Save on lawyers later, and not at the beginning: Dew-diligence of commercial real estate in Germany

German real estate is one of the most reliable assets in Europe. Partly because of this, modern Germany is considered to be the seller’s market: good properties are bought up quickly, and in most cases, realtors prefer to work with local customers. Another thing is larger and more risky transactions: for example, for objects with a low yield, but located in a prestigious place, foreign investors are often ready to offer a higher price than the Germans. Such a property should be checked especially carefully by the buyer – the procedure for evaluating the object is called due diligence (from English. “Due diligence”).

What does the doublet test check?
Due diligence includes four types of expertise:

legal – verification of documents that accompanied the entire life cycle of an object;
financial and tax – calculation of the potential costs of maintaining the facility, profitability and the amount of tax deductions;
technical – study of the technical condition of the object;
risk assessment – analysis of the prospects for the development of the location, the impact of existing and potential competitors.
The depth of due diligence may differ depending on the wishes of the client. “The audit may concern all legal areas or answer only questions posed by the client itself,” says lawyer Erica Kindsfater, Tranio’s partner in Germany. Also the type of object influences the amount of analysis. As a rule, newly constructed buildings are less carefully checked: sometimes it is enough to study construction documents (for example, compliance with the conditions of a building permit), ownership of a site and a lease agreement, if it has already been concluded. “I do not advise you to give up the due diligence at all: you can buy a cat in a bag,” she says.

So, during the legal verification of the object can be checked:

property rights;
leases, security arrangements for rent payments;
insurance contracts;
other agreements, rights and obligations (for example, credit agreements, contracts for technical works);
public law requirements (for example, building permits, concessions, preemptive rights for the state);
encumbrances of the site (for example, the rights of neighbors or the state);
tenant company (for example, the structure of the company, its solvency).

If the investor does not acquire the object itself, but the company that owns it, then the due diligence also includes the verification of all documents related to it.
How is the test?
As a rule, sellers (especially those who offer their objects out of the market through personal contacts) do not show documents to everyone. To gain access to information about the property, the potential buyer must send a letter of intent (LOI) to the seller and sign a non-disclosure agreement (NDA). Then the investor and his lawyer discuss the scope of the analysis: for example, the client can limit the check only to the study of property rights and lease agreements. A team of lawyers (specialists from different areas of law: for example, corporate, tax, construction) draws up a list of documents required for the examination of the object and sends it to the seller.
In most cases, the cost of the due diligence, depending on the size of the check and the type of object, can vary from 0.5 to 1.5% of the value of the transaction.
After analyzing the documents, the lawyer draws up a report for the client. In it, he reports on the results of the audit, features of the object, issues that need to be resolved before the conclusion of the transaction.

Why do you need it?
Due Diligence helps to identify risks, assess the potential of the object and make an informed decision about the purchase. So, if you detect the risk in a timely manner, you can make changes to the contract of sale and save the investor from additional costs in the future. Erica Kindsfater talks about one of the cases from her practice, how her client from Russia bought a hotel in Bavaria. “The building has been standing for several decades. After reviewing the construction documentation, we found that at some point the hotel was expanded, and part of the building went to a neighboring site, which belonged to the local municipality. The hotel owner did not have a contract that would confirm their agreement to this, ”she explains. According to Erica, the current situation presented two risks to the investor: the owner of the neighboring plot could demand from the owner to pay a fine or demolish a part of the building that entered its territory. “We have stipulated in the contract of sale that, in the event that the municipality makes demands on the new owner, the seller guarantees reimbursement of the costs associated with it,” says the lawyer. – And indeed, after the conclusion of the transaction, the owner of the municipal territory appeared. Subsequently, the seller had to pay several hundred thousand euros. ”