Comprehensive Real Estate Property Due Diligence Checklist for Land Sales (Pre-closing)
Land has always been one of the safest and most profitable investments as its value appreciates over time. Even during a pandemic, those who want to take advantage of the generally lower real estate prices should be extra cautious. Objectivity, instead of excitement and aggressiveness, should control the decision-making process of a potential buyer in a land sale. A legal advice from a reputable real estate lawyer is essential in this kind of transaction.
Most land deals almost always look better at first glance. That is why it is crucial to conduct a land due diligence exercise to go deeper and find out the actual value of the target real estate property, as well as the real rights of the seller. This land due diligence exercise must take place prior to the consummation of sale or signing of sale documents (i.e., deed of sale).
Finalizing a land purchase without a proper legal land due diligence can cost the potential buyer more expenses and losses (e.g., land titles are not in the name of the seller, pending disputes or cases, existing encumbrances).
Below is a land due diligence checklist which may be generally applicable to prospective buyers. It is not required, however, for a land transaction to fulfill all the items in the checklist. Otherwise, another buyer might be able to buy the property ahead of you. Hence, in every land transaction, it is crucial to exercise wise judgment in identifying high-risk areas to determine which items in the checklist should be prioritized. Note that the list below is not exhaustive. Every land transaction should be evaluated on a case-to-case basis, particularly, the intended use of land. Furthermore, it would be ideal to seek counsel from a property lawyer.
A. Property Documents
1. Land Title
It is a fundamental principle that a certificate of title is indefeasible and binding upon the whole world unless it is nullified by a court of competent jurisdiction in a direct proceeding for cancellation of title. Every person dealing with registered land may safely rely on the correctness of the certificate of title and need not inquire further as to the ownership of the property. When a certificate of title is clean and free from any encumbrance, potential purchasers have every right to rely on such certificate.
Every potential buyer should obtain an updated certified true copy of the title and look for annotations, encumbrances, covenants, leases, restrictions, mortgages, notices of lis pendens, prior sales, adverse claims, and the like which may affect the transfer of ownership and/or use of land. The name, signature, and authority of the Registrar of Deeds appearing on the title should also be verified. Titles may include original or transfer certificate of title (OCT/TCT), patent, or homestead.
2. Tax Declaration (Assessor’s Office)
While a tax declaration is not a conclusive proof of ownership, it may support the seller’s claim of ownership provided that the tax declaration is in his name. The buyer must examine the details of the tax declaration, including the (a) owner, (b) classification, (c) actual use, (d) market value, and (e) assessed value.
3. Real Property Tax Clearance (Treasurer’s Office)
A Real Property Tax Clearance ensures that the seller has paid all real property taxes related to the property. Unpaid real property taxes constitute a lien on property, superior to all liens, charges, and encumbrances. Thus, the government may subject the land to levy and sale it at a public auction.
4. Lot Plan/Vicinity Map/Land Use Plan (Tax Mapping Office; Tourism Office)
Verify the correctness of the boundaries and exact location of the property. Determine if the government has plans for expropriation, road expansion, community development, and other projects. Local zoning laws might also limit the uses of the property. These factors may also affect the purchase price set by the seller.
B. Source of Right of the Seller
Every prospective buyer should likewise examine the seller’s legal right to sell the property. The seller must have a right to transfer the ownership of the property. With the help of a trusted real estate lawyer, examining the document that supports the seller’s acquisition of the property (or his authority to sell) provides security to the potential buyer in addition to the title. Below are some of the documents that may serve as proof that the seller validly acquired the property:
1. Deed of Sale executed by the seller when he acquired the land
Verify if all parties were alive and at the place of execution of the contract on the contract date.
2. Deed of Extrajudicial Settlement of Estate or Last Will and Testament
Inquire with local authorities (i.e., barangay, municipal/city officials) and neighbors if they know the seller/s and confirm if the latter is/are the only heir/s of the deceased registered owners.
3. Deed of Donation
Make sure that the donor was still alive at the time of the donation and that the deed was not simulated or falsified.
4. Special Power of Attorney (SPA)
The SPA does not transfer ownership, but it authorizes the agent to transact with the buyer on behalf of the seller.
5. Authority to Sell
Generally, this document proves the authority of the agent of the principal owner to negotiate the terms of the land sale.
C. Other Documents (as may be necessary)
The following documents, as may be required by your chosen property lawyer, may also be examined depending on the seller’s source of ownership right: (1) Death Certificate, (2) Marriage Certificate, (3) Birth Certificate, (4) spousal consent forms (any disposition or encumbrance of a conjugal property by one spouse must be consented to by the other; otherwise, it is void), (5) shareholders’ consent, (6) payment of estate tax, (7) valid government IDs of all parties, and (8) validity of authority of the Notary Public.
D. Access
Determine whether any easements or access rights are required in accordance with the intended use of the property (i.e., road access whether public or private).
In addition, access to or availability of utilities must also be examined to determine if the planned use of land would require significant additional costs to the potential buyer in securing or establishing water access, electricity, and such other utilities as may be required by the buyer.
E. Topography
Examine documents to determine suitability of topography pursuant to the needs of the buyer or planned use of the land. In particular: (1) pictures, (2) survey/plan (i.e., boundaries), (3) shape, (4) improvements, (5) creek, (6) future road widening and other expropriation projects, (7) zoning plan/neighborhood quality, (8) public easements, (9) soil (i.e., fill-in ground or clay soil type, backfilling requirement), (10) drainage, (11) slope, (12) natural disasters (i.e., floods, landslides, earthquakes, volcanic eruptions, tsunami, etc.), (13) vegetation (i.e., existence of tree-cutting ordinance), (14) vehicular traffic, (15) pollution (i.e., air, water, soil, noise), (16) nearby land/water features, and (17) peace and order.
F. Others
Depending on the property’s intended use, other factors may be considered such as existence of agricultural tenancy, lessee, other occupants with seller’s consent, informal settlers, third-party buyer or mortgagee, and other investors. Thus, the buyer should check if there are any pending litigation, disputes, and adverse claims over the property. Other factors may also be considered in accordance with the development plans and/or financial or tax incentives of the buyer. Prevailing actual market value of neighboring properties may also be considered. Necessary permits and licenses (e.g., Special Land Use Permit, Land Use Conversion Order, Certificate of Non-Overlap) associated with the property’s registered actual use and intended use should also be verified.
Finally, compliance with nationality requirements must be ensured for validity of the land sale transaction. You may consult your property lawyer to minimize the risks associated with buying a real estate property. In a subsequent article, we will discuss the factors that must be considered by the buyer during the closing of a land sale transaction.
*Arceo & Tandoc Law Firm is a real estate law office in Quezon City, Metro Manila that serves clients anywhere in the Philippines. Its property lawyers have an extensive experience in conducting land due diligence and closing real estate transactions. Should you wish to learn more about real estate or land, you may contact us at lawfirm@arceotandoc.com to get in touch with any of our property lawyers.