Expediting the Contract Due Process in Commercial Real Estate Transactions
Almost without exception, purchasers of commercial real estate insist upon and place into the purchase contract various contingencies that must be met before consummation of the transaction. Sellers may insist upon their own set of contingencies. Contract due diligence is almost entirely about satisfying those contingencies. Since there are always one or more contingency deadlines in the purchase contract, due diligence must be effective, efficient, and be completed by the respective deadlines. Here are some methods of expediting the contract due diligence process that can ensure that those goals are achieved.
Focus on the contingencies
To expedite contract due process, the first set of tasks is to engage in a careful review of the purchase contract, identify the contingencies, log them for tracking purposes, calendar any and all deadlines, and prioritize the contingiences based on difficulty, how much time can be expected before completion, and the relevant deadline(s). Even where there are no distinct deadlines, contingencies that are the most difficult and time-consuming must be fast-tracked and front-loaded. For example, sometimes, one or more of the buyer’s contingencies involves obtaining the approval of the transfer of a permit or license, or sometimes a buyer requires a zoning variance or the approval of a special use permit before agreeing to consummate the transaction. Government agencies that handle contingencies related to items like permits and variances are notorious for their lack of efficiency and the slow pace of their proceedings. As such, immediate attention should be focused on starting these types of difficult approval processes.
Bundling and use of common access/use online platforms
Contract due diligence can also be expedited through the use of document bundling and of common access/use online platforms like Dropbox and Google Docs. For example, if corporate entities are involved, corporate books and records will be needed. These can be gathered well in advance and bundled into paper binders, uploaded to a common-access/use online platform, or loaded onto portable devices (like USB flash drives). This is an efficient method of providing easy and quick access to needed commercial real estate due diligence documents for the parties’ respective counsel, underwriters, title company personnel, and others who may need to prepare or update reports. Other due diligence documents that can be bundled and loaded in this manner include:
- Contracts for third-party vendors and services
- Tax bills and payment receipts
- Recent utility bills
- All relevant insurance, any owner disclosures with respect to claims made, any insurance investigation or assessment reports, etc.
- All warranties being transferred
- Reports for building mechanicals and major features like the roof
- Past environmental reports
- Site plans, surveys, recorded plats and/or reports/certifications with respect to building design and square footage
- Relevant documents of record including the owner’s deed, recorded easements, etc.
- Owners’ current title and title insurance documents
- All licenses, permits, and approvals for the property like certificates of occupancy, fire safety compliance and elevator certifications
- Any notices of violations with respect to health, fire, building, zoning, or safety codes
- Litigation-related documents
- Documents required by the purchase contract, a lender, and/or the title company, or that are needed for satisfaction or waiver of purchase contract contingencies
- And any other relevant documents
Use of common access platforms can also help expedite preparation and/or evaluation of an updated Phase II Environmental Report and can also expedite the joint drafting of various due diligence documents by the parties’ respective attorneys and/or presentation of draft documents. Of course, when using a common access platform, counsel must be ever mindful of their ethical obligations with respect to attorney-client privilege and work-product. Further, the use of common access platforms is not always appropriate where documents may contain confidential and/or proprietary business information.
Anticipating the need for flexibility
Expediting the contract due diligence process also involves anticipating the need to be flexible. As noted, if a contingency involves applying to a governmental agency for approval, very likely, the relevant agency will need paper copies of whatever documents are required as part of the application. That is, governmental or regulatory agencies are unlikely to access documents through a common use/access platform. Being flexible in matters like this will help expedite the process.
For more information, contact Baer Reed. Baer Reed provides a variety of commercial real estate due diligence services. To learn more, contact us online or call us today at 888-433-1990.
- On December 21, 2021
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