Real Estate Due Diligence

The actual audit (DD in the strict sense) is subdivided into:

• Composition of the DD team
  • Advisers with expertise in the following areas
    • Real Estate
    • Law
    • Taxation
    • Business Administration
    • Experience in DD
• Preparation (preparatory work)
  • Provision of information
  • Preparation of fact sheets
  • Compilation of checklists
• Performance
• Documentation
  • Data collection and structuring, incl. photo documentation
  • Evaluation of the findings
  • Reporting
• Assessment / DD Report
  • According to the Discounted Cash Flow Method (DCF)
  • DCF provides better insight into the factors in the real estate portfolio that drive value
  • Better bargaining position
• Questioning the vendor

1. All items in the “Buyer DD”

2. Documentation for the Buyer DD (data room)

• Involvement of vendor-side departments such as
  • Property Development
  • Finance Department
  • Legal Department
  • Property Management
• Preparation issues:
  • Vendor’s departments provide redundant information for the same real estate / elimination of discrepancies to avoid annoying the buyer
  • Current property management documentation is updated according to criteria that are irrelevant for the assessment of the real estate by potential investors
  • Provision as Excel files

3. Information from the vendor to the buyer

Tip: Documentation in the data room records

• Incidental obligations of disclosure of the vendor!
  • Types of disclosure:
    • Pre-signing DD
      • The buyer will not be able to make subsequent warranty claims on the basis of defects discovered in the DD.
      • Liability for breach of warranty does not apply to visible material defects that were not noticed by the buyer³.
    • Post-signing DD
      • The findings obtained in any “Pre-signing DD” are irrelevant here.
      • The buyer is bound by the signed purchase agreement to complete the purchase at the same conditions, notwithstanding the defects discovered in the “Post-signing DD“.
        • Tip: Subject to the condition precedent of a “Satisfactory DD“
        • The buyer may only withdraw from the agreement in the event of serious material defects and defects in title which entitle the buyer to rescind or avoid the agreement⁴.
          • the above-mentioned legal remedies are not applicable in the event of unconditional completion despite awareness of serious material defects.
    • Informative nature only of the DD
      • The vendor must expressly disclose all those facts that he wishes to exclude from his liability.
        • Means: Disclosure Letter.
        • In this case the information about the material defects (CO 200) disclosed in the data room is excluded and the vendor shall expressly assume liability for the known defects in title⁵.
        • Tip: The buyer should notify the vendor of the findings obtained from the DD that establish the vendor’s liability, otherwise reliance on the exclusion of liability set out in CO 200 could be construed as breaking the law.
    •  Warranties by the vendor
      • If the vendor has given warranties that the defects in question do not exist (any more) upon closing , the issue of the buyer’s knowledge or imputed knowledge is irrelevant.
  • Scope of the applicable duty of care
    • The vendor is not liable for material defects which the buyer negligently overlooks⁶.
• Duties of disclosure of the vendor!
  • Material defects
    • Principle: The vendor is not liable for those material defects which the buyer negligently overlooks⁶.
    • Exceptions:
    • Assurance of the absence of the specific defects by the vendor or
    • Intentional concealment of the specific defects
      • Intentional concealment exists only if the vendor breaches a duty of disclosure:
        • A duty of disclosure exists when the vendor knows that the buyer overlooks a material defect that is crucial for his purchasing decision and/or determination of the price.
        • A duty to notify does not exist if the defects are clearly stated in the DD documentation.
          • Exceptions: The vendor acknowledges that the buyer has overlooked these defects.
  • Defects in title
    • Principle: The vendor is liable, regardless of a duty of disclosure that gives rise to liability and notwithstanding negligent ignorance on the part of the buyer.
      • The breach by the vendor of his duty of disclosure has the effect of increasing liability.
        He is also liable, if found culpable, for further loss arising from the (full or partial) surrender of the purchased property to claim damages based on warranty of title.
    • Duty to provide information:
      • The vendor has a duty to provide information whenever he is asked to do so by the buyer.
  • The better and more reliable the information provided to the investors or buyer, the lower the deduction for risk from the property valuation will be
    • Advantages:
    • Profit
    • Shorter transaction process⁸
    •  Vendor DD gives the vendor a better bargaining position
    • Reduced risk of a transaction falling through at a stage when prospective buyers are already involved
  • Additional information for potential investors, such as
    • Depiction of market rents
    • Reference prices for individual properties
    • Essential market analyses
    • Information about the macro and micro location
    • For a potential share deal: information about the company occupying the property
  • to avoid disruptions to the vendor’s day-to-day operations and to prevent unfocused direct enquires on external premises
• Assisting the buyer in conducting his DD.

¹ The DD team is naturally not permitted to act for the buyer and vendor in the same investment transaction and simultaneously conduct the Vendor and Buyer DD.

² cf. CO 192 para. 2 and CO 200 para. 1. The buyer is not entitled to bring warranty claims if the vendor warrants the absence of such defects.

³ The buyer is able to rely on warranties by the vendor here (CO 200 para. 2).

⁴ Increased liability for material defects which entitle the buyer to rescission or reduction: liability of the vendor for further loss, CO 208 para. 3 in the event of rescission and CO 97 in the event of reduction (Constitutional Court Ruling BGE 82 II 139).

⁵ cf. CO 192 para. 2.

₆ cf. CO 200 para. 2; unless the vendor makes contradictory representations.

⁷ cf. CO 195 para. 2.

⁸ Spin-off: The Vendor DD is simultaneously a comprehensive source of information for the analyses and calculations made by the vendor/his adviser and the disclosure of promotional features of the portfolio.

⁹ These features go beyond a mere description of the property and should ensure that potential investors have a similar level of knowledge so that they do not have to catch up during contract negotiations.