Tuesday, October 4, 2011

What is Due Diligence

In the context of a real estate sale or purchase, exercising due diligence simply means taking care by checking out all the facts, paying attention to the details and implementing risk controls before you go ahead and buy or sell. When we say checking we mean checking the person, the property and the money/price involved in the transaction. So important questions must be asked concerning ownership, location and so on.

One reason why purchasing registered land is highly recommended is that a registered title which is an official record of who owns the land, its description and location is guaranteed by the state. The original is maintained at the National Land Agency Office of Titles in the Register Book of Titles. When you purchase land,  you get the duplicate certificate of title with your name duly endorsed on completion of the transaction.

Unlike sellers of unregistered land who often have to produce several documents to prove ownership, the vendor of registered land must only show his registered title.

* Person(s)

When you are buying land you want to ensure that you are purchasing same from the rightful owner. It is imperative therefore that you conduct a title search. If there are multiple owners registered and only one of the owners is selling and purporting to sell the entire property then you may have a problem,. If the explanation is that the other owner(s) is/are deceased then your lawyer will make the necessary inquiries to ensure the legalities are complied with so that the sole vendor can proceed or in certain cases the deceased's personal representatives can join in the sale. If the person selling is not the owner nor his legal representative then you WILL have a problem but it is better to know before you part with your money that unscrupulous persons are misrepresenting themselves in the hope of making you the victim of their scam.

As I mentioned in my post on Pre-contract Matters you will have to conduct further searches at the Companies Office if the registered proprietor is a company. Be aware the foreign companies can own real estate so you will have to make searches in the foreign jurisdiction to ensure that such a company is in good standing and in a position to sell.

Of course you also want to ensure that the vendor is not selling the same property to several persons at the same time that he is selling to you.  In this regard and for your general protection buyers should ask your lawyer about the importance of lodging a caveat.

* Property

The registered title for land will have a deposited plan unless the property was registered by metes and bounds. You must examine this plan to see if the property your Realtor showed you accords with that on the plan. It is critical that prospective buyers see the property they are buying but if they are away in foreign lands they should take the next best step. Get a Commissioned Land surveyor. He will confirm whether:

  • the property on the ground is the same as that in the title,
  • the boundaries are fine and
  • the restrictive covenants are being complied with or not.

* Money

Is it really worth what they are asking? It is important to get a valuation report which a mortgagee will require if a purchaser is financing the purchase via mortgage loan.However a cash purchaser may not want this added expense. At the very least one should seek to get an idea of comparable values of homes in the neighbourhood.

Sometimes the parties may seek to engage in "passing money under the table" to allow the vendor to avoid paying taxes. BEWARE! Some of these transactions are downright illegal and in any event the Transfer Tax Act gives the Commissioner the power to assess the tax on a higher value than declared.

Another area that is becoming of increasing concern is that of money laundering. The ordinary man may think that this issue is one that is of interest only to financial institutions but it is important to note that property may be forfeited if it is derived from criminal acts. So a potential party to a real estate action who has reasonable suspicion to believe that the vendor or purchaser is disposing of or transferring criminal property should not proceed or he runs the risk of forfeiture and/or being charged with a criminal offence.

It is better to be safe than sorry.