Due diligence is the process of investigating and considering an action before consummating it. Due diligence can include drilling down on the facts, risks, and opportunities of a transaction and involve business people, lawyers, accountants, financiers, consultants, private investigators, and IT specialists, among others. Due diligence is done in connection with an action significant enough to make the investigation worthwhile. Legal due diligence refers to the legal portion of a due diligence investigation.
Before buying or leasing any property one needs to ascertain some very important factors to avoid any later legal battles. The following factors are to be taken care of –
(i) Whether the property belonging to the said person is undisputed? – title Search is important
(ii) Whether the person from whom the property is to be bought or lease has all the original papers of the property?
(iii) Whether the property in question is mortgaged or disputed?
(iv) If mortgaged whether there is any dispute with the bank regarding the same?
Basically, due diligence means taking all the precautions and ensuring that investment in a property is safe and secure. After exercising due diligence, the buyer identifies and evaluates all the risks that are involved in the investment and also tries to rule out or minimize those risks.
Correct Way To Go About It
Scrutiny of Title – the scrutiny of the title or the title search relates to the search of ownership and the rights of the owner to sell the property. There are two kinds of title search reports -
(i) Full search – for a period of the previous 30 years the title of the property is searched.
(ii) Limited Search – for a period of less than 15 years the title of a property is searched.
Looking for the right of the owner – the most important aspect to note is that the owner must be capable of transferring ownership. It is to be ensured by the buyer that there is no restriction to the power of alienation of the owner. The limitations might include –
(i) The owner being minor or unsound.
(ii) Owner not having an absolute right in property.
(iii) The owner being a lessee or a tenant.
(iv) Sale of property not permitted by statute.
Issuance of a certificate by the Sub -Registrar’s Office. The buyer must inspect the original title deed in case of any loan against the property as it is deposited with the bank.
Records to Look into
(i) Title Deeds-Gift deeds, Will, Lease Deed, Sale Deed
(ii) Records maintained at the Sub-Registrar’s office
(iii) Records maintained with the Tehsildar
(iv) Records maintained by the Registrar of Companies
Helps prevent frauds – Due diligence involves verification of documents, title and ownership rights to ascertain the authenticity of the
Risks evaluated identified and minimized – Due diligence requited to safeguard the funds being invested.
As certain disputed property - If there is any court case pending concerning the property or the rights of the owner, it can pose hardships later for the buyer. The buyer is bound by the decision of the court, which may or may not be favourable.
Encumbrances affecting the value of a property – The intended property must be free from encumbrances-
(iii) Charges due (utility bills, tax payment or any other statutory payment)
Checking for Easement Rights – the interest of the buyer is affected by the process of acquisition. Buyer must check an easement right covered under the acquisition scheme of the government. It affects the returns from investment.
Approvals are granted – the buyer must ensure that all the necessary approvals are granted.
1. What is the normal due diligence period?
The recommended due diligence period is 30 days from the date your offer is accepted by the seller because of the multiple steps and parties involved when you are in the process of buying a home.
2. WHAT IS LEGAL DUE DILIGENCE?
Legal ---- related to Law; Due ---- proper; Diligence ----- any act done meticulously/ scrupulously.
3. What all is included in Title verification?
4. When should I consider property investment due diligence?
Due diligence is advised when you are considering investing in commercial real estate or if you wish to sell your commercial property to a potential buyer.