Early due diligence – avoiding pitfalls from the outset
Due diligence is a vital part of purchasing a new site and a buyer would not usually consider proceeding until it has obtained detailed information on the nature and potential risks of its investment. Due diligence by an owner is arguably equally important when considering carrying out or procuring the development of a site.
If a site has been owned for many years, a developer may assume that there are no restrictions or impediments to a development. Often the early stages of design and planning proceed without consideration to the suitability of the intended development or any potential limiting factors.
Where development finance is required, it is particularly important to make sure that issues which may impact on the conduct of a development are identified and addressed as far as possible before involving a funder’s legal team to avoid delays to the drawdown process at a critical time.
Essential due diligence includes:
- Legal ownership/boundaries - it is important to identify the full extent of the registered title to avoid discrepancies between the legal and topographical boundaries as well as to identify any unregistered land. These issues could prevent or seriously delay development should a third party landowner become obstructive and assert a right of ownership.
- Restrictive covenants – common examples include preventing development of anything other than single dwelling houses or requiring any development to be the subject of prior approval. Indemnity insurance may be available, however a full and proper investigation will be required before considering available options.
- Right of light – developers are increasingly exploring upwards development. Early identification of potential issues will ensure that appropriate steps are taken to obtain specialist advice. This will help avoid any disputes or litigation with neighbours which may delay the development.
- Other adverse rights – these might include rights of way and other registered easements over the site which may restrict or prevent development. Identification will ensure that they are properly considered as part of any design appraisals, keeping the risk of redesign to a minimum.
Searches and enquiries
Searches should be carried out to identify other matters affecting the site which are not shown within the title documents. These can include:
- Local search – this shows planning permissions, compulsory purchase orders and planning enforcement notices, as well as proposals for road schemes, environmental and pollution notices.
- Utilities searches - replies show whether a property is connected to utilities and may also show the location of utilities within the boundary of a property. This will allow for the proper provision of site-wide infrastructure and bringing utilities to site, as well as ensuring early engagement with utilities companies regarding any potential diversion or building-over arrangements.
- Environmental search – ground contamination and site conditions are a key risk in development projects. If a local authority determines that land is contaminated and the party who caused the contamination cannot be found, the current owner of the site may be required to remedy the contamination. This can be an expensive process, so it is important to assess the risk early so that appropriate surveys and investigations can be done and suitable protections put in place.
- Highways search – this will likely show the extent of the public highway and other public roadways and pathways maintainable at public expense. This is particularly important in relation to the access points to the site.
Getting to the bottom of what rights are enjoyed by or over the site is vital to avoiding unforeseen problems and minimising development risk. Accordingly, a developer might consider covering off financial risk by purchasing insurance cover for specific adverse matters identified by the due diligence review.
Where time is short and circumstances prevent full due diligence, the availability of indemnity insurance to cover unknowns can reduce financial risk in some instances. Obtaining specialist insurance advice on any potential insurance at the earliest opportunity is key, and a developer should be cautious in discussing any issue which might form the subject-matter of an insurance policy with any third party.
It is important to communicate the longer-term strategy for the site to your legal team. Knowing how you intend to deal with the site post completion, whether by disposal, lease or short-term rental, will help your legal team ensure that documents prepared at the outset are compatible with your desired outcome. For example, where there are a number of residential units being built you may wish to have your site plan approved by the Land Registry. If carried out up-front this may assist a prompt sale for units on the site as Land Registry approval can take time to obtain. Therefore the earlier that your legal team are aware of how you intend to deal with the site, the more pro-active they can be in helping you achieve that outcome.
A pre-development review or appropriate due diligence at the outset can help identify issues which may impact all stages of a development, from planning to design and programme, to risk allocation as between developer and members of its supply-chain. Identifying issues as soon as possible can avoid delay and additional costs further down the line by having suitable protections and remedies in place.