What we check before we buy: due diligence on a commercial property

Survey and condition

We instruct a building survey on every acquisition and read it for cost rather than for reassurance. Roof coverings, mechanical plant, cladding, lifts and anything with a known remaining life get priced into our view of capital expenditure over the anticipated hold.

An FRI lease puts repair on the tenant. It does not remove the cost from the picture, because a tenant in difficulty does not repair, and a dilapidations claim at expiry is often settled in cash while the building still needs the works.

Title and tenure

Solicitors report on title, and we look first at whatever restricts what the building can do. Rights of access, rights of light, service media routed through third-party land, restrictive covenants, and any historic rentcharge or overage.

On leasehold we read the head lease as carefully as the occupational leases, since unexpired term, alienation provisions and any landlord's consent requirement will govern the exit as much as the pitch does.

The lease review

Every occupational lease is read in full. We note the passing rent against our view of reversionary rent, the unexpired term, break dates and conditions attached to them, review mechanism and dates, alienation and user clauses, repair obligations, any rent deposit or guarantee, and whether the lease is inside or outside security of tenure.

Side letters and informal concessions matter more than their length suggests. A rent concession granted by the seller and not disclosed until late in the process changes the income we are buying.

Valuation and planning

An independent valuation of each syndicated property is then obtained annually for as long as the syndicate holds it.

On planning we check the lawful use, the planning history, any outstanding conditions or enforcement, and whether the use we are underwriting is the use that is actually consented. Where alternative use supports the price, we treat the prospect of consent as unproven until it exists.

Environmental and EPC

Environmental enquiries cover contamination history, former uses on and adjoining the site, flood risk and radon where relevant. Contamination is expensive to prove and expensive to disprove, and a purchaser at exit will discount for the doubt as readily as we do.

EPC ratings are checked against exposure under the minimum energy efficiency standards, with the cost of improvement works carried in our appraisal where a rating is weak.

Insurance, service charge, arrears and VAT

We obtain terms before exchange so the premium is a known figure and not an estimate, and we check whether the building has a claims history or any imposed condition that narrows cover.

On multi-let property we review three years of service charge accounts where they exist, looking at recoverability, the proportion falling to the landlord through voids or capped apportionments, and any dispute in progress.

Rent arrears are checked tenant by tenant, with the payment record rather than the current balance being the useful part. A tenant who pays late every quarter is a different covenant from one who does not.

The VAT position is settled before exchange, including whether the property is opted to tax and how the transaction is to be treated. Treatment depends on the buyer's own position, so investors using a pension arrangement or a company should take that point to their own adviser and their pension provider rather than to us.

What due diligence does not tell you

It does not tell us whether a tenant will still be trading at the next review. Covenant strength is a reading of accounts filed in the past.

It does not tell us what the building will be worth. A valuation is an opinion at a date, on assumptions stated in the report, and the annual valuations that follow will move with the market.

It does not tell us what rents will do on that pitch, whether a break will be exercised, or how long a void will run. It does not reveal what a seller has not disclosed and a search does not pick up.

And it does nothing about liquidity. A holding may be offered for sale at any time, but there is no ready market, a sale can take time, it may not be possible when a holder wants it, and a holder may get back less than they invested.

How the reports reach investors

The professional reports are made available to members at commencement, either as part of the marketing material or on request, alongside our rationale for purchase, with regular updates from there.