When Assumptions Displace Due Diligence in Property Transactions

Background

In 2022, the Council purchased a 7.2-hectare lifestyle block for $1.29 million with the intention of re-zoning it to light industrial to meet the town’s growing demand for commercial land. But a $300,000 feasibility study conducted after the purchase found a fundamental problem: more than half of the land sits on a flood-prone wetland, rendering the intended use unachievable.

The property was later declared surplus, with no clear path forward and mounting costs for ratepayers.

While this type of misstep is notable when it involves public funds, the underlying issue is not unique to councils. It is the same challenge any party faces when purchasing land based on assumptions about zoning, usability, or development potential without confirming the facts first.

Due Diligence Must Come Before Commitment

Whether the buyer is a council, developer, or homeowner, due diligence is not a box-ticking exercise—it is the foundation on which every informed property decision rests. When undertaken too late, the consequences can be costly.

Key diligence steps that should occur before signing or settlement include:

• Zoning and planning investigations, including whether a proposed zoning change is realistic.
• Environmental and geotechnical assessments, especially when wetlands or floodplains may be present.
• Feasibility studies aligned with intended use, not just with existing land status.
• Independent legal review to identify constraints, easements, and compliance issues.

In the Te Aroha case, the feasibility study came after the purchase—reversing the logical order and leaving the Council with land it could neither use nor easily resell. Former councillors described the purchase as being made “on the hoof”, driven by public pressure to secure industrial land.

Time pressure often creates a false sense of urgency, but it rarely justifies skipping foundational steps.

The broader lesson is simple: development aspirations, market demand, or political momentum should never override the need for proper investigation. Assumptions—especially optimistic ones—are not a substitute for facts.

When a Property Must Be Sold Back: Rights and Realities

Once the land was deemed unfit for purpose, the Council took steps to dispose of it, offering to sell the property back to its former owners for $1.1 million—roughly $200,000 less than it paid.

This raises another set of legal considerations that are increasingly relevant as land-use complexities grow: when (and how) sale-back scenarios arise.

Contrary to common belief, previous owners usually have no automatic legal right of first refusal unless an agreement was written into the original sale contract or triggered under specific statutory regimes (such as Treaty settlements or public-works reversions). Instead, councils and other public bodies typically follow internal policies or procedural fairness principles when deciding whether to offer land back.

Key considerations for sale-back situations include:

• Valuation method: Should the offer be at market value, original purchase price, or adjusted for known defects?
• Transparency obligations, particularly for public entities disposing of assets purchased with ratepayer funds.
• Timeframes and fairness, especially where the former owner expresses genuine interest but must secure significant funding.
• Reputational risk, as the public may scrutinise both the original purchase and the resale.

In this instance, the former owner’s family is attempting to raise the funds to acquire the property and establish an animal sanctuary. Regardless of whether that succeeds, the underlying legal questions highlight why sale-back processes benefit from clear contractual terms and early advice—both for buyers and sellers.

Lessons for Purchasers and Sellers Alike

The Te Aroha case is more than a curious local-government story. It illustrates the wider risks faced by anyone purchasing land based on future expectations rather than current realities. Sound due diligence protects buyers. Clear contractual frameworks protect sellers. And both reduce the likelihood of protracted, costly, and publicly scrutinised outcomes.