Legal due diligence is about confirming that what you're buying is what you think it is — legally. The property has clear title, the lot lines match what's on the listing, the zoning allows the use you intend, and the contracts attached to the property don't contain landmines.

This is the part of DD that beginners under-invest in. They focus on physical and financial issues and assume the legal stuff will work itself out. It usually does — until it doesn't, and then it's catastrophic.

The title commitment

The title commitment is a document issued by the title company at the start of DD. It tells you:

The vesting: who actually owns the property right now
Encumbrances: mortgages, liens, judgments against the property
Easements: rights other parties have on the property (utility easements, access easements, drainage easements)
Restrictions: deed restrictions, covenants, conditions limiting use
Exceptions to title insurance: things the title company won't insure against
Requirements: what must happen before they'll issue clean title insurance at closing

You receive this within 7-10 days of opening title (the title company starts work as soon as you sign the PSA and wire earnest money to escrow).

Reading the commitment — Schedule A and Schedule B

Title commitments have two main schedules:

Schedule A: Identifies the property, the buyer, the purchase price, and the proposed insurance coverage. Verify the legal description matches the property you're buying.

Schedule B-I (Requirements): What needs to happen before insurance is issued. Common items:

Pay off existing mortgage at closing
Obtain release of UCC filings
Resolve any open lawsuits
Get spouse's signature on deed (in homestead states)
Confirm authority of LLC signers

Schedule B-II (Exceptions): What the title insurance will NOT cover. This is the section to scrutinize. Common exceptions:

Existing easements
Recorded restrictions and covenants
Mineral rights reservations
Unrecorded mechanic's liens
"Matters of survey" (if no survey)
Existing leases (rights of tenants in possession)

What to do with each exception

For every exception in Schedule B-II:

Understand it — read the actual recorded document. Don't accept "easement to FPL" without reading the easement to know what it allows.
Decide if it matters — does this exception affect your intended use? Some are routine (utility easement along property line, fine). Some are dangerous (drainage easement crossing the middle of the buildable area, problem).
Negotiate cure — can the seller remove the exception? Pay off the lien? Obtain a release?
Get affirmative coverage — sometimes the title company will affirmatively insure over an exception that the seller can't remove

Common dangerous exceptions:

Old recorded covenants restricting use — a 1940s deed restriction prohibiting "commercial sales of alcohol" on a property you want to lease to a bar
Easements that bisect the buildable area — limits where you can build or reduces effective parking
Cross-easements with neighboring properties — your driveway or parking is shared with a neighbor and you don't have unilateral control
Mineral rights leases — someone else has the right to drill or extract on your property
Mechanic's liens — unpaid contractors who can force a sale to collect

If you find a dangerous exception, the path forward is:

Demand the seller cure it
If seller can't cure, demand a price reduction
If neither, walk

Owner's title insurance

At closing, you buy an owner's title insurance policy that protects you against title defects discovered later. The policy size equals the purchase price; the cost is roughly 0.4-0.6% of the purchase price.

Always buy it. The few thousand dollars is cheap insurance against finding out years later that someone has a recorded claim against your property.

Lender's title insurance

If you're financing, the lender will require their own title policy (lender's policy), paid by you. This protects the LENDER, not you. Most lenders require it. Cost is similar to owner's policy.

You're buying both policies at closing. The combined cost is 0.6-1.0% of purchase price. Budget for it.

The survey

A survey shows the actual physical property: lot lines, buildings, easements, encroachments, setbacks, parking, access points.

Types of surveys

Boundary survey — lot lines only. Cheapest. $1,000-$3,000.

ALTA/NSPS survey — comprehensive survey meeting national standards, used by lenders and title companies for commercial transactions. $3,000-$8,000+ depending on complexity.

For commercial deals, you almost always want an ALTA survey. It captures:

Boundary lines
Buildings and improvements
Easements (verified against title commitment)
Setbacks
Parking layout and count
Access points and curb cuts
Encroachments (your stuff on neighbor's land, or vice versa)
Utilities
Flood zone lines
Wetland boundaries

What to look for in the survey

Lot lines match what you expect — sometimes the actual property is smaller or shaped differently than the marketing materials suggested
Buildings sit within setbacks — non-conforming buildings have limits on expansion
Easements match the title commitment — anything on the survey should be in the title; anything in the title should be on the survey
Parking count matches what you need — counted parking spaces vs. zoning requirement
Access is legal — the driveway you're using is on land you own or have an easement for
No encroachments — your fence isn't on the neighbor's land, the neighbor's building isn't on yours
Flood zone — is any part of the property in a special flood hazard area? Affects insurance and lendability

Encroachments — the surprise that kills deals

A common DD discovery: the previous owner extended the parking lot 3 feet onto the neighbor's land. Or built an addition that crosses the setback. Or the neighbor's storage shed is on your land.

These encroachments have to be resolved before closing. Options:

Lot line adjustment (legally redraw the line)
Easement (legalize the encroachment)
Removal (tear down the offending structure)

Each takes time and cooperation. None happen in 30 days. If you find encroachments, you're either extending DD or walking.

Zoning verification

The single most important question: does the property's current zoning allow what you intend to do with it?

Step 1: Identify the actual zoning designation

Look up the parcel on the county/city zoning map. Note the exact zoning code (e.g., "C-2 Commercial," "R-3 Multifamily," "I-1 Light Industrial").

Don't trust what the broker said. Zoning is a public record and easy to verify directly.

Step 2: Get the current zoning code

Pull the actual zoning ordinance text for that designation. Read what it allows, what it conditions, what it prohibits.

Look for:

Permitted uses — what's allowed by right
Conditional uses — what's allowed with special permit
Prohibited uses — what can't be done at all
Density limits — units per acre, FAR (floor-area ratio)
Setbacks — front, side, rear
Height limits
Parking requirements — spaces per unit, per SF, per use
Lot coverage limits — % of lot that can be impervious

Step 3: Confirm your intended use is allowed

If you're buying a multifamily property and want to keep operating it as multifamily, your use is "by right" if MF is permitted in the current zoning. Easy.

If you're buying a former office building and want to convert it to multifamily, you need to confirm MF is allowed in the current zoning. If not, you need a zoning change — which is uncertain, expensive, and slow.

If you're buying a commercial property zoned for "general commercial" and want to operate a brewery or strip club or marijuana dispensary, you need to verify these specific uses are allowed (often they're not).

Step 4: Get a zoning verification letter

Many cities will issue a "zoning verification letter" — an official statement confirming the zoning, permitted use, and any non-conforming aspects of the property. Cost is $50-$500 and turnaround is 1-3 weeks.

This is your defense if anyone (lender, future buyer, attorney) questions zoning. It's the city saying in writing what the zoning is. Get it.

Non-conforming use — handle with care

Some properties have a "legal non-conforming use" — they were built before current zoning, the current use predates the rules, and they're grandfathered in. This is OK to inherit, but it has limits:

You can typically continue the existing use indefinitely
You generally CAN'T expand the non-conforming aspect
If the use is interrupted (vacant for 12+ months), the grandfathering can be lost
If the building is destroyed, you may not be able to rebuild

A non-conforming property is more limited than a conforming one. Price accordingly.

Service contracts and other obligations

The seller has contracts attached to the property that may transfer to you:

Property management agreement
Landscaping contract
Pest control contract
Cleaning contract
Elevator maintenance contract
Trash collection
Pool maintenance
HVAC service contract
Security service / alarm monitoring
Internet / phone for office systems
Vending machine agreements

For each:

Review the contract — what does it obligate?
Determine if it auto-transfers — some contracts run with the land; some are personal to the owner
Decide if you want it — keep, terminate, or renegotiate
Verify termination terms — how much notice, any penalties

Common landmine: a long-term, expensive vendor contract that auto-transfers and locks you in for years. Or a property management contract with the seller's brother that has 90-day termination notice — meaning you can't fire them immediately.

Other legal items

Pending litigation

Ask the seller in writing: "Are there any pending lawsuits or claims involving the property or yourself as owner of the property?" Get the answer in writing.

Search court records in the county for the seller's name and the LLC name. Civil case search is public.

If there's pending litigation, understand it. Some lawsuits stay with the seller (slip-and-fall claim from before your purchase). Some attach to the property (mechanic's lien, foreclosure, easement dispute) and follow the title.

Insurance claims history

Request a CLUE report (Comprehensive Loss Underwriting Exchange) on the property. Shows the insurance claims filed in the past 5 years. Reveals patterns (water damage, fire, theft) that signal problems.

Notices of violation

Has the city or county sent any code violation notices? Building department, zoning, fire marshal, health department? Pull this from the relevant agencies.

Boards and POAs

If the property is in a commercial condo, business park, or POA, get the governing documents:

Declaration / CC&Rs
Bylaws
Current rules
Recent meeting minutes
Any pending special assessments
Reserve fund status
Lawsuits involving the association

POA membership comes with obligations and fees. Verify them.

Estoppel certificates from major tenants

Covered in detail in Lesson 6 (tenant DD), but mentioned here because they're often considered part of legal DD. The estoppel is a signed statement from each tenant confirming the lease terms, rent paid, security deposit, no defaults, etc. Lenders require them; smart buyers always request them.

When legal DD finds a problem

The two things you can do when legal DD finds a problem:

Cure

The seller fixes it before closing. Examples:

Pay off the open lien
Obtain a release of an outdated easement
Get a lot line adjustment for an encroachment
Resolve the lawsuit
Obtain the missing documents

Compensate or accept

If cure isn't possible, either the seller credits you money to handle it post-closing, or you accept the issue as-is for a price reduction, or you walk.

The negotiating position depends on how material the issue is. A $5K UCC release that the seller forgot about — small problem, fix it. A 12-foot easement crossing your buildable area — major problem, walk if not curable.

What to take away

Legal DD verifies what you're buying is legally what you think it is
Title commitment shows ownership, encumbrances, easements, restrictions, exceptions
Read every exception in Schedule B-II — most are routine, some are dangerous
Always buy owner's title insurance ($2K-$8K typical)
ALTA survey is the standard for commercial — shows boundaries, easements, encroachments, setbacks
Verify zoning matches your intended use; get a zoning verification letter
Non-conforming uses are inheritable but limited
Review every service contract — some auto-transfer
Search for pending litigation and code violations
Cure, compensate, or walk — those are the only outcomes for legal issues

Next lesson: physical DD — what the property condition assessment actually tells you, what to look for when you walk the property, and how to spot the deferred maintenance the seller didn't disclose.

Legal Due Diligence — Title, Survey, Zoning, and Contracts