Legal Due Diligence on the Acquisition of a Development Site

Author: Shona Grey, Partner, Real Estate, London

The scope and form of legal due diligence on the acquisition of a development site is key to ascertaining the parameters of your proposed development and any third party legal interests which will need to dealt with before commencement of development (including existing tenants and adjoining or neighbouring owners).

Here we consider the form that such due diligence may take, the key differences between Certificates of Title, reports on title and development constraints reports and common considerations for each form of reporting.

1. Reports or Certificates of Title

2. What is a report on title or a development constraints report?

3. What is a Certificate of Title?

4. Common factors for reports on title and Certificates of Title

5. Some important considerations for both reports and Certificates of Title

1. Reports or Certificates of Title

Whilst legal due diligence can be tailored to reflect the specifics of a transaction, in the ordinary course, it will consist of the preparation of a report on title, a development constraints report or a Certificate of Title.

2. What is a report on title or a development constraints report?

• A report on title is a legal report produced by the buyer's lawyers based upon their underlying review of the legal documentation relating to a property. The format of a report on title will vary according the law firm producing it and can either be an in-depth report on the legal documentation, a red flag summary, or somewhere in between.
• A report tends to be a more flexible and client specific way of presenting due diligence findings and can therefore sometimes be preferred by a buyer for that reason.
• The usefulness of a report on title may be determined by the quality of information which a seller has disclosed and the willingness of a seller to respond to enquiries raised by the buyer's lawyers.
• On a development site acquisition, a report on title can commonly be referred to as a development constraints report. This report will focus specifically upon any potential development constraints to a proposed development, including existing rights of light documentation in favour of adjoining owners, restrictions on title which may restrict either the physical nature or proposed use of a development, rights or easements granted in favour of third parties which will need to be preserved post development (such as rights of emergency access) and the rights of existing tenants or occupiers which will need to be terminated to secure vacant possession of a site.

3. What is a Certificate of Title?

• A Certificate of Title is a pro forma template report produced by the City of London Law Society (CLLS) which contains a list of standard statements against which due diligence information relating to the property is disclosed.
• A Certificate of Title is commonly prepared by the seller's legal team and its usefulness may therefore be determined by the calibre of the law firm preparing the Certificate, the quality of information and instructions provided by the seller and the level of any cap on liability which the relevant law firm seeks to include in the Certificate.
• Given the standard form of a Certificate of Title, it may be a less useful format to use on the acquisition of a development site as it will not necessarily drill down into the level of detail commonly required for a development constraints report.
• A  Certificate of Title tends to be the preferred format of legal reporting for lenders and it is recommended that you pay regard to this consideration when instructing your lawyers at the outset of a transaction if it is likely that you will be financing your acquisition or development of the property.

4. Common factors for reports on title and Certificates of Title

• Both reports and Certificates of Title should include a full summary of title and planning matters affecting the property, any head leases or occupational leases to which a property is subject and a summary of the search results carried out in relation to the property. Both will be addressed to the buyer for reliance purposes and, in each case, this reliance is capable of extension to lenders and potentially other third parties.
• Reports and Certificates of Title take time to prepare. The timetable for preparing them will be dependent upon the flow of information from the seller and receipt of search results. A reasonable time period should therefore be allowed for preparation of reports or Certificates of Title to allow for all pertinent due diligence issues to be identified and flushed out before exchange of contracts for the acquisition of a development site.

5. Some important considerations for both reports and Certificates of Title

• Where a multi let building is being acquired, will all tenancies be reported on or can a materiality threshold be applied and sampling exercise undertaken (for example a percentage of the highest value leases)? A materiality threshold or limited lease reporting exercise may be particularly relevant on the acquisition of a future development site where one of the buyer's main concerns will be the ease with which it can achieve vacant possession of the site for redevelopment purposes, as opposed to the ongoing future income stream from existing tenants.
• Who else on the development team needs to review the legal due diligence? For example building surveyors, architects, rights of light surveyors, the project management team and valuers, so that this can be provided to them in good time.
• Where the buyer or seller legal team is including a cap on liability in a report or Certificate, is this cap appropriate with regards to the value of the transaction?
• What will your lender require?  It can be costly and time consuming to convert a report to a Certificate once prepared if this is ultimately what a lender requires.

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