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A return to due diligence for commercial real estate

|Written By Kelly Harris

Tougher times for commercial real-estate vendors have meant they need to do more preparation work to protect sales once they identify scarce buyers.

Chris Huband

That was part of the message delivered by commercial real-estate lawyers at a recent seminar at Blake Cassels & Graydon LLP in Toronto. Gone are the days of 2007 and early 2008 when bidding wars dominated the commercial real-estate scene. Today, a return of vendor due diligence is essential to hold onto sales.

“If you don’t want [sales] to come off the tracks, then the vendor does some homework in advance,” says Blakes partner Chris Huband. “Once you’ve got a live purchaser in hand, you don’t want to spook them.”

The seminar focused on several areas of due diligence, the return of which has come about due to both the tighter market and the time vendors now have to conduct thorough reviews of their properties.

In preparing a property for sale, vendors should also go beyond title searches and encumbrances. As part of the seminar, Joan Kennedy, another Toronto-based Blakes partner, says proper due diligence can translate into advantages for the seller.

These advantages can include proper pricing through market research, allowing for appropriate presentations of the property, reduction of delays, and allowing the vendor the time to address issues before the property goes to market or a buyer is identified.

“Nine times out of 10, due diligence unearths an issue,” she says.

Due diligence searches can unearth open work orders, zoning issues, and changes in rules, such as environmental legislation, that can modify the property.

Conducting site visits is also important. Kennedy relayed a story where a site visit found strangers living in a property. Other issues of due diligence include reviewing service contracts.

This would allow the purchaser to consider whether or not they want to keep them. In some instances, they have service agreements with other companies and therefore would need to review the costs associated with breaking existing agreements at a new property.

This, too, is a potential added cost to the sale. In the past, it was a cost the purchaser would have assumed, but in today’s tighter market that isn’t always a given.

“We want to get clients thinking about what they can do to get their properties ready for market,” says Huband.

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