Posted on Jul 01, 2020
A potential buyer is interested in purchasing a property. The property is being auctioned. The expectation is that the potential buyer will do copius amounts of due diligence prior to the auction, as well as arranging finance, so that they are totally prepared to make an unconditional bid at the auction.
Another potential buyer is interested in purchasing a property. The property is being sold by negotiation/ deadline/private treaty/tender etc. The expectation is that this potential buyer will make an offer, which, if accepted is then subject to a wide-ranging “Due Diligence” clause which enables the potential buyer to avoid the contract for any reason they choose.
Something is wrong with this scenario. On the one hand buyer one is expected to undertake considerable work and expense to put themselves in a position where they can be an unconditional buyer, with no certainty they will own the property. There are even times where they do all the work because they have been mislead as to the likely price. On the other hand buyer two can secure a property without making any firm commitment, and potentially walk away from the contract with no penalty at all.
On the surface, a due diligence clause is a quite reasonable proposition. It allows a potential purchaser to expend time and money on understanding fully all aspects of a property, knowing that they have secured the property – subject to a successful conclusion to their investigations. But the reality is that the “due diligence “ clause has morphed over time into something quite different. The DD clause has become the equivalent of the hunter with one boot on the prize, knowing that they have it if they want. But also knowing that they can walk away with no penalty.
To be meaningful a Due Diligence clause needs to detail exactly what it is the potential purchaser needs to know about the property. It needs to spell out the specifics of an investigation. Having a wide ranging DD clause too often results in a vendor having to start the sale process all over again – simply because a buyer changed their mind. And under a vague DD clause there is no penalty for doing that.
Let’s take the time to ask a few more questions up front, and determine exactly what it is that a potential purchaser needs to do under Due Diligence. Because very often we will already have a LIM, an IEP and perhaps even a valuation. And certainly answers to most of their questions.