Houston – As Houston’s real estate market continues to improve, it’s the perfect time for a refresher on due diligence. Due diligence typically consists of (i) review of title commitment and the exception documents referenced therein, (ii) review of the survey, (iii) if applicable, review of zoning and municipal requirements, (iv) physical inspection of the property, (v) a Phase I environmental assessment, (vi) review of the leases and contracts encumbering the property, and (vii) if the property will be developed, then a number of additional considerations need to be addressed.
Review of the title commitment is typically our starting point, but the “devil is in details” of the exception documents referenced therein. While obtaining title insurance is a must it does not take the place of due diligence. A title policy does not cover loss, costs, attorney’s fees and expenses for the exceptions which are typically where the issues arise. It is imperative that purchaser’s review and understand the legal consequences of the exception documents.
Review of the survey goes hand in hand with review of title because you can’t evaluate the risks without knowing the location of the encumbrances and improvements. Recently I have seen several properties priced to move that appeared to have acceptable title until the survey revealed an endurance cutting through a large portion of the property. The survey will also identify the flood zone(s) and allow you to purchase additional title insurance.
While Houston is the only major US city with no formal zoning code many of our neighboring cities have zoning. It is prudent to check any applicable zoning and municipal requirements encumbering the property. Restrictive covenants are private land use controls which can be comparable to zoning that can be enforced by local governments including our very own City of Houston.
Purchasers should hire qualified inspectors and/or architects to assess the structural and mechanical integrity of any improvements, the need for repairs, replacements or maintenance of any improvements and in the case of unimproved property determine the suitability of the property for its intended use.
Our environmental laws impose strict liability on owners for the clean up of hazardous substances even if the contamination occurred prior to the owner acquiring title. It is prudent for purchasers to obtain a Phase I environmental assessment to determine if there has been a release of hazardous substances and to qualify for the “innocent landowner” defense. It is important to note that the lack of a “recognized environmental condition” only means there has not been a release of hazardous substances, but it does not mean that there is no potential environmental liability. Also, some environmental consultants make recommendations in Phase I reports, without any requirement to do so, which could have the unintended consequence of causing you to loose the “bona fide prospective purchaser” defense for failing to timely implement such recommendations. I recommend you review your Phase I report carefully and that the consultant make any recommendations in a separate letter addressed to counsel.
Purchasers should review all leases and contracts that will encumber the property after closing. In most cases Purchasers inherit the previous owner’s agreements and the obligations and liabilities related thereto. Do not assume such agreements were entered into on terms that are acceptable to you as the new owner lest you be stuck with unwanted long term leases, below market rents, lack of adequate security, rights of first refusal or even an option to purchase the property.
Lastly, if you intend to develop the property then a number of additional considerations need to be taken into account, including if a change of use is permitted, any utility commitments, soil compaction testing to ensure the property will support the contemplated improvements, various approvals including platting and improvements, and any number of other considerations to determine the suitability of the property for its intended use.