Due Diligence is one of the most important aspects while investing in real estate which is closely followed by the understanding of commercial transactions. Due Diligence can be stated as the necessary audit, investigation, or review that is done to ensure that the facts provided are accurate. There are two types of ways of conducting a due diligence search, i.e full search, and limited search. 

This aspect of an investment is not only concerned with commercially but also provides an understanding of the feasibility of the transaction as well. While investing in a property it is important to consider various factors such as title, permitted use, the legality of construction, encumbrances, and easements as it has the power to affect the nature of the property and to understand its suitability in commercial transactions. 

Is Due Diligence Mandatory? 

Due Diligence can be stated as a necessary step that is to be taken by an individual before entering into an agreement and is a vital step in the investment process. Application of due diligence becomes important and mandatory because it helps the investor to evaluate the risk that he may have to undergo in purchasing the property. Due Diligence also enables him to ensure that the title of the property is clear and there is no dispute that may arise in the future. It will also enable you to check the marketability of the property. 

Both torts as well as contract law states that a person should take due diligence to eliminate the damage. Thus it can be stated that by applying the principle of due diligence a person can avoid any form of misrepresentation or fraud from occurring. Application of the principle also becomes necessary as it will help the investor identify any pending dues on the property including tax dues pending on the property. 

How does a Real Estate Lawyer help with the Due Diligence PROCESS?

Legal help with due diligence has increased largely in the current scenario for various factors such as a mortgage, etc. A lawyer can aid the investor by checking and confirming ownership title, the legality of development & construction, permitted use, easements, and encumbrances. A property attorney can be beneficial in considering jurisdictions and legislations of each state, scrutinizing litigations pending against the immovable property, pending charges, easements, and registration of authorization with the competent government body. The key components dealt by a lawyer with due diligence are:

  • Derivation of ownership. They could also provide you will the necessary information in relation to the title is clear and marketable.
  • They can also help you identify is the person transferring the title to you, actually has the capacity to do the same. 
  • He will also be in a position to advise you on topics such as sub-lease, lease, mortgage, etc.
  • Acquisition processes can be completed successfully and the government’s authorizations for further construction or requirements can also be taken care of by a lawyer. 

Thus it is to state that the employment of a lawyer will aid the investor with due diligence. 

Can a seller back out during due diligence? 

The direct answer to this question is yes however it is a rare scenario as the sellers are normally motivated to sell their property and rarely backs out of the agreement. Most of the real estate property transaction includes an attorney review period or due diligence period during which the seller’s attorney and the buyer’s attorney can cancel the contract and can be done legally. 

Law stands that a seller can draw out of the agreement when the buyer fails to accomplish or fulfill the terms of the agreement and in cases where the agreement is no fully executed. They will also have to do so by paying the buyer with the expense incurred by him in the process. Real Estate transactions are also governed by the provisions of the Specific Relief Act called specific performance, the buyer can take the seller to the court to fulfill his contractual obligation. 

What happens if you back out after due diligence 

Your decision to back-out after the due diligence period will lead you to lose some amount of protection provided to you unless you have a major reason or justification to do so such as irreparable damage on the property, etc. Apart from the existence of a reasonable justification to do so, you may be deprived of your earnest money. A seller can also bring about a legal suit to cover his expenses as well and in some cases plead to proceed with the sale.  

A buyer can also back out in cases of a financial contingency, i.e. inability to cover the cost of purchase. The seller can obtain a pre-qualification letter from the lender that the buyer has spoken to him about lending. The buyer can also back-out in cases of appraisal contingencies wherein the price of the property is way above the appraised price of the property. 

Can you back out during due diligence?

Yes, the buyer can back out of an agreement during the Due Diligence period which is one of the main reasons for the same. Most of the real estate agreements contain a due diligence period during which the seller or buyer may withdraw from the transaction. Some of the grounds in which the buyer can withdraw are:

  • During the period of due diligence, the buyer comes across something that he was not aware of something which if he had known, he wouldn’t have preferred the purchase.
  • The buyer and seller have problems or couldn’t reach a solution in relation to the repairs.
  • The buyer discovers facts in relation to the seller which makes him incompetent to contract or has misrepresented him as someone else. 
  • The buyer has discovered facts in relation to the neighborhood whereby he is no more interested to purchase.
  • The damage is so extensive that the property cannot be insured, etc. 

Thus it is to be stated that the buyer can back-out or withdraw from a transaction when a situation arises which makes the purchase undesirable. He can back-out of the agreement even if there is no justification but should be during the due diligence period.

Summing up, it is to be stated that due diligence is the investigation or reviewing of the property or the terms of the property done by the buyer. It provides the buyer and seller with protection to back out of the agreement if it proves opposite to the agreed. The sellers generally don’t back-out of the agreement as they are motivated to do so. Buyers should use this period to evaluate the property that they are purchasing well during this period otherwise it may cost them the earnest price or sometimes other expenses.