning status being modified.  Rezoning can be quite time consuming and require extensive steps, many of which are far outside the buyer or seller’s control.  Be sure your contract contemplates all of the variables associated with accomplishing a rezoning.  If the obligation to buy or sell is conditioned on the property being rezoned, be clear will satisfy the contingency:  having a re-zoning application pending enough? Full and final approval of the re-zoning? Or more.  For example, many development contracts will extend the obligation to purchase even beyond a successful rezoning and be tied to the issuance of a Land Disturbance Permit, which is granted after a rezoning and other conditions are met. 

Also, consider whether the purchaser is afforded the opportunity to examine the structure being purchased. If so, to what depth can the property inspection go? Is the inspection merely superficial (akin to the inspection associated with the purchase of a residence) or more detailed, such as utilizing the services of a structural engineer or other professional?  Beyond that, what happens at the conclusion of the property inspection: are there rights for the purchaser to demand repairs, or is the decision making more binary (purchase “as is” or cancel the agreement). 

Due diligence can also extend beyond the four corners of the property and its zoning designation. A buyer will often insist on the right to inspect the title of the property. Typically, a buyer is afforded an opportunity to flag any problems in the chain of title, often referred to as “title objections.” In reviewing a real estate purchase contract, one needs to consider when the title objection phase should occur relative to other elements of the due diligence process. Many contracts will define what constitutes a valid title objection and will often provide a means for a seller to cure a title objection.

The scope of due diligence afforded a buyer in a real estate contract can take on many forms. The various characteristics of the property, and the transaction itself, will motivate a buyer to engage in extensive investigation of the property, opportunities for future use of the property, as well as the historic title of the property. The length of due diligence as well as the depth of how long due diligence lasts, and how much time, and to what each part of due diligence can be heavily negotiated provisions. Understanding what rights or responsibilities the buyer and seller have throughout each phase of the due diligence process is crucial to evaluating a real estate purchase contract.