What is due diligence in commercial real estate purchases?

"Caveat emptor" is Latin for "Let the buyer beware," and it used to be the rule of thumb for any purchase and sale transaction. Over time sellers have circumscribed the doctrine of caveat emptor increasingly to protect individual consumer purchasers against sharp dealing and other unfair practices. It largely remains in force, however, when it comes to business entities engaged in transactions with other businesses. Simple mistakes, unfounded assumptions, and inattentiveness that a court might let an individual consumer get away with will find a much less receptive audience if it is a business trying to use them as justification for why it should not be held to an agreement.

Nowhere is the need for a business buyer to understand the caveat emptor rule greater than in purchases of commercial real estate. This is especially so because the widely recognized need for purchasers to go through a pre-sale process of due diligence.

So what is, "due diligence?" Generally speaking, it is the exercise of prudence that can be ordinarily expected under the circumstances to be undertaken in connection with a business transaction (not just real estate transactions). Relying on "boilerplate" language in a contract is not the same as exercising due diligence. Contract language alone may not protect you if it turns out that you were not taking reasonable steps to protect your own interests.

When it comes to commercial real estate, you will need to take into account in your due diligence investigation some of the following considerations:

  • Financial due diligence. What is the financial condition of the seller? Are there any liens on the property? Have the financing arrangements then carefully considered, and are they workable?
  • Environmental due diligence. What uses has the property been put to in the past? Is there any possibility of ground or water contamination that will need to be remediated? Are there presently any governmental or private environmentally related legal claims connected with the property?
  • Zoning due diligence. Is the intended use of the property consistent with existing zoning regulations on the property?

The above are but a sample of the topics to be covered in a complete due diligence investigation in Illinois. If you have questions about how to put together such an investigation, a law firm that works with commercial business clients can be of assistance.

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