Due diligence, DD and legal due diligence are terms used to describe the review of the legal aspects of a motel transaction. New entrants to the industry often confuse the legal due diligence process with the accountant’s review of the business financials (e.g. the net operating profit), otherwise known as verification or financial due diligence.
If a legal due diligence is required, a carefully drafted special condition needs to be added to the contract, as it is not included in the standard REIQ terms and conditions.
Generally the special condition will be very broadly worded so that the buyer and the buyer’s solicitor needs to be satisfied with the contract, any legal documents (for example the lease – if you are buying a leasehold business or a freehold investment), the requirements of the local authority or any other statutory authority, the terms and conditions of all written and/or oral contracts and agreements with suppliers and customers of the business, any necessary approvals, licences, registrations and other compliance requirements to operate the business and any other matter determined by the buyer to be relevant to it.
Depending on what you are buying, our usual legal due diligence will involve a comprehensive review of:
- the title to the land;
- the ownership of the business name, domain name, trademarks and any assets included in the sale;
- the licences required to operate the business and council requirements;
- if applicable review of the lease documents;
- if applicable review of the franchise agreement; and
- any other written agreements or contracts which will be assigned to the buyer.
But what does all of this actually mean?
For a lawyer it means lots and lots of reading and for me personally, it means lots of paper, a highlighter, hand written notes and post it notes flagging various issues. This, as part of a comprehensive review process, helps me identify and assess any potential legal and commercial issues before consolidating my findings into a concise due diligence report that I provide my clients.
At Mahoneys, our legal due diligence generally covers (but is not limited to):
- The lease, along with any assignments and variations to that. These also need to be matched with the title to ensure that all documents are registered. More often than not there will be 2 to 3 documents that form the lease, but this can be more. Importantly, these documents need to be read together to determine the rights and obligations of the tenant and the landlord. We look at a range of matters including:
- the length of the term of the lease and when any options are due to be exercised, and how they are to be exercised;
- the rent and how that rent is increased;
- the duties and obligations of the tenant;
- the repair and maintenance obligations of both the landlord and the tenant;
- Searches that relate to the land (even if only the business is being purchased). This will include a title search and copies of the plans that relate to the lot, and PPSR searches of any assets (eg copiers, tools, machinery etc) that are being purchased. We will also undertake searches on the intellectual property that relate to the business (eg business names, domains and trademarks).
- The purchase contracts. This to ensure that all the details are correct (party names, price, any conditions, key dates etc) and that the buyer is getting everything they need to operate the business.
The value of the legal due diligence process cannot be understated. It is a very important tool to safeguard the value of the business that you are buying. For a buyer it is extremely important to read the report prepared by their lawyer as well. Often they will see things from a practical or commercial perspective that may not necessarily be apparent from a legal point of view. These things are identified when the buyer takes the time to read their report and discuss it with their lawyer.
It is also important to choose an experienced lawyer with a detailed understanding of what is usual when it comes to motel leases and the motel industry to avoid issues that might otherwise get missed during a poorly conducted legal due diligence proc