Technical Due Diligence and Building Surveying for Commercial Property

Adrian Tagg

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351720151
• Edition: 1
• Topic: Architecture
• Subtopic: Architecture générale

Technical Due Diligence and Building Surveying for Commercial Property is the first book to introduce the process of technical due diligence (TDD) and examine the role of the building surveyor within the commercial property sector. The book outlines the processes that the surveyor must go through when performing a TDD inspection and report and, most importantly, covers in detail the typical pathology and defects encountered during TDD.

Performing a TDD survey involves collecting, analysing and reporting on a huge amount of information, often under specific contractual conditions. The book covers everything the surveyor needs to know in order to do a proper job and includes analysis of materials, life cycles and potential defects on an elemental basis, with detail on individual components where necessary.

Coverage includes:

• an introduction to the TDD process and types of commercial buildings encountered

• chapters outlining the life cycle and defects of: structures, roofs, facades, finishes and services

• hundreds of illustrations and photographs of defects, real-world case studies and suggestions for further reading

• a final chapter covering legal issues and technical details.

This book fills a clear gap in the literature and is the first fully illustrated book on TDD dedicated to commercial building stock. It will help students and professionals to understand the process, the science involved and the reasons why defects occur, as well as their evolution and long-term impact.

Introduction 1

Defining technical due diligence and commercial surveying

In the context of real estate acquisition, management and disposal, technical due diligence (TDD) is the term used globally to describe what is essentially a commercial building survey. Although it is a widely used term there appears to be a lack of clarity or consistency in what this actually covers; indeed there is often a bespoke nature to TDD instruction, tailored to specific client needs, sector norms or individual investment strategies. ‘It’s like beginning your geography homework on a Sunday evening knowing it has to be handed in the next day’ is the way TDD has been quite poignantly described by a high-profile chartered building surveyor – needless to say, not actively working within this field.

In essence, there is often a huge amount of information to collect, analyse, process and report within very short timescales. This is often done on buildings or portfolios which represent very high investment values. In short, it certainly is not everyone’s ‘cup of tea’ and often the first question upon receiving TDD instruction is ‘Where to start?’.

The guidance notes published by the Royal Institution of Chartered Surveyors (RICS) concerned with commercial surveying/TDD provide an essential framework or aide-memoire detailing the principal actions and considerations in this specialist area of operation. There are also numerous published works concerned with building pathology or aspects of commercial surveying. However, there appears to be little available reference information or detailed analysis of the process of TDD in this specific context or the individual construction elements and components which should be inspected. Also, although there are some excellent text or reference books in the field of building surveying, these appear mostly to be in the context of residential properties. Furthermore, there exist significant and important publications, including RICS guidance notes, which deal with specific legal or technical aspects of building surveying from a more ‘commercial’ perspective. These address individual specialisms, but in isolation, despite them often being ‘picked up’ as part of the TDD process. In essence, it is important for the TDD process to provide a global overview of a commercial asset yet, where necessary, have the information or detail to go down to component level as and when required. It is a facet of building surveying that embodies a ‘Jack of all trades’ approach in the provision of advice that encompasses many aspects of commercial surveying practice, but rather than detailing these in isolation, it seeks to deliver a ‘joined up’ opinion, allowing clients to make an informed decision.

This book will seek to introduce the reader to the process of TDD and, as well as discussing this, it will also analyse the role of the building surveyor within this commercial environment. Importantly, this book will look beyond the process of TDD and into the application of the skills and knowledge required to perform this task. It will also analyse materials, component life cycles and potential defects on an elemental basis as well as at individual component level, detailing the potential impacts on the TDD process as well as offering insights into advising clients.

The nature of TDD and commercial building surveys

TDD and commercial building surveys essentially involve highly bespoke contract instructions due to the often unique nature of the assets or complexity of the transactions. While no two TDD or survey contract instructions are identical, the actual the process is quite ‘mechanical’. There is essentially a list of things to check (often driven by the client’s requirements). Therefore, the surveying skill set required is the same as that applied to the inspection process of many other facets of building surveying works, such as dilapidations or schedules for planned preventative maintenance. Furthermore, the process of undertaking a TDD or commercial building survey is also highly transferrable between different real estate sectors and different types of building. Indeed, providing the surveyor understands local laws, building culture and language, the process of TDD and commercial building surveys is transferable to different countries.

Principally, there is a requirement to undertake a site visit to record and analyse information before delivering and reporting on the findings. Crucially, this will have to be cross-referenced with historical documents held for the property or asset. The intention is to form an opinion of the past, present and future issues associated with the site/asset under consideration in order to advise the client or investor of the potential risks that they may be exposed to, both immediately and in the longer term.

It is not solely an administrative task in which items on a checklist are noted or confirmed; indeed, the checklist provides the framework for the TDD or survey instruction which requires ‘fleshing out’ with information obtained during the site inspection. There is a need to apply scientific knowledge or theory to determine the cause, effect and evolution of defects. Ultimately, for investors it comes down to the cost or anticipated expenditure that is required to resolve defects, maintain an asset or ‘upgrade’ it to comply with legal requirements or commercial standards.

The acquisition process

When a prospective purchaser has an offer accepted by a vendor this is normally subject to a series of conditions, one of which is due diligence. A ‘window’ of due diligence is further negotiated where the purchaser, occupier or financier will be granted a set period of time to carefully examine the asset. In order to exercise the necessary level of judgement, care and prudence, as well as mitigating potential harm due to the transaction, external specialists are appointed to carry out the analysis. In the context of a commercial acquisition, the TDD or commercial building survey forms part of a wider overall due diligence process. The complete due diligence process will involve a wide range of professionals, each tasked with undertaking a careful and detailed examination of the asset to establish all facts that would be of material interest to the purchaser, occupier or financier. The due diligence process may be typically divided into the following:

• commercial due diligence

• legal due diligence

• technical due diligence

• environmental due diligence.

Commercial due diligence

Essentially, commercial due diligence is concerned with the viability of the asset in terms of acquisition value, yields or rental incomes, capital expenditure (CAPEX) and future disposal. This work is typically undertaken by chartered surveyors within the general practice faculty (investment/agency) and other sub-specialist advice from accountancy firms who may be undertaking specific analysis in matters such as property tax or company set-up.

Working often in isolation, the commercial due diligence may overlap the TDD in instances where there are technical recommendations which have a commercial impact. This is typically where there are issues of non-compliance with regulations or the cost of defects and investment in the asset.

In most cases the costs identified during the TDD are used to assess the commercial viability of the asset relative to the investment strategy of the investor. Invariably, the cost estimates generated by the TDD are used as leverage in the negotiation process during or post due diligence. It is therefore important that these are fair, reasonable and fully representative of the actual condition of the asset. While there is a team of experts appointed to act for the purchaser in the undertaking of a due diligence there is, in most cases, a similar panel of experts appointed by the vendor to represent their interests in the process. It should be in the best interests of all professionals appointed to act with honesty and integrity.

Certainly, with respect to the commercial and technical due diligence these will mostly be carried out by RICS qualified experts who should abide by their relevant rules regarding professional ethics and conduct. In reality, and in the case of investment or agency surveyors (where a large percentage of the professional fees may be dependent on the successful transaction), there invariably exists a conflict of interest to ensure that the due diligence process is smooth with little risk of either party terminating the deal. This may in some cases lead to aspects of ‘commercial negotiation’ where technical observations or recommendations are ‘dumbed down’ or even negotiated out of a deal or effectively cash settled. With respect to the technical experts (chartered building surveyors), acting effectively in the best interests of the building appears the most appropriate way to proceed. In essence, this means recording the condition of the asset and any deficiencies as a matter of fact. Using this evidence-based opinion to recommend the best technical solution (irrespective of vendor or purchaser instruction) adds a valued transparency to the process. This honest and open approach inevitably leads to further instructions and enhanced independent reputation. However, if the surveyor ‘sells out’ by distorting information or ignoring evidence in favour of facilitating the transaction, this appeasement is likely to do more harm than good.

Legal due diligence

The legal due diligence is a process by which the asset is examined in terms of statutory requirements as well as civil procedures. This is largely a desk-based exercise undertaken by a team of highly specialised lawyers/solicitors who may not even visit the building. They will examine and report on the following typical issues:

• planning permissions

• easements

• boundaries

• guarantees and warranties

• use class

• operating permits

• applicable regulations

○ building codes/regulations

○ fire safety requirements

○ health and safety

○ deleterious materials

○ energy performance certificates (EPCs)

• lease contracts.

There is an obvious overlap between the legal and technical due diligence on matters that have a legal obligation with a technical application. These are often the most contentious areas of discussion within the due diligence process and while building surveyors (acting for the vendor or purchaser) may act in the best interests of the building, the legal advisors invariably act in the best interests of their client. Legal discussions can be intense and protracted with argument and counter argument....