Net zero carbon real estate: acquisition due diligence

Out-Law Guide | 06 Sep 2021 | 9:15 am | 1 min. read

The due diligence process on the acquisition of a property is likely to be the first opportunity for a developer or investor to consider the sustainability issues affecting the property.

It is crucial that the buyer’s team has a good understanding and awareness of the legal issues so that they can be flagged and addressed as necessary.

It is standard practice to request copies of Energy Performance Certificates (EPCs) for a property on acquisition and to pass these on to the client team for review. However, lawyers should have an understanding of the client’s plans for the property so that they can identify whether there are likely to be any issues. Questions to consider include:

  • When will the EPCs expire?
  • Are the ratings sufficient, especially if the client’s business plan involves re-letting the premises during the validity of the EPC?

The lawyers should also check that the EPCs have been properly registered on the national register to avoid any issues later on.

When reviewing any leases affecting a property, the buyer’s legal team should check whether or not the leases contain any “green” clauses. Consideration should also be given as to what the buyer’s intentions are for the property in their business plan. If they are looking to refurbish any buildings or carry out any retrofitting works to improve the property’s environmental performance, it will be necessary to check whether the terms of the leases allow this. Other issues raised in our separate letting and asset management guide will be relevant on acquisition too as it will be the buyer’s first opportunity to understand whether or not they will actually be able to deliver on their plans for the property.

There will inevitably be a large degree of cross-over between the legal due diligence and the work undertaken by other members of a purchaser’s professional team. The main issue is to ensure coordination between the team members to make sure that all of the necessary information has been obtained and reported on. Most purchase contracts will provide that the buyer can only rely on information that has been provided by the seller’s solicitor in replies to enquiries raised by the buyer’s solicitor. If information is provided directly to other members of the buyer’s team, then it should also be formally requested through solicitors – even if by way of a confirmatory enquiry – to ensure that it can be relied upon by the buyer.

Many investors’ acquisition reporting procedures now include statements on the sustainability credentials of the asset. Their lawyers should familiarise themselves with these statements and the additional enquiries that ought to be raised to the seller. While commercial property standard enquiries before contract include basic enquiries in relation to sustainability issues, they are unlikely to go far enough or address all of the areas that the purchaser’s team will need to consider.