Understanding the Due Diligence Process in Commercial Real Estate Transactions

Due diligence is the period between a signed purchase agreement and closing when the buyer, and usually its lender, checks that the property is what the seller says it is. In a commercial deal the agreement normally gives the buyer a fixed number of days to investigate and a condition it can rely on to walk away if the results are unacceptable.

This guide is for both sides: buyers and borrowers who need to know what to look at, and owners of hotels, apartment buildings and retail property who want to be ready before a buyer or lender starts asking. It describes general practice in Nova Scotia and the U.S. It is general information, not legal advice; a real estate lawyer should run the legal side of any transaction.

What due diligence covers

Buyers and lenders look at the same property from slightly different angles. The buyer wants to know whether the price is right and what it is taking on. The lender wants to know whether the property’s income will carry the loan and whether its security is sound. In practice the checks overlap almost entirely, and a lender will usually ask for copies of the buyer’s reports.

The main due diligence workstreams

Area	What is checked	Usually done by
Title	Registered owner, mortgages, liens, easements, rights-of-way, restrictive covenants	Lawyer, title insurer
Survey and boundaries	Where the lot lines and buildings actually sit, encroachments, access	Land surveyor
Environmental	Past uses, fuel tanks, contamination risk on and near the site	Environmental consultant
Zoning and permits	Permitted use, density, parking, open permits or work orders, fire and building code compliance	Lawyer, planner, municipality
Leases and tenants	Rent roll versus signed leases, arrears, deposits, options, renewal and termination rights	Buyer, lawyer
Financials	Operating statements, taxes, utilities, service contracts, for hotels the revenue and booking data	Buyer, accountant
Physical condition	Roof, structure, mechanical, electrical, elevators, life safety, deferred maintenance	Building engineer or inspector
Contracts and staff	Management, franchise, service and supply contracts, employees who transfer with the business	Lawyer

Title and survey

A title search shows who owns the property and what is registered against it: mortgages, liens, easements and covenants. In Nova Scotia, land is moving onto a parcel-based register under the Land Registration Act. That register does not settle every question. The Act says the legal description of a parcel in the register “is not conclusive as to the location, boundaries or extent of the parcel”, and that provincial mapping is not conclusive either.[1] Where boundaries, access or encroachments matter, as they usually do for a commercial lot with parking and loading areas, a current survey is the way to find out.

Title insurance is common in both Canada and the U.S. It can cover some defects a search or survey would miss, but each policy has its own exclusions, so the lawyer should explain what is and is not covered.

Environmental assessment

Contamination is the risk most likely to cost more than the property is worth, which is why lenders almost always require at least a Phase I environmental site assessment. A Phase I is a desk-and-site review: historical records, government databases, interviews and a walk-through. It does not normally involve sampling. If it flags a concern, such as a former gas station next door or an old heating-oil tank, a Phase II with soil or groundwater testing follows.

In Canada, Phase I reports are usually prepared to CSA standard Z768-01; some municipalities, such as Calgary, have built their own requirements on it.[2] In the U.S., the EPA’s All Appropriate Inquiries rule sets the standard, and ASTM E1527-21 is recognized as meeting it. Timing matters there: the inquiry must be done or updated within one year before the acquisition, and certain parts, including interviews, records searches, the site visit and the lien search, within 180 days.[3] A report bought for a deal that stalls can go stale.

Zoning, permits and compliance

Zoning tells you whether the current use is allowed and whether the building could be rebuilt as it stands after a fire. A building that predates the current by-law may be a legal non-conforming use, which can limit expansion or reconstruction. Buyers also ask the municipality about open building permits, outstanding work orders and fire inspection reports. Municipal tax certificates confirm that property taxes are paid; in the Halifax Regional Municipality they are ordered online for a fee.[4]

Leases, income and the rent roll

For an income property, the leases are most of the value. The buyer checks the rent roll against every signed lease and amendment, looking for:

• rents, deposits and arrears that do not match the roll;
• side agreements, free-rent periods or promised improvements not shown in the roll;
• renewal options, rights of first refusal, exclusive-use clauses and early termination rights, which are common in retail leases;
• for apartment buildings, whether rents and any increases comply with the provincial residential tenancy rules.

Commercial tenants are often asked to sign estoppel certificates confirming their rent, term and that the landlord is not in default. Lenders also ask for subordination, non-disturbance and attornment agreements (SNDAs) from major tenants.

For hotels the equivalent work is on operating data: monthly revenue, occupancy and average daily rate, the franchise agreement and any brand-required property improvement plan, and the management contract.

Who uses which report

A typical due diligence sequence

1. Agreement signed, clock starts

   The purchase agreement sets the due diligence period, what the seller must deliver and by when.

2. Seller delivers documents

   Leases, rent roll, operating statements, tax bills, service contracts, existing reports and plans, usually through an online data room.

3. Third-party reports ordered

   Title search, survey, Phase I environmental, building condition report and, for larger loans, an appraisal ordered by the lender.

4. Site visits and tenant contact

   Inspections of units and building systems, and estoppel certificates sent to commercial tenants.

5. Issues list and negotiation

   Problems found are resolved by repair, price adjustment, holdback or indemnity, or the buyer waives the condition and proceeds.

6. Condition waived or deal ends

   The buyer gives written notice before the deadline. Silence often has a consequence set out in the agreement, so read that clause.

How sellers can prepare

A seller cannot control what a buyer finds, but it can control how quickly the buyer finds it and whether surprises come out late. Before going to market:

1. Build the data room early. Collect leases with all amendments, a current rent roll, three years of operating statements, tax bills, utility bills, insurance, service contracts, permits, plans and any past environmental or engineering reports.
2. Reconcile the rent roll. Make sure every number in it matches a signed document.
3. Pull your own title and look at the survey. Clearing an old discharged mortgage or an unregistered easement takes time.
4. Fix or disclose known problems. A buyer’s engineer will find the roof leak; a seller who discloses it controls the conversation about price.
5. Check tax and non-resident issues with an accountant. These affect the closing statement as much as the price.

Sources

1. Land Registration Act (consolidated, section 21: location and boundaries) — Nova Scotia Legislature, January 31, 2025. Checked 2026-10-12.
2. Environmental Site Assessment (Phase I and II) terms of reference — City of Calgary. Checked 2026-10-12.
3. Brownfields All Appropriate Inquiries — U.S. Environmental Protection Agency. Checked 2026-10-12.
4. Property Tax Certificates — Halifax Regional Municipality. Checked 2026-10-12.