Due diligence is an overall term used for the process of investigation and fact checking before a contract is signed.
If you’re buying or selling property, you need to perform a variety of assessments that will define the level of a risk you’re putting yourself in.
Due diligence is vital, no matter where you stand in the process. Both buyers and tenants need to be aware that the property could be poorly designed or built with inferior materials. Facts uncovered during due dilligence can also help with lease negotiations.
If you do not conduct estate due diligence, you could end up with a damaging property investment or potentially long-term problems as a tenant.
Looking beyond problems with the property itself, it is also important to read all documentation that may concern modifications, mortgages, occupancy and maintenance. In simple terms, due diligence is the process of determining whether you are actually buying or leasing what you think you are buying or leasing.
Various aspects of the property and the deal need to be looked at, these include:
Environmental factors such as asbestos, lead paint, mould, operating permits, any surrounding nature reserves, flood zones, noise restrictions, endangered species, and rights to water and minerals.
Physical factors such as structural inspection, disability access, zoning laws, building regulations, planning permission, roads, drainage, parking, loading and utilities.
Surrounding communal issues such as crime rates in the area, nearby schools and shops, and customer traffic.
Tenancy issues such as contracts, leases, licenses needed, insurance, repairs and maintenance, registered land, taxes, sub-letting and amendments.
Schedule of Condition
A Schedule of Condition is a document noting all defects after a full inspection survey of a property, giving tenants and landlords a full record of a property's state of condition at the commencement of occupation.
As a tenant, you may find that your contract states that you are liable for repairs, which means you need to leave the property in a condition comparable to that at the start of the lease.
To avoid any dispute at the end of your tenancy, and any unexpected repair costs at the end of the lease, a Schedule of Condition should be carried out before a tenancy begins.
Any future disagreements with the landlord can then be consulted through the Schedule of Condition, which is usually attached to the lease documentation. This way the tenant can be protected against unscrupulous landlords who may make outlandish claims.
Heads of Terms
The HOTS is essentially a draft version of the contract, listing the terms that both parties have agreed to.
A Heads of Terms (HOTS) is usually issued before the legal contract as a final form of protection for tenants and buyers.
While it is not a legally-binding document, it is a comprehensive account of who has agreed to what, so there is no confusion from either side before the legal proceedings begin. There is also a 'moral' aspect to HOTS as parties should not break their word.
Within the HOTS, the main topics to cover include:
The name of both parties on the agreement
A description of the transaction
The nature of any agreements
Any break clauses or provisions
Any money issues, the currency and the payment method
A timeline of how long the whole process will take until the transaction is completed
Anything that is written in the HOTS needs to be fully understood by both parties, so be sure to seek legal advice from a solicitor.
By fully assessing all aspects of the premises, developing a Schedule of Condition and drafting a HOTS buyers, sellers and tenants can protect themselves against any problems that may arise.