1. Introduction
Due diligence clauses
Most contracts to buy land for future development contain a due diligence clause.
A well drafted due diligence clause will:
allow a buyer a set period of time to undertake all necessary and relevant searches and enquiries to satisfy itself before proceeding to settle the purchase;
require the seller to produce for inspection copies of all relevant documents relating to the land;
if the results of those searches and enquiries are not satisfactory, allow the buyer to terminate and obtain a refund of all deposit monies paid.
Depending on the specific terms of the contract, the parties may well have a right to renegotiate some elements of the contract such as price, time for settlement or other critical elements.
There are many important reasons why performing due diligence is essential before buying land for property development. Some of these are to:
Establish whether you can actually develop what you want on the site
Establish whether you can actually make the profit margin you need
To undertake a realistic feasibility for the project
Identify and factor into any feasibility any potential programme delays or unusual construction issues
Understand exact details of the site.
Essentially a good and comprehensive due diligence process before buying a site will identify as many potential issues up-front to avoid any costly mistakes or delays once a purchase is complete. Many financiers will insist on this before approval and advancing funds to settle development property.
2. Legal Aspects
The legal checks will involve reviewing everything to do with the site which has a legal implication or restriction, which for some sites can be very straight forward and minor, but some sites can be incredibly complex.
The starting point is a report on title to establish ownership and any registered or unregistered encumbrances or restrictions on use.
For example, easements can have the potential to dramatically affect use and access to a site. Similarly, building or environmental covenants which restrict the size of any development or the location of any construction on the land can greatly affect the viability of a project.
This essentially means in the first instance reviewing the land registry information relevant to the site. Any registered easements or encumbrances should be thoroughly investigated.
In some cases, a registered encumbrance that looks problematical can be resolved by extinguishment or removal.
There can be many potentially complex legal issues arising from the land title and related searches.
This is one area in the property development due diligence checklist where spending money to get relevant searches and on a good solicitor will benefit you in the long run.
3. Utilities and Services
Site constraints
Are there any services either above or below ground on the site that would impact on any proposed development?
Services are usually checked by a series of searches of all of the relevant utility companies who have plans, maps and detail about any services across the site.
Knowing the exact location of these services is fundamental as it can require drastic alterations or restrictions to designs and have a huge implication on cost.
For instance, having to move gas or electrical or sewage pipes for below ground carparking can require obtaining several levels of government consents and approvals, excavations and consequent additional costs and delays.
The mere existence of these services does not mean that the project is not feasible - just that they need to be taken into account in any design, timing and costings. Knowing about these services in advance may also allow some renegotiation of price.
4. Local Authority & Planning
Developers buy sites with one primary intention - to develop the land to its maximum potential and make a profit.
In some cases, a site will be sold with all development approvals already in place. If so, this considerably reduces a lot of the risk in proceeding with a purchase, but this does not mean the project will be profitable. The fact that the local authority approves a particular development does not mean that it cannot be changed or improved. In some cases, a planning scheme may change and a development approval given some time ago which is still current can be amended to permit a different design or greater density of dwellings and hence more profit.
Therefore, an absolute key part of any due diligence of land to be developed is to look at the applicable development scheme to ascertain what is possible. Here, the services of a good town planner is essential. In some cases, the current zoning is suitable and in others it may not be. It’s essential to know if develpoment approval is required, what conditions might be attached and will those still allow the development of the project. Your town planning consultant will be able to identify current use and zonings as well as advise what may be possible if a change is required and may initiate preliminary discussions with local authority planning officers to assess the policies, or appetite for whatever you propose that may require approval. This can identify any issues at an early stage and allow an informed decision to be made. In some cases, the changes can be made but the costs of doing so need to be considered. For instance, changing the density of a development may mean additional lots to sell and greater profits, but this may require an upgrading of services such as a sewage treatment plant, an expensive exercise in itself, and one that carries additional risk factors.
Further, if there is a risk of a long drawn out court battle in the planning and environment court to obtain an approval, the cost and time factors may make a project unviable.
A good town planning consultant can guide and assist you through this process.
Developers should always be aware and informed about planning risk, but the main aim of the property development due diligence is to highlight all of the potential planning risk items and to see where on the risk curve these items sit. Are they project killers or can they be worked around?
5. Site Survey Requirements
Every development site should be subjected to a range of physical checks and surveys. A boundary survey will ensure accuracies of boundaries, while a soil test will help to determine construction issues.
These checks can be expensive, but can be critical to have before notifying completion of a satisfactory due diligence. Encroachments or incorrect boundaries are not common but the consequences can be very costly to rectify.
In getting these searches completed, you are identifying and establishing the risks and assessing whether additional time, costs or design changes are required for your development. You can only do this armed with the correct information.
6. Future Construction
How ‘buildable’ is your intended development?
All aspects of the construction process and assess any issues that might arise need to be anticipated and considered.
Can the site be easily accessed for the type of construction for the project?
Is there space for site works accommodation..? Can the site be made secure from trespassers?
In the case of future construction issues, it’s always best to speak to a contractor to get their opinion. They will quickly be able to provide some advice on the potential issues associated with the site and more importantly, how to overcome them.