RICS draft guidance note - Technical due diligence of commercial property, 5th edition

4 Taking instructions

4.1 Key items

It is important to remember that the client may not be familiar with the range of services the RICS member or RICS regulated firm is able to offer. When a client asks for a survey, it is recommended the RICS member or RICS regulated firm asks questions to ensure the type of survey being requested is the correct one for the circumstances.

The following should be confirmed in writing (by email or letter) by the RICS member or RICS regulated firm in their scope of works/terms of engagement:

  • precisely what service is to be provided
  • identify the contracting parties, including who is responsible for paying the fee and
  • establish that no conflicts of interest exist between any of the parties or for the property. Obtain 'informed consent', if any exist.

The RICS member or RICS regulated firm should carry out a risk assessment. This will include seeking clarification from the contractual party or their agent if there are any known site hazards or operational issues that need to be assessed and any risk mitigated before inspection.

The RICS member or RICS regulated firm should confirm the standard terms of business, including:

  • precisely who the RICS member or RICS regulated firm/surveying company is
  • the limitations on the scope of the survey and report
  • level of liability and any other cover and limitations. Confirm the RICS member or RICS regulated firm holds appropriate professional indemnity insurance
  • their understanding of the property address and extent of the premises to be inspected
  • involvement of other consultants or contractors and the extent of their appointment (e.g. on behalf of the client)
  • date of instruction
  • timescales for completing the instruction and any intermediate stages
  • commercial terms such as professional fees, abortive fees and hourly rates for follow-up consultancy
  • how the fee will be claimed/become payable and the charges for late payment
  • whether disbursements are included or not and
  • whether access hoists or other specialist means of access are required.

See Appendix A: Technical due diligence services.

There are key items common to confirming instructions no matter what the commission or scope of service.

The following are recommended for consideration as basic good administration and should include confirming:

  • existing or intended use of the property and any timeframes affecting a change of use
  • precisely who the client/other parties are, i.e. current property owner, occupiers and managers
  • if there are any particular aspects of the property the client considers to be important
  • what is not being provided (e.g. a valuation)
  • any particular occupational safety and health issues that would affect the nature of the inspection
  • how variations to the instruction will be assessed
  • specialist access requirements and access restrictions
  • specific information to be sourced from the relevant authorities (e.g. building control, planning approvals, etc.).
  • extent of any information being made available for review and how reliable it is
  • report format
  • the client's indemnification of the RICS member or RICS regulated firm against damage caused if opening up is required as part of the survey
  • the procedures to be followed in the event of a dispute
  • personal guarantees for payment from directors of small companies
  • advance payments
  • additional charges for time spent attending post survey meetings
  • an agreement with the client on the level of reliance (i.e. maximum number of assignments)
  • extent of document/data room review the RICS member or RICS regulated firm is to undertake, and time allocated to the task (see section 4.4)
  • client imposed restrictions (i.e. the extent of investigation or detail of report required) and
  • the RICS member or RICS regulated firm should state if they believe that the client-imposed restrictions effectively devalue the intention of undertaking a technical due diligence survey.

4.2 Practical limitations

The RICS member or RICS regulated firm should make the client aware of the practical limitations of any inspection or survey exercise and include these limitations within their terms of engagement. In any property, but particularly large and/or complex properties, there are literally hundreds of items that may need to be checked. Many of them will be hidden and/or inaccessible. The RICS member or RICS regulated firm needs to assess the risk of a significant defect or other issue being present in an inaccessible area and, if appropriate, undertake an inspection during a return visit using specialist access equipment or opening up, this all being subject to client instruction, an additional fee and vendor's consent.

Repetitive items (such as windows) will normally only be checked on a sample basis. However, a client will reasonably expect that all major defects (or potential major defects) and issues are highlighted.

4.3 Extent of liability

The RICS member or RICS regulated firm should deal with the issue of liability for the report - whether or not they are willing for the liability to be passed to a third party. The RICS member or RICS regulated firm may wish to limit assignments to one or two parties only, subject to their insurance terms, with a requirement for further assignments to be subject to written consent. RICS members or RICS regulated firms should refer to their professional indemnity insurance (PII) cover for specific conditions.

Another important concept in liability management is 'shelf life'. RICS members or RICS regulated firms should be able to limit their liability for a technical due diligence report, given that with the best endeavours and due care the report will only ever represent a 'point in time' opinion based on the actual day of inspection. Over time all reports lose their value. For technical due diligence a client should not expect the same reliability from a report produced five years ago as one produced last year.

See also section 4.8 relating to the extent of liability for specialist subconsultants.

4.4 Data room and document review

Virtual data rooms are often set up to enable property-related documentation to be accessed and reviewed. It can be time-consuming to access the data, locate the relevant documentation and review it. Data may continue to be added to the data site, even after the report submission.

It is recommended that all documents relied upon are downloaded and stored electronically by the RICS member or RICS regulated firm, if confidentiality permits.

The RICS member or RICS regulated firm should also:

  • state clearly what documents will be reviewed, limiting the extent and scope of review. For instance, if warranties are available, the RICS member or RICS regulated firm would normally be expected to comment on whether these are still valid, and any obvious omissions, but detailed assessment would normally be undertaken by the legal team
  • confirm if the documents reviewed will be downloaded and kept on file. Access to the data room after the project is completed is often difficult and so securing copies is good practice, but sometimes not possible due to the confidentiality of the instruction
  • confirm the time allocated to the data review, and state that additional fees will be charged if this time is exceeded and
  • confirm the 'point in time' at which the RICS member or RICS regulated firm data room review has been completed. This is important as it is not uncommon for further documentation to be added to the data room after the preparation and submission of the technical due diligence report. The RICS member or RICS regulated firm would not normally revisit a data room unless requested to do so by the client or their legal team.

The RICS member or RICS regulated firm should consider at the outset the documents that will need to be reviewed to complete the commission. These may include:

  • health and safety file
  • fire risk assessments
  • fire engineered solutions/plans and
  • asbestos documentation.

4.5 Client requirements

Having a clear understanding of the client's intentions for the premises is important, as there are a range of survey types that could be undertaken. Section 3 outlines the main survey types and offers direction for the RICS member or RICS regulated firm in this regard.

The RICS member or RICS regulated firm should establish why the client requires the information and possibly guide a client that is not fully conversant with the options for various types of survey and professional services available. This may include specialist support from other disciplines. Where such specialists are to be appointed, their liability should be direct to the client in order to secure a direct contractual relationship. Where this is not the case and the appointment is as a subconsultant direct to the RICS member or RICS regulated firm, the matter of liability needs to be clearly identified and defined.

4.5.1 Tenure information

The RICS member's or RICS registered firm's ability to provide a definitive report may be severely compromised without a full copy of the lease and/or other title documents. They are key to determining the leasehold liabilities with regard to the premises, particularly where the client is the occupier. Where documents are missing, have not been provided by the client, or where a review is out with the scope of the appointment, the RICS member or RICS regulated firm should make reasonable assumptions or appropriate exclusions and state what these are within the report.

4.5.2 Proposed use

The RICS member or RICS regulated firm should identify the client's intention in acquiring an interest in the building and any special requirements that the client may have. The RICS member or RICS regulated firm should also understand how the client's undertaking or operations will affect the premises and surroundings. It may be appropriate to consult an operational specialist in the field (possibly from the client's own staff) to assist in the survey and report. If the client has intentions to physically alter the building, this will affect the scope of the report and will likely lead the RICS member or RICS regulated firm to engage specialist engineering assistance.

4.5.3 Report format

The RICS member or RICS regulated firm needs to agree the report format with the client.

If a short form report is to be used, this should be clearly stated in the instruction letter and in the scope of service. It is recommended that the short form report format is pre-agreed with the client to ensure the content reflects their specific requirements.

The following questions should also be raised:

  • should photographs be included
  • only electronic soft copies in PDF format are usually provided. If the client requires hard paper copies, how many should be provided and do these also need to be delivered by the agreed deadline
  • are any copies to be issued directly to other parties authorised by the client, such as their agent or legal advisers
  • if hard copies of the report are being provided, how should the report be delivered, e.g. by normal post to an office address or by secure delivery to a named individual
  • if the report is being sent in soft copy by email only, confirm the contact details of all those due to receive the report and
  • are costs for works or repairs identified in a report to be included? If so, how detailed do they need to be (set a minimum cost to be reported) and on what basis are they to be assessed.

4.5.4 Electronic data collection

There are several software programs available and their use is becoming increasingly common, particularly with more simple or repetitive structures (Stock Condition Surveys) and for undertaking Planned Preventative Maintenance Schedules.

The RICS member or RICS regulated firm needs to be satisfied that electronic data collection is suitable for the subject property and allows sufficient reflective thought from which to draw their conclusions and recommendations.

4.5.5 Coordination

Commercial surveys will typically involve a team of individuals (RICS member or RICS regulated firm, engineers, environmental consultants, etc.) contributing to a single report.

Where these are appointed separately by the client, it is important to clarify with the client who will be responsible for coordinating these individuals to ensure that the information they produce is correct and delivered in a timely fashion. Whoever takes on this responsibility should expect that the client will make this clear to all the members of the team.

4.5.6 Time

In agreeing a timetable with a client, the RICS member or RICS regulated firm should detail the time necessary to:

  • carry out the various inspections
  • complete research and tests
  • prepare and submit an initial executive summary
  • prepare and submit the draft report and
  • amend and submit the final report, subject to responses to enquiries/additional documents supplied.

 

If the RICS member or RICS regulated firm feels insufficient time is being allowed, they should notify the client and suitably limit their report.

The RICS member or RICS regulated firm needs to be aware that responsibility will remain with him or her when accepting instructions for quick 'walk-through' surveys that do not allow enough time for a full evaluation.

When accepting such instructions, RICS members or RICS regulated firms should ensure clients are fully aware that compromising on the time allowed will result in a limited report.

4.6 The property or premises (buildings, assets or facilities)

4.6.1 Location and size

It is important to precisely identify the areas to be covered within the survey.

The extent of the survey should also be confirmed in writing for large premises, where only part of the building or site is to be included. However, the RICS member or RICS regulated firm should bring any obvious areas of inaccuracy or uncertainty to the client's attention.

Where the survey includes multiple units of a repetitive nature such as apartments or hotel rooms, the RICS member or RICS regulated firm may consider limiting the extent of the survey to a limited number of units representative of type and condition.

4.6.2 Access

Confirmation that all areas of the building will be accessible on the dates agreed for the survey(s) is advisable. It is also important to check in advance whether roof access is available from within the building (i.e. roof hatches) for flat roof inspections, or whether separate ladder or platform access is required and needs to be organised, internally or externally, via a building manager or local contractor.

Tenant notice period or other access restrictions also need to be ascertained. The fee arrangements should detail the costs of return visits to sites if access is not available as expected.

4.6.3 Occupation

The RICS member or RICS regulated firm will benefit from knowing what parts of the building will be occupied as this may restrict the survey. For example, it may be that out-of-hours inspections will be needed for noisy or otherwise intrusive investigations. Similarly, the operational processes or activities being undertaken in the premises may bar the RICS member or RICS regulated firm from specific areas at certain times.

The RICS member or RICS regulated firm will benefit from knowing if the premises, or parts thereof, are vacant. It is also important to establish any requirements for privacy of any party, or the need for a 'non-disclosure' or other confidentiality agreement.

4.7 Confirming the instruction

While it is possible to establish a contract verbally, the RICS member or RICS regulated firm should ensure that any instruction is formalised in writing. Email or letter is acceptable and should include all the points covered in this section, and the points covered in section 4.1.

It is not essential that the client provides confirmation of acceptance of the conditions; however, it is advisable for the RICS member or RICS regulated firm to request that the client signs and returns a copy of the letter of confirmation to show acceptance of the terms and conditions of the engagement.

In the absence of any express clause, there is an implied term between an RICS member and a client that work will be carried out with the skill and care reasonably to be expected of a competent person exercising the profession and skill in question.

4.8 Specialist consultants and their appointment

Undertaking a technical due diligence investigation, particularly on a large and/or complex property, can involve the need for a number of different consultants each covering their specific area of expertise and requirement under the regulatory framework of the country. It is unlikely that a single consultancy will be able to provide all disciplines required with exclusive in-house personnel. Therefore, on occasion, other specialist consultants will be engaged to assist with the technical due diligence process.

These specialist consultants are engaged primarily by one of three modes, or a combination:

  • by the lead consultant or
  • directly by the client or
  • indirectly by the lead consultant on behalf of the client.

4.8.1 RICS member or RICS regulated firm acting as lead consultant

Where a specialist consultant is to be engaged by a lead consultant via a subconsultancy agreement, the lead consultant should advise the client which aspects of the report will be undertaken by third party companies or individuals.

The RICS member or RICS regulated firm should bear in mind the following general requirements to:

  • provide the subconsultant with a comprehensive brief of the services required
  • check the subconsultant's professional indemnity insurance cover (mandatory for RICS members)
  • be responsible normally for paying the fees of the subconsultant and
  • ensure that the subconsultant accepts the same conditions as the lead consultant with the client and, if required, enter into a separate non-disclosure/confidentiality agreement with the client.

The lead consultant should obtain the client's written instructions to proceed with engagement of specialist subconsultants and to incur the amount of the additional fees involved if these were not included in the original fee proposal approved by the client.

The scope of the coordination role provided by the RICS member or RICS regulated firm acting as lead consultant will normally involve some or all of the following tasks depending on the circumstances of the project:

  • assemble the consultant team and brief them on the project
  • make arrangements for site access for the whole team
  • obtain all documentation necessary for the investigation and channel requests for further information via one point of contact
  • implement health and safety policy for all personnel under its control while on site
  • liaise with all consultants during and after the site inspection(s)
  • identify and advise the client of any 'deal breakers' from a technical perspective as soon as they are identified by the lead consultant or a subconsultant
  • review progress of each consultant and provide input during all stages of the appointment and
  • review and comment on draft and final reports.

Where any summary of the subconsultant's report is included in the TDD report, it should be referenced to the annexed report. In cases where creditability or reliability of information supplied cannot be supported, such information should not be used.

Instructions may come from term commission arrangements where contract details may have been agreed at some time in the past. These should be reviewed, and in such cases care should be taken to ensure that the formalisation of individual instructions under a term commission is completed in each and every case (for example, purchase/works orders and pro forma approvals). The RICS member or RICS regulated firm should ensure that the instruction is properly established and that a contract exists before starting the identified task.

The client will benefit from a summary, so it is customary for the subconsultant to provide this within the limits of a full report and it is this that the lead consultant will include provided it is in context. Should the lead consultant find it necessary to change the subconsultant's report, agreement to the changes should be obtained from the subconsultant.

The lead consultant is recommended to clarify the extent of liability for specialist subconsultant reports, whether or not the subconsultants are directly engaged. It would be appropriate to ensure that the level of detail included in the agreement with the client is at least replicated in any agreement with a specialist subconsultant or contractor, and it is recommended that PII cover is mirrored (this is not always possible, particularly with environmental consultants or smaller businesses). In circumstances where a subconsultant is appointed on behalf of the client, it ought to be stated that the RICS member or RICS regulated firm is not responsible for the content of the report.

4.8.2 Engagement directly by the client

A client may wish to appoint a specialist consultant directly. In this instance, the client will issue a brief directly to the third-party consultant and meet the cost of their involvement. In this case the contract is between the client and the specialist consultant. Despite this direct relationship between the client and the specialist consultant, the RICS member or RICS regulated firm may be asked by the client to treat the specialist consultant, and the reports produced, in the same manner as they would a subconsultant's report.

The RICS member or RICS regulated firm should confirm with the client that they are not responsible for the content of the subconsultant's report.

4.8.3 Engagement indirectly by the consultant on behalf of the client

In many cases, the client would prefer the RICS member or RICS regulated firm to coordinate and organise all subconsultants and act as lead consultant during the due diligence process. As a result, the client will require the appointment of subconsultants on their behalf to protect their direct contractual relationship.

The RICS member or RICS regulated firm should establish the terms of the subconsultant's appointment and obtain client agreement, together with confirmation that payment of the subconsultant's fees will be covered.

The RICS member or RICS regulated firm should confirm with the client that they are not responsible for the content of the subconsultant's report.

4.9 Inspections carried out in countries outside the RICS member's or RICS regulated firm's country of employment

It is important for RICS members and RICS regulated firms to recognise that different countries have different property professionals undertaking similar services. Indeed, some countries have several professions performing the same, or parts of the same, service that an RICS member or RICS regulated firm may offer.

There are a number of key issues that should be established before taking instructions:

  • RICS members or RICS regulated firms should only accept instructions if these can be adequately resourced and standards maintained.
  • RICS members or RICS regulated firms should assess each instruction and establish whether limited local knowledge will be a barrier.
  • Many countries have legal barriers to operation, so RICS members or RICS regulated firms should establish these before entering into a contract.
  • There are legal differences, not only in other countries but also between federal states or regions within countries, and RICS members or RICS regulated firms should acquaint themselves with the country's specific issues, preferably before accepting instructions.
  • Some clients want their buildings compared to their own country's standards and regulations, or an ISO international standard, to provide a consistent benchmark and this should be stated in the client's instructions.
  • Communication can obviously be a clear barrier, and while English is the generally accepted language of business, there are many instances where it is essential to communicate in the local language in order to complete the instruction.
  • RICS members or RICS regulated firms should be aware of local law and legislation from commencement to the end of the project
  • Value added tax (VAT), goods and services tax (GST) or country specific tax issues are complex, and should always be considered according to the specifics of a transaction, particularly where the service is being provided in a location outside the RICS member's or RICS regulated firm's own country of employment. Ideally, specialist tax advice should be sought by the client.
  • Exchange rates and bank transfer fees can have an impact upon fees, particularly for longer term instructions. Base rates should be stated and variants specifically included or excluded.