Property due diligence: it pays to do your M&A homework

August 16, 2023
Property Due Diligence Deal
Property due diligence is incredibly important. Mergers and acquisitions (M&A) are one of the most significant activities that will take place in a business, typically to support future growth and business aspirations.

They can take several forms – from a full business merger, to the purchase of a specific asset or stock.

In almost every M&A transaction, a purchaser will acquire an interest, whether freehold or leasehold, in at least one property asset.

However, such assets are unlikely to be the driving force behind the M&A activity.

If they don’t form a core part of the business post-transaction, in our experience, they can become somewhat forgotten during the due diligence process.

Without effective due diligence, the risks associated with the property assets you’re about to acquire are unknown, unquantified and unmanaged.

This brings with it a number of risks which, without effective property investment due diligence, have the potential to expose your business to significant downstream costs.

Indeed, if problems are discovered after the acquisition is completed, it can negate the commercial benefits you might have gained elsewhere in the transaction.

Some of the most common considerations as part of the property due diligence process include:

Lease issues

When it comes to leasehold properties where you’re a tenant, on what basis will you occupy the premises and does the lease allow for it to assigned to a new company?

What are the terms and obligations under the leases and what does it cost? How long is the lease and can you get out of it if needed?

Are there any lease break options either for the landlord or the tenant which would mean you would need to move? And what liability is there in respect of dilapidations costs?

In the case of freehold properties whereby you inherit ownership of the property itself, issues might include defective titles, easements, restrictions or charges which may limit the use or effect the value of the property.

Building maintenance 

Technical and legislative advances mean that some buildings are fast becoming obsolete.

Can the building be fully utilised for your use or are there limitations such as poor IT infrastructure?

Does the property have a poor EPC rating and are remedial works needed to bring the property in line with current legislation.

It’s important to establish whether the property you’re acquiring is poorly designed, built or maintained.

Will it therefore require significant expenditure to address defects or harmful materials? Indeed, is it nearing the end of its economic life altogether?

It’s important to establish whether the property you’re acquiring is poorly designed, built or maintained.

Geoff Fallon, Partner, Vail Williams LLP.

Planning and environmental issues

When it comes to planning, have you thought about whether the building is to be used for its current or alternative use?

Are there any restrictions on what it can be used for? Are there any developments or future developments in the vicinity which will impact on the property either positively or negatively?

There may be significant environmental liabilities, particularly regarding industrial property.

As a purchaser, you could be liable for environmental contamination even if it was caused by a prior owner.

This might require a substantial clean-up and other expenditure not reflected in your post-acquisition budget, particularly if contamination has migrated to adjoining properties.

Market insight

It’s important to understand the property market in the area in which the property is situated.

What is the current supply of similar properties and is there demand? Consequently what is the building worth and is there a market for it?

If you were to let the property, what rent could it achieve and what terms would need to be granted? Would rent free and/or other incentives be needed to attract a tenant, and if so, what might this look like?

All the above, either in isolation or combination, can have an effect on a business post-acquisition.

It’s therefore vital to undertake property due diligence and put in place a robust real estate plan as part of any M&A transaction.

If addressed early on in the process, it can ensure that you, as the purchaser, can:

  1. Identify property costs that may be material to your pricing decision
  2. Gain negotiating leverage on property issues
  3. Modify the deal structure to mitigate real estate issues
  4. Account for any property related issues requiring significant lead time in to the deal timeline
  5. Otherwise factor any property due diligence considerations in the decision-making process

Our specialist Occupier Advisory team is experienced in working closely with M&A legal teams to ensure full visibility and understanding of any risks or value associated with the properties our clients acquire.

For help and advice in relation to on your property requirements, don’t hesitate to get in touch.