As every monopoly player knows, owning a first-class property asset can be a great boon, and buying a dud can be a fatal mistake.  So if you are planning to acquire a business that owns property, no matter how incidental that property is to the transaction, you should pay attention to the potential liabilities involved.

Whether the target company owns a cheap leasehold office in a scruffy part of town, or runs a chain of luxury boutique retail units, it is essential that you are comfortable with the level of risk they present.  Why?  For a start, you could be saddled, unwittingly, with exorbitant arrears of rent, dilapidations, or contamination liabilities that render the whole deal uneconomical or worse.

Shares purchase or asset purchase?

First of all, consider the two main ways in which you might acquire another business – either through acquiring the share capital of that business (a “share purchase”) or by buying its assets (an “asset purchase”).

A share purchase will be more straightforward from a property point of view, because the property will remain under the same legal ownership, even though the share structure of the owner has changed.

An asset purchase will be a bit more complicated, because legal ownership of the property will transfer from one company to another – which means more paperwork and more deliverables in the sale agreement.

In either case, you should ensure that you understand as much as you can about the property before exchange.

Investigating the property

If you’ve got enough time, the best way to identify the likely extent of your property liabilities is to ask your own lawyer to carry out full due diligence.  He or she can tailor it to your specific needs, and will report in full on all findings.   Your lawyer will discover – amongst other things - whether there are any planning consent problems, whether there are private pipes running through the land (for which you may be liable), or even whether you are legally responsible for repairing the local church!

If timing is tight, and if you are more comfortable with risk, you may require the Seller to provide a “certificate of title” instead.  The certificate will generally be restricted to factual statements about the property, and might not be tailored to your specific requirements or reveal everything that you may have wanted to know.

Don’t forget, if the acquisition is being funded by a bank, they may have their own requirements as to the level of necessary due diligence, and you are likely to be led by them.

Warranties and disclosures

In any event, your property lawyer should ensure that the Seller provides a series of property warranties (contractual promises made by the Seller in relation to the property assets).   If a warranty turns out to be untrue, you may be able to sue the Seller for your losses, so discuss these carefully with your lawyer.

The Seller will normally seek to water-down the warranties by making “disclosures”, which mean that you may be deemed to have knowledge of certain things about the property, whether you actually know about them or not.   If any problems arise after completion, the Seller might be able to point to a relevant disclosure and claim that you were aware (or should have been aware) of the problem in question, leaving you without an adequate remedy.  Your lawyer will try to ensure that any disclosures are kept to a minimum, and should talk to you about them before exchange in the context of your own bargaining position and timing requirements.

A risk-based approach

Above all, your property lawyer is there to ensure that the transaction is as smooth as possible, while protecting your position.  But don’t lose sight of the deal – early communication will help to ensure that nothing is held up without good reason, and that everyone involved with the matter understands your individual approach to risk and your priorities.