HOMES & PROPERTY: Due diligence in real estate deals

This article attempts to highlight the significance of undertaking due legal diligence in real estate transactions and the methodology to be followed.

Introduction

Real estate is one of the fastest growing sectors in Tanzania evidenced by a sharp increase in real estate transactions involving buying, selling, leasing and financing of properties. In addition to transactions in urban areas, we have also witnessed large scale procurement of land from individuals in villages close to the urban, industrial and commercial centres. Similarly, there has also been an increase in leasing (both short and long term) of commercial office space.

Due diligence in real estate transaction exercise is probably the most important aspect involving real estate, which would broaden the understanding of the commercials.

This process has the potential of not only impacting the commercials, but also determining the feasibility of the transaction itself.

While the commercials often pay high importance to expedite the conclusion of a transaction, it is critical in the interests of the players to provide adequate time and attention to a detailed due diligence of the property involved.

The need for conducting and scope of legal due diligence of real property:

Due diligence is conducted mainly to verify the ownership of title over the property and any encumbrances over the property, so as to protect one against pre-existing claims over the property.

Such claims could either affect the ability of the transferor to transfer the property or could attach themselves to the property even after it is transferred.

The primary objective of a due diligence is therefore to gather information - provided by Section 67 (b) (i) and (ii) of the Land Act CAP 113 and Section 34 of The Land Registration Act CAP 334 CAP. The extent and type of due diligence to be undertaken by the purchaser’s lawyer will depend on the following:

• The risk profile and business objectives of the purchaser/ lessee;

• The type of real asset involved;

• Nature of the real estate transaction (i.e., whether it is a purchase, long term/ short term lease, mortgage or financing of the real property);

• The time frame for completion of the transaction; and

• If the purchaser is looking at obtaining third party financing either during the

pre-transaction or post-transaction phase.

In case of a prospective purchase, a lease of the property or real estate financing, a title search is performed primarily to answer three questions:

• Does the owner/ lessor have sufficient authority/ interest/ right to enter into the

• Transaction involving the property in question?

• Do any liens exist on the property which needs to be discharged before the consummation of the transaction in question? These could be in the nature of mortgages, charges, acquisitions, unpaid taxes, litigation, easements and other assessments.

• What is the nature of restrictions on the use of the property?

Apart from undertaking title due diligences for purchase or lease of properties, a title due diligence is also performed when an owner wishes to mortgage the property with any bank, financial institution or a lender.

Such bank/ financial institution/ lender may require the owner to submit a due diligence report of the property or may conduct such diligence on its own.

Types of due diligence

Depending upon the nature of the transaction, the property involved and the objective of the participants, a due diligence can be divided into two broad categories:

1. Full Search: A full search is usually done while giving a title certificate of the property in instances of sale/ resale/ long term lease transactions and for transactions that involve obtaining of financing by mortgaging the property in question. In a full search, the search regarding status of ownership of the property is generally conducted from the date on which the seller in question came to acquire the property.

2. Limited Search: A limited search is generally conducted in transactions where the property is taken on lease for a short term from the date on which the current owner of the property came to acquire the property.

In a limited search, the search relating to the history of the property may be limited to restricted aspects such as recent title history, encumbrances on the property, disputes related to the property etc.

In order to conduct a due diligence, the following aspects would require to be examined:

• Legal capacity of the present owner of the property (whether the person is legally capable of entering into a binding contract for sale or lease of the property or for mortgaging the property);

• Nature of current owner’s right over the property, and whether such right is transferrable;

• Source of right or title of the current owner;

• Legality of the construction

• Encumbrances over the property; and

• Whether the property is a part of any acquisition process.

Conclusion

a lawyer, undertaking a due diligence of land having a structure on it or not, needs to first get familiar with the local construction laws applicable in the region in which the building is situated, and then, to determine whether these have been complied with, in undertaking the construction of the building in question.