Accounting

Due diligence of Polish property

Accounting


Transactions related to the acquisition of real estate in Poland usually require a large investment funds. Potential risks associated with such transactions should, therefore, be subject to a particularly careful evaluation. The negative effects of omissions of legal defects or adverse facts relating to property acquisitions may endanger not only the viability of the project, but sometimes even the financial stability of the entrepreneur. The more complex the transaction, such as the acquisition of several objects at the same time, the harder is a fair assessment of the legal status of its subject matter, especially without having legal expertise. Even with the acquisition of individual properties it is advisable to conduct an in-depth examination of their legal situation. For this reason, the increasing number of entrepreneurs, before making a final investment decision, decide to carry out a legal audit, so called due diligence, during the acquisition process. .

The scope of due diligence of Polish property

Legal audit includes a detailed analysis of the legal status of the property to be acquired and the risks that may be associated with the planned investment.

The subject of the analysis is usually:
-       legal title to the property,
-       existence of a burden in the form of mortgages, other limited property rights, such as easements, rights of use, etc.
-       the existence of agreements or claims of third parties, especially the rental and leasing of real estate,
-       correctness of the construction process for facilities that are located on it,
-       issues related to planning and zoning and requirements of construction law, and compliance with the construction and environmental requirements by buildings.

What is the interest of an entrepreneur purchasing property in ordering an audit?

Checking the legal status of the property before its acquisition in business relationships is regarded as the exercise of due diligence. This is very important because the omission of such an investigation may lead to difficulties in pursuing warranty claims and claims for damages from the seller.

Other audits

A comprehensive examination of the subject of the transaction is, of course, not confined to legal analysis.  Relevant aspects of the relevance and profitability of investment must also be examined as part of the financial, tax, technical or environmental audit. Because accurate examination requires specialized knowledge and experience, each of these audits should be conducted by experts in the field.

It is desirable to perform various types of audits at the same time so that entities conducting research could work together and use the obtained information.

Report

After the analysis of the available material the auditors prepare the audit report. The document contains a description of the legal status of real estate, structured according to the needs of a particular transaction. The report is divided into sections on individual issues, in which the  identified risks are described.

The report may also include recommendations for action to exclude or minimize the identified risks. The information contained in the report will also help assess the costs, such as the amount of taxes and other public charges, and income, such as rent, related to real estate. For the convenience of ordering entrepreneur audit key findings are described in the chapter summary or in an additional document, the so-called executive summary.

Sometimes, instead of or in addition to this summary, so-called red flag is also developed - a document that contains only a description of the identified risks associated with the legal status of the property and, where appropriate, recommendations to take appropriate measures in this regard.

Most often the report is divided into sections on: the legal title to the property of the seller, real estate mortgages burdens, easements and other rights and claims of third parties, rental and lease agreements, the planning issues and the construction process.


Michał Dudkowiak

Lawyer

Michał Dudkowiak

Barrister, Partner

Michał Dudkowiak
Marcin Kręglewski

Lawyer

Marcin Kręglewski

Barrister, Senior Counsel

Marcin Kręglewski