Warehousing and distribution centre due diligence

A buyer under a letter of intent has a short list of documents and searches that decide this deal, and many of them may concern the building or the equipment inside it. The checks fall into five groups: who has a claim on the equipment, what the lease actually lets you do, what shape the building is in, whether the municipality and regulators accept the use, and what the client agreements say when ownership changes. Treat each as a way to find a problem early enough to renegotiate or walk away, and ask for written answers rather than relying on conversations. Keep a running list of open items with an owner and a date against each, so nothing remains unresolved when closing approaches.

Search for claims on the equipment

Racking, lift trucks, conveyors and warehouse software may be financed or leased. Ontario’s Personal Property Security Act provides a registration system for security interests in personal property, and a search shows what is registered against a named seller. A search is a starting point, not a guarantee, and other provinces run their own regimes. Compare the results with the seller’s equipment list. See how to run a PPSA registry search before buying business assets.

Read the lease for what it allows

Check the remaining term, renewal rights, rent resets, permitted use and the assignment clause. In Ontario, section 23 of the Commercial Tenancies Act deems a covenant against assigning without consent to carry a proviso that consent is not to be unreasonably withheld, unless the lease contains an express provision to the contrary. Read the lease for that exception. Ask the landlord to confirm in writing that the lease is in good standing and that there are no unresolved defaults. The landlord consent checklist lists the steps.

Commission the building reports

Ask for a property condition assessment that covers the roof, floors, dock levellers, fire protection and building systems. Ask whether an environmental review is warranted, particularly if the site has stored fuel or chemicals, held a tank or sits on a previously industrial lot. The glossary entry on environmental site assessments explains the stages. Ask for the most recent fire inspection report and any orders or deficiencies the local fire authority has issued.

Confirm zoning, occupancy and licences

The City of Mississauga explains that a Zoning Certificate of Occupancy approves a new use or a change of use under its Zoning By-law, and the City of Edmonton ties zoning approval to a valid business licence. Municipalities differ, so ask the one that governs the site. For fuel installations on site, the Technical Standards and Safety Authority states that its Ontario licences are not transferable and the new owner must apply. Ask what the equivalent body in the province requires, and obtain the current licence and inspection records for each regulated item on site.

Read every client agreement

Client agreements produce the revenue, so read each one: term, termination rights, change-of-control or assignment clauses, liability for goods held, insurance requirements and rate-change terms. Reconcile them with the revenue reported by client, and ask which clients have asked for new terms, rate cuts or a shorter commitment. A client whose agreement can end on short notice is not the same asset as one under a multi-year term.

Insurance, claims and goods in the building

A warehouse holds other people’s goods, so ask for the insurance policies, the certificates given to clients and the claims history. Ask what the operator’s liability is for loss, damage or theft of stored goods, what the client agreements say about it and whether any claim is open. Ask to see the inventory-control records and the most recent counts, and how differences between the system and the shelf have been handled. Ask your lawyer who would be responsible for any unresolved shortage or open claim after closing.

Findings worth stopping on

These findings are worth stopping on:

• A landlord who will not consent to assignment on terms you can accept, with no contractual route around it.
• A condition report that shows deferred capital repairs the seller did not disclose.
• An anchor client that has left, or whose agreement ends before closing.
• A zoning or occupancy position that does not cover the current or planned use.
• A registered security interest over equipment that the seller cannot clear at closing.