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					Legal Due Diligence Issues in Real
Estate Purchase Transactions
Everett S. Ward

This article oers some observations and suggestions regarding the management
of the legal due diligence process in connection with the purchase of real

The primary purpose of due diligence is to obtain in-                        Contract Negotiations
formation, and the extent and type of due diligence that
                                                                             The purchase and sale agreement contains Žve impor-
purchaser's counsel may undertake will depend on,                            tant provisions relating to property due diligence:
among other factors:
                                                                                (i) the representations and warranties;
    (i) the risk proŽle and business objectives of the                          (ii) the due diligence deliveries section;
    purchaser;                                                                  (iii) the provisions describing the duration of the
    (ii) the type of real estate asset involved;                                due diligence period and the purchaser's inspection
                                                                                rights during the due diligence period,
    (iii) the time frame for completion of the transac-
                                                                                (iv) those contract provisions relating to the seller's
                                                                                obligation to provide consents and/or estoppel let-
    (iv) the cost of conducting due diligence; and                              ters from certain third parties; and
   (v) whether the purchaser will obtain third party                            (v) the conŽdentiality provision.
   Žnancing either pre-transaction or post-transaction                          As with due diligence itself, the primary purpose of
   closing.                                                                  contract representations and warranties is to provide
                                                                             the purchaser with information regarding the seller and
   As a prelude to commencing legal due diligence,                           the property. Purchaser's counsel should strive to
purchaser's counsel Žrst must negotiate eective due                         include as many property-related representations and
diligence provisions in the purchase and sale                                warranties in the contract as is practicable under the
agreement. Following execution of the purchase and                           circumstances.1 Property-related representations and
sale agreement, purchaser's counsel typically under-                         warranties are particularly useful in circumstances
takes a review and analysis of the title commitment ap-                      where a seller must expand or modify a ‘‘standard’’
plicable to the property, the underlying title documents                     representation and warranty (e.g., a representation and
referenced in the title commitment, and the property                         warranty that the seller has not received knowledge of
survey. Depending on the property type, the due dili-                        any building code violations) in order to provide infor-
gence process may include obtaining and reviewing                            mation that identiŽes issues of particular concern to
property leases, ground leases and other property-                           the purchaser (i.e., in the example above, the actual ex-
related documents, some of which may be prepared by                          istence of a building code violation). If a representa-
                                                                             tion and warranty deviates from the standard ‘‘no
outside consultants.
                                                                             problems’’ language, then purchaser's counsel should
                                                                             request additional information from the seller during
Everett S. Ward is a partner in Jenner & Block LLP, in Chicago. He           the due diligence review period regarding both the
practices in the Žrm's real estate group, representing lenders and own-
ers of real estate in various purchase and sale, joint venture and capital   ‘‘problem’’ and the legal consequences of the exis-
markets transactions. Mr. Ward can be reached at           tence of that problem.2

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Legal Due Diligence Issues in Real Estate Purchase Transactions

    The contract should contain a detailed list of all due   Due Diligence
diligence delivery items,3 as well as a schedule for the
delivery of copies of the due diligence materials to the     Immediately following contract execution and prior to
purchaser and its counsel (or, in the alternative, the       commencing due diligence, the purchaser and its
date on which the items will be made available for           counsel should allocate between themselves responsi-
review at the property or another location). Many sell-      bility for performing the various due diligence tasks.
ers currently use online due diligence ‘‘rooms’’ where       Depending on the purchaser's organizational re-
the necessary due diligence documents are made avail-        sources, the purchaser usually will take responsibility
able to the purchaser and its counsel immediately fol-       for reviewing all Žnancial information (including
lowing contract execution.                                   capital expenditure requirements), physical condition
                                                             information (i.e., property condition and environmental
    The contract must provide the purchaser with a
                                                             reports), appraisals, and similar items, while purchas-
speciŽc period within which to complete its due dili-
gence and raise any objections with the seller. The          er's counsel will undertake the review of the title com-
commencement and length of this ‘‘due diligence pe-          mitment, underlying title documents, survey, leases
riod’’ or ‘‘review period’’ often is the subject of much     and other legal documents.5 The purchaser's counsel
negotiation, as the seller typically desires to have the     also should discuss with the purchaser the need for any
due diligence period commence upon contract signing          third party reports or searches of a legal nature, such as
(or earlier, if the seller has provided the purchaser with   a title commitment and current survey (if the purchaser
due diligence information during any letter of intent        is responsible for those items), zoning reports, UCC
negotiations) and be as short as possible. Depending         searches, and building code violation searches in order
on the complexity of the transaction and the volume of       to make sure that those items are ordered and received
due diligence information, the parties may negotiate         in sucient time for review prior to the expiration of
‘‘phased’’ due diligence periods whereby the purchaser       the due diligence period.
will have to comment on title and survey by one date,            Unless otherwise instructed by the purchaser, pur-
and other due diligence matters by one or more other         chaser's counsel should prepare written summaries or
dates.4                                                      abstracts of all due diligence documents reviewed by
    Depending on the asset type and transaction struc-       counsel. These summaries should be as detailed or
ture, counsel for the purchaser may need to add a pro-       brief as the client and/or the nature of the transaction
vision to the contract describing the seller's obliga-       require, but the summaries will be a very useful re-
tions to obtain third party consents and/or estoppels.       source both during the due diligence review period and
Third party consents may be necessary in situations          after transaction closing.
where the purchaser is assuming existing mortgage or
bond Žnancing in connection with the acquisition,            Title Review
while estoppel requirements are customary in purchase            Counsel for the purchaser should analyze the title
transactions involving oce buildings, industrial facil-     commitment and underlying title documents (includ-
ities and shopping centers (i.e., transactions where         ing any REAs and CCRs) in the context of the client's
there are signiŽcant tenant leases, ground leases, recip-    current and anticipated use of the property. For ex-
rocal easement agreements (‘‘REAs’’), declarations of        ample, if the client is purchasing an apartment project
covenants, conditions and restrictions (‘‘CCRs’’),           with a view to converting the project to condominiums,
commercial condominium, or other documents that af-          then counsel must conŽrm whether the title documents
fect the use or operation of the subject property).          allow, prohibit or otherwise condition the use of the
Counsel should carefully review all due diligence            project as condominiums. Also, counsel must review
documents to determine if those documents expressly          all easements and other agreements that aect the prop-
obligate the parties thereto to furnish estoppel letters     erty in order to (i) understand the rights, if any, of the
upon request.                                                purchaser under the documents and, to the extent pos-
    Finally, the contract usually contains provisions        sible, make sure that those rights are insured by the
requiring that the purchaser keep all of the due dili-       title insurance company under the owner's title insur-
gence information regarding the property conŽdential,        ance policy issued at closing, (ii) identify any obliga-
irrespective of whether the information is furnished to      tions under those documents that will bind the pur-
the purchaser by the seller or independently obtained        chaser after closing (e.g., common area maintenance
by the purchaser from its consultants. The purchaser's       and expense obligations in connection with the owner-
counsel must make sure that the conŽdentiality provi-        ship of a shopping center), and (iii) determine whether
sions permit the purchaser (i) to meet with and inter-       any additional easements or other agreements of rec-
view any necessary third parties (e.g., tenants, repre-      ord, or the modiŽcation of any existing agreements of
sentatives of governmental authorities, ground lessors)      record, will be necessary in connection with the pur-
and conduct any appropriate on site physical inspec-         chaser's ownership and intended operation of the prop-
tions and testing during the due diligence period, and       erty post closing.
(ii) to share due diligence information with the purchas-        On rare occasions, provisions in the underlying title
er's lenders, accountants, insurers, attorneys, consult-     documents may impact the purchaser's proposed
ants and other relevant advisors.                            ownership structure. For instance, the terms of the


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CCRs may prohibit fractional ownership of real estate.       and (iii) notify the title insurance company of any co-
Such a restriction, unless modiŽed, may prevent a            insurance and/or reinsurance requirements.
tenant-in-common sponsor/syndicator from purchas-            Survey Review
ing an asset.
                                                                 The survey may represent the only ‘‘view’’ (albeit a
    During the title review, counsel also should deter-      two dimensional view) that purchaser's counsel will
mine as soon as possible whether any third party             have of the property prior to closing. Counsel must
consents are required under the various title docu-          carefully review the survey in order to conŽrm (i) that
ments, as well as decide which parties to the documents      the legal description contained in the title report is the
should provide estoppel letters in favor of purchaser        same as that contained in the survey; (ii) the location
(and purchaser's lender, if any) in connection with the
                                                             of the various easements and other exceptions to title
acquisition transaction. Based on these determinations,
counsel should prepare and forward to the seller's           (to the extent those exceptions can be depicted on a
counsel any required third party consents and                survey) on the property, and (iii) the availability of a
estoppels.                                                   survey or similar endorsement for inclusion on the
    If the purchaser is going to Žnance its acquisition of   owner's title insurance policy.
the property, then purchaser's counsel also must                 Wherever possible, in connection with the acquisi-
review title in the context of identifying and resolving     tion of improved property the purchaser should obtain
issues that the lender may have regarding the underly-       an ALTA/ACSM ‘‘as-built’’ survey prepared in accor-
ing title documents. Such issues may be as simple as         dance with the most recent ‘‘Minimum Standard Detail
making sure that all estoppel letters are addressed to       Requirements’’6 and dated not earlier than 30 days
both the purchaser and the lender, or as complex as          prior to the last day of the due diligence period. ALTA/
requiring that the seller amend existing REAs, CCRs          ACSM surveys are typical in most sophisticated trans-
or ground leases to provide more lender protections in       actions, and the ALTA/ACSM survey format costs
those documents. If the purchaser is assuming an exist-      more than state-standard surveys and requires that the
ing loan as part of the acquisition transaction, then        surveyor provide more detailed information about the
counsel to the purchaser must review both the loan           property than most state-speciŽc survey standards.
documents of record and all other loan documents to          Purchaser's counsel should discuss with his client what
make sure that both the seller and the purchaser are         additional matters (in the form of the so-called ‘‘Table
complying with the loan assumption requirements. In          A’’ items) should be included on the survey. Table A
addition, counsel should identify any provisions of the      items include matters such as zoning information, ood
loan documents that require modiŽcation to conform           zone information, calculation of building area and any
to the purchaser's requirements, e.g., transfer and in-      wetlands designation. Purchaser's counsel also should,
surance provisions.                                          in consultation with his client, identify the parties that
                                                             will be the addressees of the survey (i.e., the parties
    In situations where a municipality has ongoing
                                                             that are entitled to rely on the survey) and determine
involvement in the development and/or operation of a
                                                             the need for any specialized survey certiŽcation lan-
property (e.g., where the purchaser is purchasing a (i)
                                                             guage that the purchaser or its lender will require from
leasehold interest in a property owned by a governmen-
                                                             the surveyor.7 In making these decisions the purchaser
tal body, or (ii) property where the current owner has
                                                             and its counsel must balance the need for obtaining the
outstanding performance obligations to a governmental
                                                             additional information that Table A or a non-standard
body, such as unremedied building code violations),
                                                             survey certiŽcation form may provide, against the ad-
purchaser's counsel must review all relevant docu-
                                                             ditional cost of obtaining those items.
ments (recorded and unrecorded) in order to identify
those obligations that will survive the purchaser's              The second appendix to this article contains a
acquisition of the property and become the purchaser's       sample checklist that purchaser's counsel may use as a
responsibility. These obligations may include obtain-        guideline to reviewing a survey.
ing a replacement or new letter of credit or surety bond     Zoning Reports
or providing a guaranty as security for unŽnished                In some circumstances, certiŽcates of occupancy
obligations to be performed by the property owner, or        for the property may not be readily available and/or for
negotiating with the appropriate governmental authori-       due diligence purposes the purchaser may desire a let-
ties the terms of any additional development to occur        ter from the applicable municipality conŽrming the
on the property or the timetable for curing outstanding      zoning classiŽcation of the property and that the cur-
building code violations post-acquisition closing.           rent property use complies with applicable zoning
    Finally, prior to the expiration of the due diligence    laws. In those cases, purchaser's counsel should
review period purchaser's counsel should (i) inform          engage a zoning services company to work with the
the seller's counsel and the title insurance company in      municipality to obtain copies of the certiŽcates of oc-
writing of any required revisions to the title insurance     cupancy (or conŽrmation that no such certiŽcates ex-
commitment, (ii) ascertain the availability and cost of      ist) and a signed zoning letter. In particular, the zoning
any endorsements to the Žnal title insurance policy that     letter will provide additional support to the title insur-
the purchaser will require as a condition to closing,        ance company if the purchaser wants a zoning endorse-

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Legal Due Diligence Issues in Real Estate Purchase Transactions

ment to its owner's title insurance policy, and in           process purchaser's counsel may be asked to review
jurisdictions where zoning endorsements are not avail-       and summarize critical terms of leases, ground leases
able (e.g., Texas) the zoning letter will serve as a very    and property Žnancing documents. As with other due
useful substitute.                                           diligence document reviews, the goals should be to:
UCC and Other Searches                                          (i) ascertain that the documents allow the purchaser
    Purchaser's counsel should consider ordering UCC,           to operate and/or modify the property consistent
tax lien and other searches of the seller in order to make      with the purchaser's business objectives;
sure that any liens and encumbrances against the real           (ii) identify the purchaser's post-closing rights and
property or personal property being acquired by the             obligations under those documents;
purchaser in the transaction are identiŽed and released         (iii) conŽrm the Žnancial provisions (e.g., rent,
at closing (to the extent the purchaser has not agreed to       expense reimbursements, landlord payment obliga-
assume certain liens and/or encumbrances as part of             tions) of the documents; and
the deal). UCC searches are particularly useful in
identifying encumbrances aecting personal property             (iv) determine whether a lender will require any
that are not identiŽed by the title insurance company as        modiŽcations to the documents as a condition of
part of the title search process. These searches also can       providing mortgage Žnancing for the property.
help conŽrm the accuracy of the title insurance com-         Property Transfer Requirements
pany searches of the real property. Finally, judgment
                                                                Some jurisdictions have speciŽc requirements that
and tax lien searches can conŽrm (or take the place of)
                                                             must be satisŽed as a condition to transferring title to
corresponding contract representations and warranties
                                                             real property. For example, the City of Chicago re-
by the seller on those matters.
                                                             quires that the water meter at the property be read and
    Building code violation searches are useful to           the water bill be paid prior to recording the deed. Other
supplement the purchaser's physical due diligence on         municipalities require an inspection of the property as
the property, especially in situations where the pur-        a condition of title transfer. Purchaser's counsel should
chaser plans to undertake renovations of the property        identify any such legal requirements and make sure
after acquisition.                                           that the seller or the purchaser, as applicable, is com-
Other Due Diligence Documents                                plying with those requirements.
   Depending on the purchaser's needs and the type of
property being acquired, as part of the due diligence


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                      Appendix 1                                  (n) Current payroll listing of all employees of the
                                                                  Seller involved with the Premises, their names,
                                                                  contact information, job descriptions, union/non-
                                                                  union status and current salaries or pay rates, as well
   Seller has previously furnished to Purchaser or will           as a payroll register for the last twelve (12) months
promptly furnish or make available to Purchaser at the            including employer taxes, contributions and ben-
oces of Seller in [City, State] within two (2) business          eŽts;
days after the Eective Date (and at all times thereaf-
ter):                                                             (o) Detailed tenant delinquency reports and/or aged
                                                                  receivable reports for past two (2) year ends and the
   (a) The most recent survey for the Premises in the             current month;
   possession or control of Seller;
                                                                  (p) Current and future month's concession report;
   (b) Copies of the most recent title policy or commit-
   ment for the Premises in the possession or control             (q) Current month's pre-paid rent report, security
   of Seller;                                                     deposit audit report, property status report that
                                                                  shows total number of units occupied, vacant, em-
   (c) A true, correct and complete copy of each writ-            ployee, models and down units and a detailed unit
   ten Lease and a true, correct and complete written             status report that shows status for all vacant, vacant
   summary of each oral Lease;                                    pre-leased, on-notice, on-notice pre-leased and
   (d) A true, correct and complete copy of each writ-            down units; and
   ten Service Contract and a true, correct and com-              (r) Current year-to-date leasing summary report that
   plete written summary of each oral Service Con-                shows activity by marketing source and reasons for
   tract;                                                         tenant move-outs;
   (e) Copies of:                                                 (s) Accounting records for the Property, including
      (i) Prior real estate tax bills, including special as-      without limitation,
      sessments or incentives, copies of all tax protests,            (i) Last twelve (12) months' cash receipts jour-
      and related correspondence and protest results                  nal, including bank statements and reconcilia-
      for the Property for the past three (3) years; and              tions;
       (ii) Prior twelve (12) months' utility bills for the           (ii) Last twelve (12) months' cash receipts post-
       Property.                                                      ing summaries (a.k.a. rent reconciliation reports);
   (f) A true, correct and complete copy of the current               (iii) Last year end and current month's accounts
   management agreement;                                              payable;
   (g) CertiŽcates of occupancy for the Premises and                  (iv) Last year end and current month's balance
   other documentation with respect to compliance of                  sheets;
   the Property with government requirements;                         (v) Insurance premiums for current year insur-
   (h) A current, certiŽed Rent Roll, including unit                  ance policy and
   number, unit size, market rent amount, contractual                 (vi) Access to selected vendor invoices and ten-
   rent amount, vacant units, down units, model/                      ant lease Žles;
   employee units, security deposit amounts and pet               (t) All third party engineering, environmental and
   deposit amounts;                                               geotechnical reports and assessments (both draft
   (i) Financial books and records for the Property,              and Žnal), action and/or work plans, contracts for
   including, without limitation,                                 remediation, soil and groundwater sampling reports
       (i) Detailed operating statements for the past two         and results;
       (2) year ends, current year-to-date and a twelve           (u) All termite, radon and mold tests or studies;
       (12) month rolling history; and                            (v) A copy of Seller's [partnership agreement][or-
       (ii) Schedule of replacement costs and capital             ganizational documents];
       expenditures (if not already included in detailed          (w) A true, correct and complete list of all tenants
       operating statements) for the past two (2) year            who permit the Property to qualify as a qualiŽed
       ends, current year-to-date and a twelve (12)               residential rental project under Paragraph 142(d) of
       month rolling history;                                     the Code, together with copies of all income certiŽ-
   (j) General ledgers for the past two (2) year ends             cations furnished by tenants since the commence-
   and current year-to-date;                                      ment of the qualiŽed project period, as such term is
   (k) Rent Rolls for the past two (2) year ends and the          deŽned in Paragraph 142 of the Code;
   past twelve (12) months;                                       (x) A copy of all plans and speciŽcations in the pos-
   (l) Twelve (12) month rolling occupancy report;                session or control of Seller relating to the Improve-
   (m) Lease expiration report for the next twelve (12)           ments on the Property;
   months;                                                        (y) A current, certiŽed Rent Roll, including unit

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Legal Due Diligence Issues in Real Estate Purchase Transactions

     number, unit size, market rent amount, contractual        (ee) Any and all other contracts, agreements, docu-
     rent amount, vacant units, down units, model/             mentation or evidence relating to the ownership,
     employee units, security deposit amounts and pet          zoning, Žnancing, value, income, expense, opera-
     deposit amounts;                                          tion, leasing, construction, maintenance and repair
     (z) A list of all personal property;                      of the Property;

     (aa) A list of all permits, warranties and unexpired      () Copies of all requests for disbursement of
     guaranties;                                               proceeds of the Bonds and evidence of such dis-
                                                               bursement and records relating to the investments
     (bb) Copies of existing insurance policies, a sum-        of proceeds of the Bonds;
     mary of all claims submitted in the past three (3)
     years and any pending claims relating to the Prop-        (gg) Copies of all Žlings, certiŽcates and reports
     erty;                                                     required to be made under the First Mortgage Loan
                                                               Documents, including but not limited to any Žlings
     (cc) A schedule of pending litigation aecting the        related to arbitrage rebate; and
     Seller or the Property;
                                                               (hh) Any and all appraisals in Seller's possession or
     (dd) Evidence of the zoning classiŽcation of the          control.


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                     Appendix 2                               17. Topography.
             SAMPLE CHECKLIST FOR                             18. Lot numbers and location of lots in underlying
             EXAMINATION OF PLATS                             subdivision.
                      OF SURVEY                               19. Compliance with set-back and parking require-
   Requirements with respect to a plat of survey and          ments of zoning.
matters to be checked will vary depending upon the            20. Compliance with record restrictive covenants.
purpose of the survey and the physical condition and
proposed use of the property. This checklist is general
in its nature and is not intended all-inclusive. On the        1
                                                                 This is a very dicult task in the current purchase and
other hand, certain items on this checklist may be inap-   sale environment, where in even the largest transactions sell-
plicable in a given situation.                             ers often make few or no representations or warranties
   1. Check legal description for possible defects.        regarding the physical condition of the property or concern-
                                                           ing any other matters where the purchaser can obtain infor-
   2. Check boundaries and courses on the plat against     mation by making inquiry of unrelated third parties (i.e.,
   the legal description.                                  obtaining and reviewing title commitments, physical condi-
   3. Check legal description against title insurance      tion reports, and environmental reports).
   commitment or other title documents.                       2
                                                                In the case of a building code violation the purchaser
   4. Consider necessity of review of plats of underly-    should want the seller either to remedy the condition prior to
   ing subdivisions or obtaining contiguity or other       closing or, alternatively, provide purchaser with a credit
                                                           against the purchase price in an amount necessary to cure the
   endorsement in title insurance policy or both.
   5. Is survey of a fairly current date?                     3
                                                                See Appendix 1 to this article for a sample provision.
   6. Check certiŽcation, and as a minimum required           4
                                                                Phased due diligence may occur in a situation where the
   reference to appropriate survey standards.              seller is responsible under the contract for providing a cur-
   7. Does plat show sucient details relative to loca-    rent title commitment and survey to the purchaser but has
   tion of improvements on and easements over adjoin-      incurred delays in obtaining those documents.
   ing land?                                                   5
                                                                 Sometimes it is necessary for the lawyers to review the
   8. Access to public streets and highways.               business due diligence documents as well. One example of
                                                           this is where the purchaser is a tenant-in-common (TIC)
   9. Area, dimensions, courses and angles.                sponsor and the purchaser's counsel will be responsible for
   10. Area, dimensions, height of improvements.           preparing the private placement memorandum in connection
                                                           with the oering of the tenant-in-common interests.
   11. Location of improvements relative to property
   lines, including setbacks, etc.                              ALTA/ACSM is an acronym for American Land Title
                                                           Association/American College on Surveying and Mapping.
   12. Show appurtenant and dominant easements             The ‘‘Minimum Standard Detail Requirements’’ establish
   identiŽed by document numbers.                          the minimum level of work that the surveyor must perform
   13. Location of utilities onsite and connections to     to prepare an ALTA/ACSM survey. The most recent revi-
   source.                                                 sions to the ‘‘Minimum Standard Detail Requirements’’ oc-
                                                           curred in 2006.
   14. Are improvements shown as completed, or only
   as to locations of foundations?                              If the purchaser wants the title insurance company to
                                                           delete the general exception for survey matters from the
   15. Method of describing curves and angles.             owner's title insurance policy and provide a survey endorse-
   16. Showing of pavements, parking areas, drive-         ment, then the title company must be one of the addressees
   ways, curbs, fences, trees and shrubs, etc.             of the survey.

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