What is a Due Diligence Lawyer and What Do They Do?

In the state of Illinois, the process of buying or selling residential or commercial properties often involves the assistance of a due diligence lawyer, someone with real estate experience. This is a customary practice, not a legal requirement. You have the option to navigate the process independently, but there are certain aspects where the skillset of a lawyer proves indispensable.

What Does a Commercial Due Diligence Lawyer Do that a Residential Due Diligence Lawyer Doesn’t?

Commercial due diligence (CDD) is a process that helps someone who is interested in buying a company (the buyer) understand the company they’re considering (the target) in detail, from a business perspective. It’s like doing a deep dive to understand the company’s situation and its potential future. This process is usually less time-consuming for the company’s management because a lot of the information needed is about the broader business environment, which can be found through research​1​​ and 2​.

Examples of Commercial Due Diligence

Buyer-initiated CDD: This is when the buyer wants to understand the current and future performance of the target company. This process might look at the company’s past performance, the size of the markets it serves, and how it stands among its competitors. It can also involve looking at how the target company would fit with the buyer’s business​3​.

Vendor-initiated CDD: This is when the seller of a company wants to give an unbiased look at their company’s future prospects. This process might focus on growth forecasts, financial performance, and what sets the company apart from others. The goal here is to cater to potential buyers’ needs and answer their questions before they ask them​4​.

Red flag reporting: This is a shorter type of CDD that focuses only on key issues. It can be initiated by either the buyer or the seller and is often used for smaller transactions because it’s less costly than a full CDD​5​.

chart for commercial due diligence law

Commercial Due Diligence of Real Estate Transactions

Commercial Due Diligence attorneys consider a number of factors on whether the property will make you money. For some of these, you’ll see a heading in this article. If you do, read on for that issue because we spoke about that at a much greater length.

Title Review

Your due diligence attorney conducts a title search to ensure that the seller has a clear and legal title to the property, meaning they have the right to sell it. We would look for any liens, encumbrances, or other issues that might affect the transfer of the title to the buyer. We go into this in far more detail in this article.

Commercial Survey

A commercial survey is a precise measurement of the property, including its boundaries and any structures or improvements on it. The attorney would review this to confirm the boundaries of the property and any potential issues like encroachments onto neighboring properties.

The attorney would review the legal description of the property, which is a detailed way of identifying the property’s location and boundaries in legal terms. They would verify that it matches the actual property. Everyone takes this for granted until they realize someone else owns the parking lot.

Chicago Zoning Approval

If the property is in Chicago, the attorney would verify that it meets all zoning laws, which regulate what types of buildings and activities are allowed in certain areas. Realistically, we pay $300 for a certificate where the City, as a vendor, does this for us.

Declaration of Covenants, Conditions, Restrictions, Reservations and Easements (CC&Rs)

The attorney would review these documents, which outline the rules and restrictions for the property. They might limit how the property can be used or require certain maintenance obligations. Think of these as deed restrictions or rules of owning the property. They’re more common in multiunit than single unit.

Third-Party Engineering, Environmental Impact Statements, Appraisals, Soil Tests and Other Studies

These studies provide information about the physical condition and value of the property. The attorney would review these to look for potential issues like environmental hazards or structural problems.

Lease and Guarantee Review

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If the property is being leased, the attorney would review the lease agreements and any guarantees to understand the terms and ensure they are legally sound.

Rent Roll and Capitalization Study Review:

A rent roll is a document showing the rental history of the property, while a capitalization study assesses the property’s potential income. The attorney would review these to verify the income potential of the property.

Profitability Analysis by Quarterly Profit Loss: The attorney would review financial documents to analyze the property’s profitability, helping the client understand the potential financial return.

Permit and Occupancy Analysis: The attorney would check that the property has all necessary permits and meets occupancy regulations, which can affect its legal use.

Security Deposit Review

The attorney would review the security deposits held for the property to ensure they have been correctly handled and are in accordance with the law.

Tax Incentive and Assessment Review:

The attorney would review any tax incentives the property might be eligible for, as well as the property’s tax assessments to ensure the taxes are being correctly calculated.

Service Contract Liability Review:

If there are any service contracts associated with the property (like for maintenance or utilities), the attorney would review these to understand the obligations and potential liabilities.

Insurance Analysis:

The attorney would review the property’s insurance policies to ensure appropriate coverage is in place.

Pending Litigation Analysis

If there is any pending litigation involving the property, the attorney would review this to understand the potential legal risks.

Understanding the Role of a Due Diligence Lawyer in Contract Creation

In Illinois, a due diligence lawyer plays a crucial role in the creation of contracts during the process of buying or selling real estate, whether residential or commercial. Yet, even in wholesale or subject to transactions, you’ll need someone like me to help. So, here’s a detailed breakdown of what a real estate lawyer does to help you with due diligence:

Drafting Contracts:

Only a licensed attorney can draft a legally binding contract for the purchase or sale of real estate. Importantly, this is because we understand the complexities of the law and can create a contract that protects your interests while complying with Illinois laws and regulations. Therefore, nobody but the buyer, seller, or lawyer can create a contract for purchase and sale, prepare deeds, or handle the final steps of a sale.

Also, a due diligence lawyer reviews any existing contracts and suggests amendments to ensure that the terms are fair and beneficial to their client. So, they can modify contract clauses to safeguard the client’s interests. However, we can change anything about a contract except the price. But, unlike real estate agents, a due diligence lawyer can provide legal advice on the contractual obligations and rights of the parties involved.

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Exploring the Unique Role of a Due Diligence Lawyer in Document Preparation

The real estate transaction process is often buried in paperwork. Certain documents can only be prepared by you or your real estate attorney. These include, but are not limited to, contract addenda, deeds, notes, mortgages, powers of attorney, affidavits, possession agreements, escrow agreements, tax proration agreements, requests to extend contract contingencies, and contract termination notices.

Your due diligence lawyer will be able to:

Accuracy in these documents and calculations is crucial. Any mistakes could result in delays, disputes, and potential legal actions. The expertise and experience of a due diligence lawyer can help prevent such issues, ensuring a more seamless and efficient process. This level of proficiency is not found in a real estate agent, whose primary role is to market your property. Meanwhile, the due diligence lawyer’s responsibility is to guarantee a successful property closure.

Why Would I Pay Money for a Due Diligence Attorney?

due diligence attorney

In the realm of law, attorneys owe their clients an unwavering allegiance. This means they are duty-bound to prioritize your interests and maintain the confidentiality of your information. However, other stakeholders in the transaction, such as lenders, inspectors, and title companies don’t share this obligation. But, numerous cases affirm that these entities are primarily business vendors, likely prioritizing their profits. Yet, an Illinois real estate attorney stands in stark contrast to this!

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Let’s not mistake the actions of one for the entirety. First, the fundamental ethical obligation of an Illinois real estate attorney is to maintain a duty of loyalty towards their client. In summary, this means the attorney’s actions should always be in the best interest of the client, prioritizing the client’s needs above their own.

Critical Elements of Attorney Loyalty:

Avoiding Conflicts of Interest: Attorneys must steer clear of scenarios where their obligations to one client clash with those to another, or where their personal interests conflict with their professional duty. Accordingly, transparency is key if such a situation arises. Therefore, the attorney needs your informed consent to begin or continue the representation.

Safeguarding Confidentiality: Attorneys must maintain the confidentiality of their client’s information, with disclosure permitted only upon client consent or if mandated by law.

Vigorous Advocacy: Attorneys must fight tooth and nail for their clients. We must provide the best and most rigorous outcomes within the confines of the law.

Honesty: Attorneys must be truthful with their clients, ensuring the accuracy of any information and avoiding any attempts to mislead.

Communication: Attorneys must keep their clients in the loop about their transactions regularly.

Why You Need a Lawyer for Title Insurance!

Title insurance acts as a protective shield during a property purchase. It guarantees that the property you’re acquiring (or selling) is indeed yours and free from any external claims. These claims could emerge from unpaid debts of previous owners attached to the property or claims of ownership from others. Such claims are referred to as “liens” and “encumbrances.”

Title agents are the people who verify these details. We delve into public records and other relevant information to ensure the property’s history won’t come back to haunt you. As a result, many of us are investor-friendly attorneys. If they stumble upon any issues, they take steps to rectify them, allowing the property sale to proceed smoothly. This process is termed “clearing the title.”

In Illinois, there are specific regulations regarding who can serve as a title agent. Although many can take up this role, it’s generally best for Illinois real estate attorneys to take the reins. These “attorney agents” possess specialized knowledge in property law (as opposed to non-attorneys, rather than compared to other lawyers) and are adept at handling any arising complications.

What Does an Illinois Real Estate Attorney Title Agent Do?

My job is to be your home detective. We solve the mystery of how to sell this house (or what clues there are that you should buy it!)

Our role involves scrutinizing all records associated with the property. This exercise helps gets us informed about the property’s history. Similarly, it helps identify potential problems, such as open estates, ownership disputes, or legal violations. Similarly, we hunt for any liens or encumbrances. For example, these might be unpaid debts or claims from others in mechanic’s liens.

Even beyond that, as part of your closing, I’ll commission a survey to confirm the property boundaries. This is crucial to prevent boundary disputes or even demolition orders!

How does this help me buy with confidence?

Then, we report our findings to the title insurance company, which then decides on the property’s insurability. If they deny coverage, we put our detective hats on to uncover the reason. Most of the time, it’s just about more paperwork.

If and when we uncover any problems, we get to work resolving them. This involves further research, determining the appropriate course of action, and executing it. This often requires drafting hefty packets of FOIA requests and legal documents on your behalf.

As you can see, we are one of the biggest volume firms in helping people buy and sell homes, condos, and other properties in and around the Chicago area. So, when you’re ready to buy or sell, we can help you do it with confidence.

What Should I Look for in an Illinois Due Diligence Lawyer?

Make sure the title company and the due diligence lawyer give you a title policy that covers all necessary areas. There are many of these areas. Those include title defects, liens, encumbrances, occupants, and issues related to easements, covenants, and access rights. The policy should also cover any legal fees or costs associated with defending the title. This is standard everywhere, but we mention it because some title companies don’t necessarily do this!

Title insurance costs can vary based on the value of the property, the location, and the specifics of the transaction. Our rate card is online.

So, carefully review any exclusions or exceptions in the policy. These are specific situations or types of risks that the policy will not cover. If your due diligence attorney can’t explain these risks to you, find a different attorney.

Reputation and Coverage:

The insurer should have a solid reputation and a history of paying out claims. You can check the company’s rating with insurance rating companies like A.M., Best, or Demotech. First American Title, Chicago Title, Citywide Title, Stewart Title, and Fidelity Title are all great companies that we’ve worked with. Many attorneys choose Greater Illinois Title Company and Old Republic Title, but we do not work with those companies. Try to find someone local!

If you’re getting a mortgage, your lender will likely require a lender’s title insurance policy. This protects the lender’s investment, but it does not protect your equity in the property. For that, you’ll need an owner’s policy. The title insurance company is much more likely to help the lender policy out than the owner policy. This is a distinction that your due diligence attorney will explain.

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Final Words

So, a due diligence attorney plays an indispensable role in mitigating risks associated with business transactions. Not only do we scrutinize contracts, but we ensure regulatory compliance, title and leave no stone unturned. Accordingly, our work safeguards your investments. Then, we know we offer you confidence and peace of mind in your business dealings for investment property and more.