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Legal due diligence of the real property



Most of the transactions on the Real Estate market encompass high-value objects. This is the reason why – in order to minimize the investor’s risk – the investment should be preceded by a detailed analysis of the legal status of the property.


What is a legal due diligence?

Due diligence is the process of examination of the property before the transaction is completed. Its purpose is to provide the investor with information concerning potential risks, which may affect the transaction and investment plans. This whole set of information obtained in the process enables the investor to make the best and the most profitable decision, including the basic one – whether it is possible to complete the investment as he expects to.


What does the due diligence consist of?


1) Land and Mortgage Register

The pre-investment analysis is usually started by the examination of the Land and Mortgage Register. The ownership issues are the first to be checked:


• whether the seller has a legal title to the property;

• whether the effective transfer of title is possible.


Land and Mortgage Register also includes information concerning encumbrances of the property. Chapter IV encompasses entries on mortgages. Form the Chapter III, the investor learns about possible rights or claims of third parties, such as easements or effective tenancy agreements. In the case of a tenancy agreement concluded for a specified period of time, the investor may not be able to terminate it earlier.


The principle of pubic credibility of Land and Mortgage Registers will protect the investor’s interests in most cases, but not always (the principle does not apply if there are records on easement, appeal, and also in the case of lack of title to the property).


2) Map and Extract form the Land and Buildings Register

Map and Extract form the Land and Buildings Register is a different document which provides crucial information about the property. It includes the property’s Land and Mortgage Register number, total area, legal boundaries, location of the land and its character (i.e. agricultural, urban, industrial), type of land in accordance with the Polish Land Classification, information on the owner of the plot. This document may serve as the reference to make sure that the Land and Mortgage Register entries are compliant with the factual circumstances.


Map and Extract form the Land and Buildings Register is the basis for the description of the property in the Section I-O of the Land and Mortgage Register, and if there are any discrepancies between the two documents, the Land and Buildings Register data are acknowledged.


3) Regulations concerning the spatial development

If the investor is thinking about a developing specific type of investment on the property, regulations concerning the spatial development are of great significance. Details about the character of the property may be obtained in the local Urząd Gminy or Urząd Miasta. Everyone is entitled to access them. First, the investor has to check if there is a local spatial development plan adopted for the area. This plan is crucial to every investment, as it decides whether the specific kind of building, i.e. residential, commercial, etc., may be constructed on the plot. It may also include restrictions concerning construction (i.e. maximum height or floor area ratio).


If the plan was not adopted for the area, the auditor who performs a legal pre-investment analysis has to examine other documents which provide information on the spatial development: local study of conditions and directions of spatial development and the decision on land development conditions (if it is issued for the particular plot), which describe the details on the permitted development and character of the plot.


4) Building permit and occupancy permit

If the property includes buildings, there are two important documents – building permit and occupancy permit – which state whether the construction was made as planned and if it may be occupied. Moreover, it is worth to check other documents concerning the construction process (i.e. the correspondence with the Construction Supervision Office).


In the case of a property under the perpetual usufruct rights, due diligence should include the purpose of establishing these rights, which should be described in the agreement or decision on granting the rights to usufruct. Such examination will eliminate the risk of possible charges for the perpetual usufruct, or even the termination of the agreement, which results in the loss of rights to the property.


5) Land Development Conditions

Finally, while examining the legal status of the property, one should not forget about the specific conditions related to the environment protection and the conservation area policy. Regulations on the environment protection may limit or preclude conducting a particular business activity on the property. As for the conservation area policy, it is worth to know, that if the property is included in the Register of Historic Landmarks, possibility to perform repair and modification works will be limited and each will require obtaining the decision of the Voivodeship Office of the Conservator of Monuments.


What are the reasons for performing the due diligence?

Legal due diligence is one of the elements of the examination of the property before the transaction is made (other elements include technical and financial evaluations). It allows the identification and avoidance of many risks related to the property purchase. The knowledge that due diligence provides the investor with, often decides on the profitability of the investment and creates new arguments for the negotiation of the transaction.


Jakub Jastrzębski


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