What is a Due Diligence Clause?

 


What is a Due Diligence Clause?

When an owner of a commercial real estate property receives a purchase agreement from a buyer there is usually a Due Diligence time period added to the contract.

You might be asking yourself, “What exactly is a Due Diligence Clause?”

A Due Diligence Clause can cover and effect various components in a purchase agreement. Due Diligence, in Commercial Real Estate, is the efforts of the buyer to investigate, examine, and review all aspects of the property for which they have an accepted offer on. 

If the buyer is represented by a sharp real estate broker, there will be a carefully crafted “get out of jail free card” inserted into the due diligence language. What does that mean? The buyer’s broker will ascertain that the buyer may abandon the deal and walk away for any reason, or no reason at all, during the Due Diligence time period.

Conversely, if the seller is represented by an astute real estate broker, there will be pushback from the ownership side. The seller wants to ensure the transaction will reach the closing table and might, therefore, ask the buyer to be specific and narrow during the due diligence period.

 What does a buyer’s Due Diligence look like?

In the agreed-upon time period, a buyer is reviewing any and all pertinent documents related to the subject property, including but not limited to leases, surveys, phase one environmental inspections, and any other documents that the seller has in their possession. The buyer may also conduct physical inspections of the structures on the property and arrange their financing. If one of the sale contingencies is petitioning to re-zone the property, that process would also begin during this time.

How long is a typical Due Diligence time period?

While no two properties and purchase processes are the same, standard due diligence time periods can range from 30 days for a relatively simple property and up to 180 days if the transaction is complex.

In conclusion, a Due Diligence Clause is a pivotal component in commercial real estate transactions, providing both buyers and sellers with a critical period to assess the property thoroughly before finalizing the deal. Understanding and negotiating the Due Diligence Clause is crucial for both parties, as it can significantly impact the outcome of the commercial real estate transaction.

I have 35 years of experience negotiating in commercial real estate transactions. If you find you are in need of my assistance, give me a call at 765-427-5052 or email me at bneihouser@shook.com.

All The Best To You,

Brad Neihouser

Cut Through The Noise. Get Straightforward Advice.

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