Due diligence before buying a property

Due diligence before buying a property

by George Coucounis

“Due diligence protects the potential purchaser in his choice”

THE term due diligence refers to the process usually initiated by the purchaser of an immovable property or a business, through which the interested party or entity requests and obtains information, documents and assurances as to the status of the property in issue but also regarding the seller himself. Although underestimated at the beginning of the negotiations, this preliminary inquiry is crucial and it is wise to be followed properly by prudent buyers who are eager to avoid any unpleasant surprises or obstacles which may lead to a lengthy and costly litigation battle. The ambit of the due diligence process is wide enough to cover a whole range of issues which need to be examined, including but not limited to the legal status of the property, the financial standing of the seller, any tax liabilities owed by the seller to the Commissioner of Taxation and other local, governmental or public Authorities, any communal charges due, the tax aspect of the deal, the authority of the seller to dispose the property and the potential need for the purchaser to acquire permits or consents by the Government or any other governmental body. The well-known problems leading to the passing of the relevant legislation regarding the purchase of immovable property, its registration in the buyer’s name free of any encumbrances, the issuance of the separate title deeds, the legality of buildings and other similar issues signify the importance and value of following the due diligence process strictly.

 Before purchasing an immovable property, the potential purchaser must carry out due diligence in order to ascertain its status, any obligations or encumbrances burdening it, any tax liabilities owed by the vendor with regard to the property in issue and proceed with caution to avoid any future complications. When choosing the property suitable to buy, the purchaser should obtain a valuation of the asset and conduct a search at the Land Registry to find out whether the property is subject to any mortgages, memos or other encumbrances or restrictions. Moreover, he must inquire into whether any prohibitions affect the vendor, either bankruptcy or an interim order, or whether he has any tax liabilities. In the event the property is an old building, it may be listed or rented by a statutory tenant; a field may be affected by compulsory acquisition or requisition or even by land consolidation. He is also advised to visit the Town Planning and Building Authority to verify the prospects for the development of the property, whether it is affected by any planning scheme and its building density. In the event that the property constitutes a house or an apartment under construction, the purchaser must be provided with a copy of the town planning and building permits or if it is a property without a separate title deed, to ask for a copy of the aforesaid permits, the division permit and a copy of the architectural plans. Moreover, he must search whether the property is subject to VAT.

In case the property is mortgaged or subject to a memo or any other prohibition, the purchaser must not proceed with its purchase unless the vendor proves that he is able to make the necessary arrangements and have them extinguished so that the property is free at the date of the transfer. The signing of a sale contract must follow due diligence and only upon transfer should the payment of the purchase price be made. The deposition of the sale contract at the Land Registry is not adequate and does not protect the purchaser who may find himself in a difficult position if the vendor is unable to meet his obligations and make the transfer of the property. Nevertheless, it is of utmost importance for the sale contract to be deposited immediately, since any delay may create problems to the purchaser, such as the registration of encumbrances in the meantime having priority over the sale contract. When a property is to be purchased from a person not being its registered owner, but instead from a purchaser under a sale contract, the potential purchaser should confirm that the person selling the property lodged his sale contract at the Land Registry and that he does not owe any money to the original vendor, who must declare that he has made arrangements to pay the relevant capital gains tax, if any. Provided that the aforesaid requirements are met and the relevant tax release certificate is obtained, the sale can be made through an assignment agreement, on which the signatures of the assignor and the assignee must be certified. The above underline the significance of obtaining professional advice before engaging into the process of purchasing immovable property.