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 following7 steps;
•PROPERTY IDENTIFICATION AND SELECTION
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 practice of inserting a caveat “Subject to Contract or Without Prejudice” in the body of the offer letter is common. However, the reality is that 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 (known an ‘earnest monies’) gives rise to a contractual relationship between the vendor and purchaser for a defined period of time. This lock down arrangement allows the purchaser to conduct his 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 DOCUMENTION COVERING PROPERTY OWNERSHIP
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 paying a visit to the site of the 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 AND REVIEW OF TRANSACTION 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 purchaser’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 by both 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 on trust 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 at 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
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.