Unnecessary expenditure or essential due diligence?

  • Associate director Tom Burton 

With an improving economic picture and increased availability of finance, we are beginning to see an upturn in the volume of property transactions, both on a freehold and leasehold basis, Tom Burton explains.

Though many people are aware of the risks involved with investing in bricks and mortar and appreciate the importance of technical due diligence, many prospective tenants and freeholders alike  failing to investigate exactly what it is that they are investing in.

In the past year, the building consultancy team at Innes England under took a previously unprecedented volume of pre-acquisition building surveys and we are all too familiar with the pitfalls that inherently exist across the whole range of property use types and construction methods.

While at first sight, a building can appear to be in good order, a detailed inspection often identifies not only defective elements of the building fabric, but also wide ranging legal and regulatory compliance matters, such as unsuitable and insufficient means of escape, queries relating to access rights and ownership, unsuitable fire signage, alarms and separation, to mention but a few.

The market, while undoubtedly showing signs of recovery, is still one of caution, and for many the cost of commissioning a building survey can act as a deterrent. However, the implications of failing to investigate can often far outweigh the associated professional fees

The cost of suitable remedial and statutory compliance works will, of course, depend on the scope and scale required, but is not unusual for recommended works costs to be significant, sometimes representative of a large proportion of the freehold value or in excess of several years’ worth of rental payments. In a number of instances, the findings of a pre acquisition or building condition survey have identified such significant issues, that the purchase or letting of the property is no longer considered viable.

In relation to freehold properties, failure to take account of these matters and address them, prior to letting the property, can so often result in significant damages claims arising towards or at the end of the term. Conditional break clauses are also often subject to matters of repair, which can be particularly onerous for properties held on full repairing and insuring terms.

While the responsibility lies with any prospective purchaser to undertake due diligence, and vendors protected by Caveat Emptor (buyer beware), an upturn in the property market is likely to lead to a further reduction in the number of building surveys commissioned, due to commercial and market pressures, but the very real risk remains.

Although a cash freehold purchase may not call for immediate expenditure, ignoring recommendations of medium to long term wants of repair may have significant implications for any new owner at the point of re-sale, even in a favourable market. Although rarely considered by a purchaser to be as important as the investment yield at the point of purchase, the deal is all too often soured by the findings of a building survey, which is best employed in good time, in order to facilitate the more favourable negotiation of terms or, on occasion, reconsideration of the investment.