RICS draft guidance note - Technical due diligence of commercial property, 5th edition

2 The need for technical due diligence

Technical due diligence of commercial property when carried out by an RICS member or RICS registered firm consists of the systematic review, analysis, discovery and gathering of information about the physical characteristics of a property and/or land (the property). The RICS member or RICS registered firm then undertakes an impartial and professional assessment of the property and provides a balanced and professional opinion of the condition of the property in the form of a technical due diligence report. This enables a prospective purchaser, occupier or financier of the property to make an informed assessment of the risks associated with the transaction.

During the process of undertaking technical due diligence, an RICS member or RICS regulated firm may establish defects or deficiencies in the property that could have an impact on the asset and the life safety of occupants in its immediate, short-, medium- or long-term performance. The defects may include the need for repairs arising from a lack of planned preventative maintenance, neglect or misuse, insufficient capacity in services, items nearing or reaching the end of their useful or economic life, deleterious materials, and non-compliance with statutory or mandatory requirements such as planning and Building Regulations or Building Codes.

Matters may also arise that are not to the potential purchasers' or occupiers' required standards, such as cultural, social or religious beliefs or requirements.

Technical due diligence can be used for many purposes, including:

  • providing a basis for optimisation of design of new developments
  • gaining an understanding of the condition and design of the property
  • establishing the suitability of the property for its intended use (if known)
  • understanding the need for and quantity of future costs of repair and replacements and other liabilities
  • providing a level of protection for the occupier, owner, institutional investor or funder
  • providing a basis for the allocation of risk
  • providing a basis to improve life safety
  • providing a basis for price negotiations
  • providing a basis for performance improvement.

Many large property owners are institutional investors who manage a portfolio of property assets on behalf of their beneficial owners. They may be held in the form of listed or unlisted property trusts, property companies or syndicates. The managers of these investment vehicles have a fiduciary responsibility to the ultimate owners in making acquisitions, to ensure that all reasonable risks and liabilities are understood.

The process of technical due diligence is therefore critical to any successful property transaction and its subsequent operation.