When you hire an attorney for a business or real estate deal, you are not just paying for document drafting. In many cases, you rely on your lawyer to protect your interests in the deal, as well.
Doing that requires investigating the key facts, identifying legal risks and advising you on what those risks may mean financially. That kind of investigative work is commonly referred to as “due diligence,” and it can play a major role in whether a transaction delivers what you expected – or comes with costly surprises.
When important issues are missed, a client may be left holding liabilities they did not bargain for. In some situations, inadequate due diligence may support a legal malpractice claim, depending on the circumstances.
Due diligence is a part of competent representation
Florida lawyers have ethical and professional responsibilities tied to competence and preparation. Florida Rule of Professional Conduct 4-1.1, for example, states:
“A lawyer must provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness, and preparation reasonably necessary for the representation.”
The judicial comment to the rule reinforces that “competent handling” includes “inquiry into and analysis of the factual and legal elements of the problem” and “adequate preparation,” with more extensive diligence often required for complex transactions.
In transactional matters, due diligence is often where “thoroughness and preparation” shows up in practical terms: reviewing records, confirming key facts and making sure the client understands what is being assumed, released, guaranteed or waived.
A scenario: buying a business with hidden liabilities
Consider a buyer purchasing a profitable local service company. The buyer hires a lawyer to assist with the acquisition and relies on the attorney to manage the legal aspects of the transaction. The deal closes, the buyer takes over operations, and then a series of unexpected bills arrive:
- A landlord claims the business is in default under its lease and demands a large cure payment.
- The Florida Department of Revenue sends a notice regarding unpaid sales taxes from prior periods.
- A former employee files a wage claim tied to the prior owner’s practices.
- A lender asserts that certain equipment was never owned free and clear and is subject to a lien.
Any one of these issues could be financially disruptive enough to turn what appeared to be a good investment into a solid loss.
In many business purchases, these risks are not automatically the buyer’s problem – but whether the buyer becomes responsible can depend on how the transaction is structured, what was disclosed, what was discovered (or not discovered) during diligence, and what protections were negotiated in the contract.
Where due diligence can break down
A lawyer’s role is not to guarantee a perfect outcome. However, problems can arise when the diligence process is unreasonably limited or key steps are skipped without the client understanding the risk.
Depending on the transaction, due diligence may involve items such as:
- Reviewing the target company’s contracts (leases, vendor agreements, customer agreements) for change-of-control clauses or defaults
- Performing lien and UCC searches to see whether any assets are encumbered
- Confirming corporate authority and ownership (who has the right to sell, and what is actually being sold)
- Reviewing regulatory exposure, permitting and licensing requirements
- Spotting tax issues and recommending appropriate tax professionals when needed
- Negotiating representations, warranties, indemnities, escrow or holdbacks to protect the buyer if problems are uncovered later
In a real estate transaction, similar diligence concerns might include a title and survey review, zoning and land-use restrictions, permit history, easements, HOA limitations and/or environmental concerns, depending on the property and its intended use.
When a diligence gap causes financial harm
Legal malpractice claims generally involve three core ideas: a lawyer owed the client a duty, the lawyer breached that duty, and the client suffered a financial loss caused by the breach. In a due diligence context, the financial loss might be a specific liability the client could have avoided, negotiated down, insured against or refused to accept if the lawyer had identified it before closing.
It is also important to recognize that transactional losses can have multiple contributing factors. A careful review of the timeline, the engagement scope, the documents and all relevant communications is often needed to evaluate whether the attorney’s conduct fell below the generally accepted standard of care and whether the conduct actually caused the client’s loss.
Get more information
If you believe a prior lawyer may have failed to perform adequate due diligence in a business, real estate, or other legal transaction – and you suffered financial harm as a result – a legal malpractice attorney can help you understand your rights and what options for redress may be available.