Kick the Tires and Check under the Hood: Due Diligence Provisions in Pennsylvania Agreements of Sale; Posting 3 of 3

Of the pre-closing due diligence triad, the property investigation almost always covers the most ground. While representations and warranties will help you spot and clarify issues during the negotiation of the Agreement of Sale, and title review will identify and locate recorded encumbrances, the property investigation is where the Buyer gets its hands dirty.

At a recent presentation with co-panelists Michael Moyer of Land Services USA, Inc. and Aileen Schwartz of Hill International, entitled “Real Estate For In-House Counsel: An Examination of Title Issues, Contracts and Negotiations in Real Estate Deals” at the Association of Corporate Counsel (Delaware Valley Chapter)’s 2nd Annual In-House Counsel Conference in Philadelphia, Pennsylvania, I discussed many of the areas a Buyer can explore in evaluating the property.

The scope of a property investigation is transaction-specific and can have many components, including feasibility review, environmental review, zoning review, and structural review.

The feasibility review focuses on the ability of the property to function in a manner that will effectively and efficiently serve the Buyer’s needs now and in the future. Attention should be paid, at a minimum, to:

  • Access to roadways
  • Sufficiency and location of utilities
  • Available building area

An environmental review of the property is also essential with a Phase I analysis and, where indicated, a Phase II study being conducted by a reputable consultant.

An understanding of the zoning regulations affecting the property is critical, as those restrictions dictate how the property can be used and developed. Included in the documents that the Buyer should review are:

  • The municipal zoning code and map
  • The local zoning file for the property
  • Prior approvals for the property

The Buyer can also request a zoning compliance letter from the municipality, although the willingness to issue those letters and the level of detail contained in them varies depending on the municipality.

A study of the structural fitness of existing buildings on the property and/or geotechnical studies may also be warranted, depending on the nature of the transaction and the Buyer’s plans for the site.

Other property related items that a Buyer should consider reviewing during the due diligence period include:

  • Leases (including subleases, if any) and rent rolls
  • Brokerage agreements
  • Casualty insurance policies
  • Environmental insurance policies
  • Service contracts that do not terminate as of closing
  • Prior engineering and feasibility studies or reports prepared by the Seller
  • Governmental permits and licenses
  • Notices of violations
  • Third party licenses

Like a used car, every property is unique, with its own individual history, nicks and scratches. There is no “one-size fits all” formula or approach to performing the due diligence on a property. Reps and warranties, title review and property investigation give a buyer the tools to determine whether the property is one which it should acquire. The thoughtful use of those tools is the key to a successful due diligence investigation and deciding whether to drive that car off the lot or look for a different one.