Taking counsel

  • 2005-04-13
  • By Elina Cakste-Razna, an associate at Sorainen Law Offices in Riga
Due diligence of real estate prior to purchase

There is no need to emphasize that each purchase, especially of real estate, should be thoroughly considered and assessed by a buyer prior to making a final decision. However, in practice problems sometimes arise 's not everything pans out the way the purchaser has intended. For example:

l a lessee or tenant continues to use the purchased building and fails to vacate premises;

l planned construction cannot be carried out on purchased land plot;

l construction of an apartment house stops because a building permit is revoked.

These situations are possible in all three Baltic states. Why are they possible, and how can one avoid them?

How to identify risks associated with the purchase of real estate. Prior to purchasing real estate it is necessary to carry out a due diligence of the property. The issues of due diligence can be divided into general issues 's i.e., those that would be the same for almost all property purchases 's and specific issues, i.e., those that are of a particular importance for a particular type of property, especially due to the purchaser's plans regarding further use of that property. It should be added that not all issues are related only to the legal status of a property. Here possible issues, for example, involve the technical condition of a building, assessment of land plot contamination, the evaluation of which various specialists should be included.

Though incomplete, the issues mentioned below should be kept in mind for almost any type of property.

General issues. Information should be received about the owner, the composition of property, property borders, debts the property is encumbered with and other encumbrances 's neighbours, disputes and litigation in connection with the property, etc.

Part of this information can be obtained from the public register in the respective country. However, knowledge in real estate matters is required for understanding the contents of entries in the public register. For example, a lease agreement registered with the Land Book in Latvia should also be fulfilled by the next owner of real estate 's such information is not included in the Land Book entry but can be read in the law.

Part of the above information can be obtained directly from the seller. For example, information on litigation related to the property, communications available to the property, etc.

Some information can also be obtained by questioning neighbors. For example, regarding the issue about possible lessees or users of the property, neighbors can provide information about the activities observed in the property until the present.

In Estonia, even though the notary check the title, some facts about the property are presented by the seller to the notary, and our practice has shown that the above-mentioned risks may be incurred also in notarized agreements in Estonia if no due diligence has been carried out before the purchase.

Specific issues about property. Parties should know that examination of publicly available registers will not always provide answers to specific issues that arise exactly in connection with the respective type of property.

For example, when purchasing a land plot on which it is planned to construct an industrial object, it should be clarified whether the respective land plot is intended for such usage in the planning of the local territory. Otherwise, the construction of the industrial object on the land plot will not be possible.

Indisputably, a complicated and time-consuming issue in all countries is the assessment of lawfulness of issuing a building permit. However, it should be noted that cancellation of a building permit can stop construction work.

Clarification of any issues about property requires the seller's interest and responsiveness when selling the property. Buyers have become more and more knowledgeable and demanding in the Baltic real estate market. Therefore, sellers must be ready to inform them about the property on sale in as much detail as possible. In clarifying respective issues, the involvement of professional consultants, who not only collect information but perform the appropriate analysis and can assess potential risks, can play a particularly vital role.