Acquiring property either to live in or
for investment purposes is foremost at the heart of many individuals.
Property ownership gives a sense of financial security both for the
present and the future. It is also a good store of value and a hedge
against inflation and other micro economic factors.
Acquisitions can be fraught with
irregularities and should be handled by professional acquisition
specialists and legal advisers versed in the commercial and legal aspect
of the acquisition process. Life cycle of a property acquisition
transaction is spread broadly across the following 7 steps;
The target property should be
identified. Viewings, inspections must be conducted to determine if
property is suitable for proposed use, be it for residential,
commercial, retail or industrial use. For investment purposes,
investment advice should be sought to determine if property yields are
commensurate to capital investment. Knowledge of property taxes, income
tax deductions from rents, property maintenance costs, property
appraisal and valuation values etc should be put into consideration when
taking such investment decisions.
Expression of interest and earnest monies
When the property is selected for
acquisition, it is necessary to express an interest in the property to
the vendor or his/her representatives. At this stage it is unwise to
make a direct offer or convey an acceptance to the Vendor as due
diligence on the property has not been carried out and in order to
determine a competitive purchase price, it is presumptuous at this stage
to assume the property is free from encumbrances or debt obligations.
To avoid this, the practise of inserting a caveat “Subject to Contract
or Without Prejudice in the body of the offer letter is common. However
the reality is the vendor is rarely inclined to move away from the
offered prices especially in a seller’s market. In advanced countries, a
payment of a portion of the purchase price (knows an ‘earnest monies)
gives rise to a contractual relationship between the vendor &
purchaser for a defined period of time.
This lock down arrangement allows the
purchaser to conduct its due diligence without fear of the vendor
accepting a better offer from another prospect or pulling the property
out of the market. It also gives the vendor the assurance that in the
event the purchaser breaches his obligations in the contract, barring
any default from the vendor, the vendor has recourse to the earnest
monies. It would be interesting to see this becoming a practice in
Nigeria.
Obtaining copies of relevant documentation
The acquisition specialist assists the
purchaser to obtain relevant documentation covering the property. These
include but are not limited to copies of title deeds, survey plans,
property remittance (land use charge etc), tax clearance certificates of
vendor(s) (this is required for purchaser’s registration of new title),
CAC and tax documents where property is held in a corporate structure,
probate documents where property devolved under a will or letters of
administration and various types of documents required to conduct a
comprehensive due diligence on the property.
Legal and general due diligence
This exercise should be carried out by
specialist solicitors versed in the acquisition process. Legal due
diligence involves investigating, tracing and ascertaining current and
historical root of title to establish a clean and good title of current
registered owner or unregistered as the case may be. It also involves
establishing that the property is free from encumbrance i.e. an
encumbrance on the assets such as a mortgage repayment obligation,
caution as to transfer of property or loss of title documents etc. It
also encompasses ascertaining that the property is within defined
boundaries as seen in the survey maps and thereby free from future
government acquisition though this is not a warranty against such
occurrence. Also, the identity of the vendor must be ascertained to
ensure the vendor is the correct contracting party. For a property held
under a trust or in a corporate structure, trustees and directors with
power to transfer must be ascertained.
General due diligence can involve
visiting property and asking questions on ownership where property is
occupied. Neighbours can give accurate information especially where sale
is a complex one involving large families. Where property is owned or
held by a company, a search at the Corporate Affairs Commission would
also reveal any charges or encumbrance on the property. This step is to
ensure monies are being paid to and title is being transferred by the
correct party. A search at the appropriate courts can also reveal if
property is subject to litigation.
Exchange & review of transactional documents
Once the due diligence process is
completed and solicitors are satisfied as to the authenticity of
ownership and vendor’s power to transfer , the purc haser’s solicitor
prepares the transfer agreement (in most cases a Deed of Assignment) and
draft documents are exchanged between both parties for review and
acceptance.
Exchange of signed documents and payment
Where draft documents have been
accepted, execution versions are prepared and signed byboth parties.
Exchange of documents is mostly done parri passu with payment. However
the dynamics of payment can affect the transfer of documents. In
practice where parties transact ontrust basis, the vendor may retain the
documents until he/she receives confirmation of payment vice versa. The
vendor may part with the executed documents prior to receiving
confirmation of payment. Where parties are dealing as arm’s length or in
different geographical zones, an escrow arrangement is often used where
executed title deeds and all original documents covering the property
are held in escrow until payment is confirmed. Upon confirmation,
documentation is surrendered to the purchaser by the escrow agent.
Banks,
law firms act as escrow agents in most scenarios
Closing
Sale is completed where the vendor has
received payment and the purchaser has received executed title deeds and
all other original documents covering the property
These steps may not be exhaustive but broadly covers the steps taken to mitigate risks of acquiring an encumbered property.
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