Real Estate Due Diligence: How to Buy Property Without Surprises

Any real estate buyer (hereinafter referred to as the "Buyer"), when entering into a transaction with the property seller (hereinafter referred to as the "Seller"), seeks to maximize their protection from potential negative consequences. For this, it is not enough to simply conduct a check based on an extract from the relevant register, as relying solely on such information can lead to significant financial losses, the need to repay the Seller's debts, lengthy legal disputes, the inability to fully use the acquired property, and even the loss of rights to it. It is necessary to thoroughly investigate the property by conducting a comprehensive due diligence, which can be broadly divided into 3 stages:

• Property analysis;
• Seller verification;
• Technical inspection.

Verification of the property's legal status

Regarding the property itself, before its acquisition, it is necessary to establish, including but not limited to:

• the existence of registered ownership rights in the Unified State Register of Real Estate (hereinafter – "USRN").

Please note: As of March 1, 2023, personal data of property owners (full name, date of birth) are not available in USRN extracts when obtained by third parties (Article 36.3 of Federal Law No. 218-FZ of July 13, 2015 "On State Registration of Real Estate"). Therefore, for a comprehensive verification, we recommend requesting the extract from the Seller;

• whether the property's actual characteristics match the USRN data;
• the property's purpose (residential/non-residential), permitted use, and other characteristics (as applicable);
• the permissibility of using the property for its intended purposes;
• the presence or absence of encumbrances on the property (e.g., mortgage, seizure, easement, lease, prohibition on registration actions, etc.).

For example, the existence of long-term lease agreements can significantly impact the Buyer's ability to use the property.

Other information may also be subject to legal verification, determined by considering the property's characteristics, location, and intended use.

Verification of seller's rights

When purchasing real estate, it is crucial to ensure that the Seller is genuinely entitled to dispose of the property; otherwise, there's an increased risk of losing the asset, disputes over transactions, and additional costs in the future. Regardless of the Seller's legal status, a general analysis of the Seller's information should always be conducted, for example:

• grounds for the Seller's acquisition of ownership (sale and purchase agreement, gift agreement, etc.) and the history of ownership transfer from other parties;
• the Seller's actual ability to dispose of the property (absence of prohibitions, arrests, disputes over title);
• legal disputes involving the Seller (including disputes related to the alienated property or other property of the Seller).

Some information subject to verification depends on whether the Seller is an individual or a legal entity. For example, if the Seller is an individual, the verification should include, but not be limited to:

• existence of a registered marriage, status of the property being sold (personal/joint ownership), presence of spousal consent;
• presence of consents from other third parties (co-borrowers, co-owners, guardianship authorities);
• the Seller's legal capacity;
• the Seller's credit and banking history (presence of overdue debt, active enforcement proceedings, blocked accounts).

If the Seller is a legal entity, the verification should include, but not be limited to:

• presence of corporate approvals (decision of management bodies, consent of participants);
• authority of the person signing the agreement (position, power of attorney, order/resolution of appointment);
• presence or absence of bankruptcy proceedings and signs of pre-bankruptcy status.

Even with formal compliance with legal requirements, the Buyer may lose their acquisition in the future or incur other losses related to the property (for example, in the event of the Seller's bankruptcy, if they sold the premises when already showing signs of bankruptcy). Preventing such consequences requires even more thorough due diligence, as it is necessary not only to verify all information provided by the Seller regarding the real estate but also to request all necessary additional documents.

Technical due diligence

For technical analysis of real estate objects, it is necessary to check, including but not limited to:

• compliance with urban planning regulations;
• permitted use of the land plot;
• presence of building permit and commissioning permit;
• absence of unauthorized redevelopments.

Accordingly, the Buyer must inspect the property and compare its actual appearance with the plans/schematics indicated in the documents, and analyze the property's suitability for its future purposes (especially if the Buyer plans to carry out construction/reconstruction).

If any discrepancies/violations are identified for any reason, this could lead to the impossibility of operating the property, the Buyer, as the new owner, being held administratively liable, or receiving a demand for demolition or for bringing the property (e.g., regarding room re-planning) into compliance with the plans/schematics contained in the USRRE.

Given current practices, risks for the Buyer (including invalidation of the transaction, loss of ownership, incurring additional expenses, inability to use the property for its intended purpose) can be divided into 2 categories:

• "External" risks (risks directly mentioned in the documents provided by the Seller and obvious);
• Deferred risks (risks that the Buyer knows will materialize, but after some period, or risks that the Buyer is unaware of during the initial inspection).

Conclusion

The purchase of real estate must be accompanied by a comprehensive due diligence of the property, which will allow the Buyer to identify hidden risks, assess the legality of the transaction, and minimize the likelihood of future litigation and financial losses.

Ignoring any stage of the due diligence significantly increases the risk of losing ownership / the ability to use the property and/or incurring additional obligations.

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C Cases Recommendations

To mitigate the risks discussed, the C Cases team recommends that the Buyer take the following actions:

• sending a request to the Seller for a list of necessary documents for review, taking into account the property itself, its planned use, and other factors;
• legal due diligence of the property itself: cross-referencing USRRE data with the actual condition, assessing encumbrances, analyzing permitted uses, etc.;
• due diligence of the Seller, considering their status (individual or legal entity);
• technical inspection and examination of the property, including an analysis of urban planning restrictions, compliance of layouts with the actual condition, etc.

A Buyer conducting due diligence independently may overlook significant risks that are not always obvious when analyzing a basic set of documents, which is why we recommend consulting specialists when purchasing a property. The C Cases team can assist with comprehensive legal due diligence of real estate and propose an optimal transaction structure tailored to specific circumstances.

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Sources

• Civil Code of the Russian Federation;
• Federal Law No. 218-FZ dated July 13, 2015 "On State Registration of Real Estate".