Due diligence key in purchasing process
A sometimes under-utilised clause in residential sales and purchases that can be used when making an offer on a new house will help save people from hidden issues, including everything from noisy neighbours to costly repairs.
While the standard clauses contained in the Auckland District Law Society Agreement for Sale and Purchase of Real Estate (Agreement) cover purchaser requirements, a due diligence clause provides the purchaser with maximum protection and the option to walk away.
What is a due diligence condition?
It is common when purchasing property to include specific conditions in the contract such as financing, building inspections or a Land Information Memorandum (LIM) condition. It can end up being a very long list of separate conditions.
As a purchaser, it is useful to have as few conditions in an agreement as possible and make those conditions effective and more attractive to a vendor when presenting an offer.
That’s where a due diligence condition comes in. This acts as a catch-all to effectively include all the conditions within one clause.
It provides scope to discover any hidden risks and to determine the property’s true potential before buying, including everything from reviewing the LIM and building report, to any other checks the purchaser feels are necessary.
It also covers a variety of instances. An example of this would be if you drove by your potential new home and there is a large party going on at a neighbour’s house which you discover, is a common occurrence.
Cancelling the agreement
Using standard conditions in the Sale and Purchase Agreement means a purchaser can only cancel the contract for specific reasons and must follow the set process contained in the Agreement. For example, if it is subject to a finance condition, a purchaser must provide evidence of not being able to obtain finance or under a building report condition, a purchaser must provide a vendor with a copy of the building report.
A good due diligence condition should have a provision contained within the clause that allows a buyer to cancel the agreement without needing to provide a reason. This makes it easy for a purchaser to walk away from an agreement if they decide the property is not for them for whichever reason.
A guide on time frames
The clause outlines a specific time frame for any checks to be carried out. We recommend at least 10 working days as anything less is sometimes too short a time frame to carry out the checks properly. We would only recommend a lesser time frame if the purchaser is sure they can complete all the checks they need to by the due date.
A first home buyer using KiwiSaver for their deposit will need 15 working days to allow time to complete the application and for forms to be processed by their Kiwisaver provider. Also, some banks may require a valuation which can take extra time.
One of the huge benefits of a due diligence clause is that it provides maximum possible protection to purchasers.
If, as a result of inquiries and reports, a purchaser finds anything out about the property they don’t like, or that they cannot fulfil, they can easily walk away.
If you are looking at purchasing a property, Haigh Lyon can provide advice to make the process and contract negotiations simpler. Contact Kate von Biel on @email or 09 306 0625.