Due Diligence: What Should You Consider When Buying Commercial Real Estate?

Real Estate

When purchasing anything, you want to make sure that you are buying from a reputable seller, that there is nothing wrong with the product and that the seller legally owns the product. The same should apply when purchasing commercial property.

Here are some due diligence steps to consider to avoid unwanted surprises when purchasing commercial property.

Property Searches

1.     Title Search

One of the most important steps in due diligence of real estate is to review the title of the property. Various charges and encumbrances can be registered on title that may negatively impact the value of the property and will still remain registered to the property even after the property has changed hands. Depending on the terms of the contract of purchase and sale, you may be able to request the seller to discharge unwanted charges.

2.     Property Tax Search

In most real estate purchases property taxes and utility bills are split between the seller and purchaser proportional to the amount of time in the tax year that each party owns or possesses the property. A property tax search confirms the amount of property tax and utility bills due and if these taxes and bills have been paid.

3.     Municipal Search

The municipality contain various records regarding buildings on the property. Such records include zoning and development information, heritage statuses of the buildings, outstanding permits that have not been finally inspected by the municipality or outstanding fire department deficiencies. These records can be requested from the municipality and sent in the form of comfort letters, but may take some time to process.

4.     Site Registry Search

The BC site registry is a database of the provincial government’s records of environmental investigations and cleanups. It is not a comprehensive database on contaminated sites, but merely a record of steps the government has taken on properties that are or were contaminated.

5.     Health Authority Search

If the property contains or used to operate food, water or other personal service establishments it might be a good idea to conduct a search with the applicable Health Authority. Searches conducted with the Health Authority may reveal records of outstanding deficiencies or complaints regarding the establishments.

6.     Technical Safety BC Search

Technical Safety BC oversees the installation and operation of technical systems and equipment. It contains records of various systems and equipment on the property including electrical equipment, boilers, refrigeration systems, natural gas and propane appliances, elevators and escalators. Searches with Technical Safety BC reveal whether there are outstanding non-compliance issues or fees.

Searches Regarding the Seller of the Property

7.     Personal Property Registry and Bank Act Searches

Security interests against personal property of the seller can be registered at the Personal Property Registry and the Bank Act Security Registry. Personal property that is purchased along with the commercial property may be subject to security interests. These could potentially allow the holders of such security interests the right to seize personal property attached to the property. A search of these registries can inform you of such risk.

8.     Corporate Search

This search is commonly done for any purchase of real estate involving corporate sellers. The corporate search reveals basic information about the company, such as its full legal name, directors and share structure. Mostly importantly, it shows the status of the company, such as whether the company is in good standing.

9.     Bankruptcy and Insolvency Search

When purchasing real estate, you may want to ensure that the seller is not bankrupt or undergoing bankruptcy proceedings. As such, creditors may have a right to the property even after you purchase it. This due diligence step can inform you of any risks.

10.  Litigation Search

Litigation searches may reveal whether the seller has been sued or is currently being sued. This is relevant in establishing the reputation of the seller or determining the financial viability of a seller if it has to pay significant damages in a lawsuit. In some cases, the subject matter of the lawsuit can even be relevant to the property.

11.  Canada Revenue Agency Search

search at the CRA confirms whether the seller has outstanding arrears for GST or income tax. Among other issues, this may be relevant in determining the financial viability of a seller.

Which due diligence searches to conduct before purchasing commercial real estate depends on a variety of factors, including:

  • cost of the searches
  • timing of the purchase
  • value of the property
  • value of personal property purchased along with the property
  • what activities were previously conducted on the property

If you have questions regarding the purchase or sale of a property or due diligence generally, please contact a lawyer in our Business Law group.