The Changing Face of Technical Due Diligence
Most people in commercial property transactions have been involved with a Technical Due Diligence (TDD) process in some shape or form. These reviews examine the physical and technical aspects of the facility as a primary function, but how has this changed over the last 20 years?
Back in the early 90’s, it was not unusual to expect a team of 12 consultants involved in a TDD report. Individuals were each assigned a specific aspect covering the Building Structure, Fabric, Mechanical, Electrical, Fire, Hydraulics, Lifts, Town Planning, Surveying, Environmental and Building Compliance aspects of the building with a Quantity Surveyor preparing a consolidated cost schedule of the findings. The outcome was a bound hard copy report the size of three telephone books which took a month to produce.
The early 2000’s saw the introduction of specialist TDD Building Consulting teams which included multi-disciplined Building Structure/Fabric Surveyors and Services Engineers. These teams could suddenly turn around instructions within two weeks, and reports whilst still being quite descriptive, were thinned down to one telephone book.
In 2018, specialist TDD teams operate in a similar manner but in many cases, particularly over the last 5 years, reports are more ‘executive’ and sometimes may only include a Capital Expenditure schedule. We are now down to a twenty page report that can be turned around in days, but are the reports no longer ‘Diligent’. These reports probably should be called a Life Cycle Replacement report as they are primarily forecasting component replacement costs due to theoretical life projections.
There are many instances where we have seen major risk and cost issues that have nothing to do with the physical appearance or life of a building component. These issues are usually grouped under areas of design, compliance, maintenance and lease covenants.
Has the building’s structure, fabric and services been designed in accordance with Australian Standards and to the requirements of the occupiers? Sometimes, older building AC and electrical systems were not designed for modern-day occupant levels. Over recent times, the design and installation of external cladding needs to be fully understood.
Planning and building compliance have a high potential to derail a transaction. Has the building and associated fitouts been approved and certified and what happens if they’re not? Is the current use of the building consistent with its original planning permit and building certificate? What happens if the original building doesn’t comply with the BCA at the time of construction? These are all issues we face on a regular basis.
Pouring through maintenance and testing records may seem overkill to some, but it’s sometimes the only way to discover if there are inherent issues. Often we find fire testing is not performed in accordance with codes and standards and there is a clash between the approved design requirement and the current test results. These anomalies can result in critical defects and cost consequences. Back in the early 2000’s, it was not uncommon for a TDD team to conduct their own independent testing.
Whilst legal advisers would normally review the leases, certain Landlord Obligation clauses have a direct bearing on the technical requirements of the building. Government agencies often have clauses in their leases requiring certain minimum building and environmental standards. Tenant make-good and redecoration clauses also have capex consequences, which can swing both ways.
Every property owner has a different perspective of risk which influences the scope of the TDD report. The best advice is to discuss the various options available at the time of transaction and to customize the scope to suit the property. As with most things, one size does not fit all.