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Due Diligence
Practical Law Glossary Item 1-382-3424 (Approx. 4 pages)
Glossary
Due Diligence
In the context of a securities offering, due diligence is a fact-finding process undertaken by the working group to:
- Identify and evaluate significant risks faced by the issuer.
- Verify the accuracy and completeness of the registration statement or other offering-related disclosure document (such as a private placement memorandum).
For more information, see Practice Note, Due Diligence: Securities Offerings.
In the context of mergers and acquisitions or finance transactions, due diligence is the act of investigating a business entity, person, or party in preparation for a business or loan transaction. Due diligence usually includes reviewing documents, talking to management, visiting a location and performing analyses.
In a commercial real estate context, due diligence is a fact-finding process by purchasers to ensure the soundness of an investment. The timeframe to perform due diligence is known as the due diligence period. The due diligence period is a negotiated, fixed amount of time, which varies from deal to deal.
The due diligence performed varies from one transaction to the next, but typically involves:
- Appraising the seller's corporate structure, interest in the property, and right to convey (see Practice Note, Real Estate Due Diligence in Corporate Transactions).
- Physically inspecting the property, which may include structural and environmental testing (see Standard Document, Environmental Due Diligence Access Letter Agreement).
- Validating the seller's disclosures concerning covenants, conditions, and restrictions (CC&Rs).
- Reviewing leases to verify tenant information, term length, and income, including requiring tenant estoppel certificates (see Standard Document, Tenant Estoppel Certificate).
- Assessing the property's conformance with applicable land-use and zoning laws to confirm its suitability for the purchaser's desired use (see Practice Note, Zoning and Land Use Law for Owners and Developers: Overview).