Companies and individuals preparing to conduct a commercial real estate transaction have a legal obligation, and substantial financial incentives, to conduct due diligence prior to finalizing the contract and closing the sale. Due diligence is a legal concept that spans a wide variety of contexts; in business and financial matters, it frequently means conducting a thorough examination of the circumstances of a deal under consideration in order to ensure that the other party has the authority to negotiate and is doing so in good faith, and to make sure that there are no undisclosed detriments associated with the item offered for sale that might make it less valuable than it appears, or expose the purchaser to unanticipated risks once the transaction is complete. 

Legal due diligence in commercial real estate often involves a careful investigation of the property's history and tenancy, and may also require an examination of current and pending legal and regulatory requirements that might affect how the property can be developed. Commercial real estate developers and investors frequently turn to outside counsel to conduct their due diligence and advise on the property purchase and negotiations. To schedule your conversation with a Louisiana business law attorney experienced in due diligence for commercial real estate, reach out to Business Law Group today by calling (504) 446-6506. 

What Is Due Diligence in Simple Terms? 

Cornell University Law School's Legal Information Institute (LII) addresses the concept of diligence in two places. LII defines due diligence as attending to a matter with a degree of care that is sufficient to avoid liability. This first definition is accurate, but not altogether practical: The primary purpose of due diligence is to avoid liability, just as the LII explains, but outside of contracts (which may include waivers in their terms), the primary locus for determining whether due diligence has been sufficient to avoid liability is in a court of law, where failure in due diligence may be held to render defendant liable for the damages sought by the plaintiff. 

The second definition provided by LII comes under the organization's entry on diligence, which LII defines as the use of "care" or "thorough attention" to a matter, and opposes the concept to that of negligence – a crucial detail, as negligence is one of the most common grounds for liability in civil lawsuit. Under the "diligence" heading, LII goes on to clarify that due diligence means taking the degree of care or attention reasonably required by the circumstances. In other words: Due diligence is the diligence that is "due," or owed, as the degree of diligence necessary to take reasonable care relative to the circumstances – and parties that have performed all diligence due in order to take reasonable care in light of the circumstances may not always avoid being named as defendants in civil lawsuits, but in general they can expect to mount a strong defense against allegations of negligence. 

What Is Due Diligence in a Commercial Real Estate Transaction? 

Legal due diligence in commercial real estate usually means conducting a detailed, independent examination of the property. Depending on the type of property involved, this examination may focus on the tract of land itself, or may be attuned to existing structures located on the property – often with an eye toward their flexibility of use, any pre-existing tenancies and the terms of their commercial leases as defined by Louisiana Art. 2668, and other relevant factors such as needed renovations, expected costs of regular maintenance, and so on. The property-specific avenue of inquiry during the due diligence process may also incorporate considerations regarding current state, local, and federal laws and regulations that may limit the type and extent of future developments on the same premises, as well as an assessment of the types of development to which the land's physical properties (such as elevation, drainage, and access to water) may be suited. 

In many cases, legal due diligence in commercial real estate transactions will extend beyond collecting, verifying, and assessing the implications of information regarding the parcel of land itself and even beyond review of tenancy agreements and regulatory constraints, to also include some degree of investigation into the background of the seller. The thoroughness of investigation needed to fulfill this element of due diligence research may range from cursory to checks to confirm that a familiar real estate speculator remains solvent and in good standing and that the deed history of the property for sale is as advertised to a deeper inquiry into the financial history of the individual or firm selling the land and verification of their business reputation and particularly any record of disputes related to the property under consideration. Businesses considering a commercial lease will also want to consider many of these same factors. A commercial real estate attorney with Business Law Group may be able to advise you regarding the most central due diligence considerations for your situation.

What Is a Due Diligence Checklist? 

Businesses of all kinds use due diligence "checklists" as a form of intellectual scaffolding at the organizational level to help ensure that all partners and employees are exercising the degree of care reasonable in the situation to which a given checklist applies. In commercial real estate, a legal due diligence checklist will typically be organized around the principle of due diligence research, whose practices tend to be subdivided into research designed to help the prospective buyer assess risk and research designed to help the prospective buyer verify information (usually as received from the seller). Risk assessment and factual verification, not surprisingly, interact: A responsible assessment of risk will depend upon getting reliable facts, while verification of information – or the inability to verify information shared by the seller – will support a careful assessment of risks associated with the transaction. 

The specific factors to be researched may vary somewhat depending on the property in question and the circumstances of the (potential) sale. As a general rule, however, most commercial real estate due diligence checklists will include, at a minimum, the following categories: 

• Property Inspection: Rather than relying on a visual inspection, hire a qualified professional to conduct a thorough physical inspection of the property to assess its condition and identify any major issues with the land or any buildings included in the sale.

• Title Search: Review the property's ownership history to identify any potential title defects or encumbrances. This step may sometimes prompt additional research into the seller's reputation and business practices.

• Environmental Assessment: Before finalizing the purchase of any commercial real estate, conduct an assessment of the property's environmental condition to identify any potential contamination or other environmental issues. Often this assessment will need to be performed by a professional surveyor or other qualified professional, and some commercial properties – particularly those located in or near areas that have been designated for some form of ecological protections – may demand enhanced scrutiny in light of the regulatory requirements that may apply to their future use and development. 

• Financial Analysis: Work with an accountant or attorney to review the property's financial statements and operating history to assess its financial performance and potential cash flow. The financial analysis can be especially important for commercial real estate properties with long-term tenants already in place, as financial records from the past several years may offer some indication of what a buyer can expect from their investment in the near future. 

• Legal Review: Request copies of, and review, all legal documents associated with the property. Commercial lease agreements are one of the most common examples, but a variety of other contracts, such as those involved in third-party property management or premises maintenance, may also be involved. 

Discuss Your Due Diligence Concerns With a Commercial Real Estate Attorney

If you are considering a commercial real estate purchase, conducting due diligence research to assess risk and verify the information presented by the seller is likely among your foremost considerations. Conducting legal due diligence in commercial real estate can be a complex and multi-factored process, involving numerous financial and legal considerations as well as demanding substantial familiarity with zoning laws and regulatory frameworks that may impact future property development. 

Thanks to the extensive duration of many commercial lease agreements, the ability to carefully scrutinize existing contracts that affect the property's use may also be helpful. Consider working with a business law attorney experienced in conducting due diligence in commercial real estate transactions. Louisiana businesses and investors can connect with a member of the commercial real estate and contracts team at Business Law Group by calling (504) 446-6506 to schedule a consultation.