Commercial Real Estate Transactions - Due Diligence Considerations for Vendors
Updated: May 16, 2019
This article is Part Two of the two-part series outlining key due diligence considerations for parties engaged in a commercial real estate transaction. This Part Two will discuss the recommended due diligence vendors should undertake in the process of selling their commercial property. By conducting appropriate due diligence near the outset of a transaction, the vendor can be sure that there will be time to deal with substantive issues that could hinder or even prevent the sale.Similar to the purchaser due diligence process, the type and extent of due diligence for a vendor will depend on the type of property being sold, the nature of the transaction, and the terms and conditions of the agreement of purchase and sale (APS).
A sub-search of title of the property is always the bare minimum and necessary first step in a vendor’s due diligence process. The vendor’s lawyer should obtain and review a copy of the parcel register to ensure there are no encumbrances registered against the vendor’s property that could prevent transferring good and marketable title to the purchaser. There may be certain inactive or irrelevant instruments on title that can be cleared either unilaterally by the vendor or with input from third parties (e.g., the registered owner on title is not the current vendor’s current corporate name due to a name change or amalgamation, or there is an old notice of lease on title for a tenancy that no longer exists).
However, there may also be more difficult title matters that should be addressed by the vendor and his or her lawyer first and foremost, as they typically involve third parties whose timing and cooperation is not under the control of the vendor. For example, a forgotten mortgage on title that needs to be discharged will require proof that its been repaid in full and correspondence with the mortgagee to ensure a valid discharge will be available prior to closing. A construction lien, which is registered against title to the property by a contractor or other professional who has performed work on that property but has not been paid for services rendered, could also require additional time and effort to remove from title. Other red flag issues include a Certificate of Pending Litigation (notice that the property is subject to litigation), a Caution (notice that someone has a proprietary interest in the property (e.g., relating to an APS), which could restrain the owner from dealing with the property), or a Restrictive Covenant (a restriction against transferring or charging the property without written permission from certain individuals).
Similar to the purchaser’s due diligence, the vendor’s lawyer should review a survey of the property with the vendor in the early stages of the due diligence process. Significant items to note would be material encroachments onto or from the property, location of easements, building structures and property boundaries. If there are any issues, coverage by title insurance may be a viable solution.
Reviewing an adjoining lands search is also of utmost importance due to Section 50 of the Planning Act and should be part of vendor due diligence for all sale transactions. Without getting into too much detail, this section of the Planning Act provides a general prohibition against a vendor conveying property (Property A) where the same vendor holds an interest in adjoining property (Property B). If this is the case, the vendor must convey both Property A and B in the same transaction. There are some notable exceptions to this prohibition (e.g., where Property B is a whole of a lot on a plan of subdivision), but if none of the exceptions apply, the vendor’s transaction with the purchaser involving only Property A cannot proceed without acquiring consent from the Committee of Adjustment or by implementing other solutions; otherwise, the transaction could be rendered invalid.
Conducting a search under the Personal Property Security Act (PPSA) may also be a necessary part of the vendor’s due diligence if it reveals security interests in personal property related to the land and building(s) being sold. If the vendor’s obligation to the creditor has been fulfilled, a discharge of the registered security interest should be obtained. Alternatively, if the purchaser agrees to assume such security interests related to outstanding debts of the vendor as part of the deal, the vendor may still need to obtain consent and approval by the creditors if such is required by the terms of the security agreement that established the security interest in the property. If the security interest does not affect the property being sold, sometimes such confirmation from the creditor is all that is required.
Writ searches are also essential in the process of vendor due diligence. When a party is successful in bringing litigation but fails to collect monies owed by a debtor, a judge may issue a writ of execution. If the debtor fails to make payment, the writ is registered against the debtor and follows the debtor until it has been paid. A writ attaches to all lands owned by the debtor and must be cleared before any such lands are transferred. If a writ is identified after a search, the vendor’s lawyer must take steps to remedy the debt owed to allow the property being sold to transfer to the purchaser without the attached writ.
If the vendor is a corporation, it is prudent for the vendor’s lawyer to conduct a corporate profile search to ensure the correct name of the vendor is reflected on title and the APS. If there are any discrepancies, they should be remedied by the lawyer as early as possible in the transaction.
Some additional due diligence that a vendor may wish to perform, perhaps to make the property more favorable to prospective purchasers, include environmental investigations, zoning reviews and obtaining building condition reports. Contracts involving the vendor and the property, such as leases, should also be reviewed.
Although many would associate due diligence in a real estate transaction as a task for the purchaser, there are a variety of title and off-title searches and inquiries a lawyer should perform when acting for a vendor as well. Conducting such due diligence early on in the transaction will help ensure a smooth closing for both the vendor and purchaser.