Due diligence before buying a property

“Due diligence protects the potential purchaser in his choice”

The term due diligence refers to the process usually initiated by the buyer of an immovable property or a business, through which they request information, documents and assurances as to the status of the property and its seller. Although underestimated at the beginning of the negotiations, this preliminary inquiry is crucial and it is wise to follow it properly to avoid any unpleasant surprises which may lead to a lengthy and costly litigation battle.

The ambit of the process is wide enough to cover a whole range of issues, including but not limited to the legal status of the property, the financial standing of the seller, any communal charges due, the tax aspect of the deal, the authority of the seller to dispose of the property and the potential need for the purchaser to acquire permits or consents from the government or any other governmental body. The well-known problems leading to the passing of the relevant legislation regarding the purchase of immovable property, its registration in the buyer’s name free of any encumbrances, the issuance of title deeds, the legality of buildings and other similar issues signify the importance of the due diligence process.

Before purchasing a property, the potential buyer must carry out due diligence and proceed with caution to avoid any future complications. When choosing a property, the purchaser should obtain a valuation and conduct a search at the land registry to find out whether the property is subject to any mortgages, memos or other encumbrances. Moreover, he must inquire whether any prohibitions affect the vendor, either bankruptcy or an interim order, or whether he has any tax liabilities. In the event the property is an old building, it may be listed or rented by a statutory tenant; a field may be affected by compulsory acquisition or requisition or even by land consolidation.

One is also advised to visit the town planning and building authority to verify the prospects for the development of the property, whether it is affected by any planning scheme and its building density. In the event that the property constitutes a house or an apartment under construction, the buyer must be provided with a copy of the town planning and building permits or if it is a property without a separate title deed, to ask for a copy of the aforesaid permits, the division permit and a copy of the architectural plans. Moreover, they must search whether the property is subject to VAT.

In case the property is mortgaged or subject to a memo or any other prohibition, before the buyer proceeds with the purchase, the vendor must prove they are able to make the necessary arrangements so that the property is free at the date of the transfer. The signing of a contract must come after due diligence and only upon transfer should payment be made. The deposition of the sale contract at the land registry is not adequate and does not protect the purchaser who may find himself in a difficult position if the vendor is unable to meet his obligations and make the transfer of the property. Nevertheless, it is of utmost importance for the sale contract to be deposited immediately, since any delay may create problems, such as the registration of encumbrances in the meantime having priority over the sale contract.

When a property is to be purchased from a person who is not its registered owner, but instead from a purchaser under a sale contract, the potential purchaser should confirm that the person selling the property lodged a sale contract and does not owe any money to the original vendor, who must declare that he has made arrangements to pay the relevant capital gains tax, if any. Provided the requirements are met and a tax release certificate is obtained, the sale can be made through an assignment agreement, on which the signatures of the assignor and the assignee must be certified. The above underline the significance of obtaining professional advice before attempting to purchase property.

George Coucounis is a lawyer practicing in Larnaca and he is the founder of GEORGE COUCOUNIS LLC, Advocates & Legal Consultants, email address: [email protected]