Legal: Due Diligence

MLVelascoIn legal terms Due Diligence is the process of factual and legal investigation, research, analysis and discovery, on a business, person or asset before the signing of a contract, the signing of public documents or the purchase of an asset. The objective of these investigations is to give correct and unbiased information to the stakeholders involved, in order to make informed decisions.

A typical example is the process of purchasing a property. In this case due diligence will be the research of hidden defects in the deeds, the inscriptions and even the structure and stability of the property (in this case you will need a technical architect). This is to assist the buyer of possible risks in the purchase.

Due diligence when investing into a property in Spain
Considering the amount of things that can go wrong during the purchase of property in Spain, the due diligence process is practically mandatory.

It will have to be carried out by an independent Spanish lawyer specialised in real estate law. In this context independence means, with no conflict of interests.

Over the due diligence process the lawyer might find pieces of information that will have direct implications over the purchase. For example, if the property has a swimming pool that was built without the necessary authorisations from the town hall, it will have to be legalised before the purchase. This will have costs and will probably delay the whole transaction. In any case it will be possible to negotiate with the vendor.

The process
There are several basic checks that the lawyer and a surveyor will carry out. The vendors will be responsible for giving access to inspections and also cooperating with disclosures as requested.

Analysis of the property inscription
The objective is to be certain that the vendor has full ownership and the right to sell the property. For this a nota simple from the property register (registro de la propiedad) will be enough most of the time. A typical example is when the property was acquired by the vendor through an inheritance.

If the vendor failed to process the inheritance, the nota simple will still record the deceased owners instead of the sellers.

It will also be important to check that the ‘nota simple’ is accurately describing the asset being purchased. Any discrepancy with reality will have to be investigated.

The nota simple will also detail any right of passage on the property that might be present.

Building surveys:
Covers the physical quality of a property from a technical,infrastructural, and architectural point of view and identifies potential or known technical deficiencies, compliance issues and risks.

Check for tenants or preferential rights
In certain cases, other parties could step-in after the purchase and force the buyer to sell it at the same price. This is the case of compulsory purchases if there are specific interests of a public administration. For example, if the property is in an area affected by the coastal planning law (ley de costa). Alternatively, it could be the right of a long term tenant in the property (beware of properties with sitting tenants)

Check for taxes payment and possible debts to the community of owners
Since any unpaid taxes becomes the new owner’s liability, the lawyer will check if all local taxes (IBI) have been paid at least within the last 4 years.

Check if the property is free of debts, charges and embargoes
Since any unpaid debt on the property becomes the new owner’s liability, it is important to check if there are debts attached to the property. The existence of debts is not a problem as long as they are properly stated and they are cleared before the purchase. For example, if the property has a mortgage, the vendor will clear the mortgage at the moment of the sale. In this case the buyer will pay part of the sale price in a separate cheque directly to the mortgage lender, and retain an amount to pay notary and land registry fees for the mortgage cancelation.

Check with the local town hall planning department
If the description in the deeds or the nota simple doesn’t match reality it will be necessary to check what can be legalised and what cannot. In this case most of the time the lawyer will send an architect to do a survey in order have precise measurements.

Of course this is not an exhaustive list of Due Diligence checks,but it a good starting point.


(News/Legal: Velasco Lawyers)

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