Due Diligence Review Under a Purchase and Sale Agreement

By: Josh F. Botts (Co-speakers) and Brian P. DeVoss (Co-speakers)
Lorman Education Services
June 2007

This article will discuss (i) the typical issues which arise in the course of a due diligence investigation performed prior to the acquisition or disposition of real property, (ii) the types of investigations, document reviews, and inspections that should be considered by seller and purchaser, (iii) the motivations for each party in pursuing the information, and (iv) the potential consequences of not reviewing such information prior to the expiration of a due diligence period or closing date under a purchase and sale agreement.

Prior to the current real estate boom, purchase and sale due diligence was routinely performed in a mad-scramble fashion shortly before the expiration of a due diligence, or “free look,” period or the actual closing date. Aside from the opportunity cost, a buyer typically had little to lose if he or she decided to terminate a contract. Seller did not have specific performance and earnest money was generally small relative to the purchase price.

However, as more capital entered the commercial real estate market, the competitive environment has allowed sellers to demand more earnest money. Today good real estate, whether unimproved, income producing or potential redevelopment, will attract multiple potential buyers, enhancing the ability of a seller to get more earnest money relative to the purchase price and shorten the due diligence free look period in order to weed out less serious suitors. Consequently, by the time a buyer executes a purchase and sale contract today, the buyer typically already has a large monetary investment that will not be reimbursable within 15 to 90 days after the date of the contract.

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