Beyond the Purchase Price: Sound Investment Through Due Diligence

What is Due Diligence?

There are two main ways of completing checks on a property. These are referred to as conditions and are included in your sale and purchase agreement.

• The first is referred to as “standard conditions” and need to be selected under the sale and purchase agreement (Agreement). These include Finance, LIM Report, Building Report and Toxicology Report. Any additional checks outside these standard conditions will need to be included separately under the Further Term of Sale within the Agreement. If no additional conditions are included under the Further Terms of Sale, you (generally) do not have the ability to complete any further checks on the property and are limited to the standard ones selected. These conditions also have limited rights in the event you wish to back out of the agreement and can therefore be restrictive.
• The second way is to include a “Due Diligence” clause under the further terms of sale. This clause contains wording to the effect that a purchaser can complete any checks to a property and these checks do not need to be included as separate conditions under Agreement. If you are dissatisfied with any of the checks completed on the property you are able to back out of the Agreement.

What is the benefit of including a due diligence clause?

As the process of buying a property is overwhelming, it can often be difficult to think of all the checks you wish to make to the property at the time you sign an Agreement. The benefit of having a due diligence clause in the Agreement allows you to make any checks to the property without having to specify what these are. This means if you later realise there is an additional check you wish to make to the property (after signing), you can go ahead and complete this under the due diligence clause.

In contrast, this would be difficult to do under the standard conditions and you are limited as to the scope of what checks can be completed under these standard conditions. This means if you have not included additional conditions under the further terms of sale you are at the mercy of the vendor and will most likely need to negotiate additional conditions (which the vendor is under no obligation to agree to).

What checks can I do under a due diligence clause?

There is not an exhaustive list of what checks you can complete under a due diligence clause. The areas you should investigate will vary depending on the type of property you are purchasing, the age of the building and other improvements (including the design and material used), the property location and your intended use. For example, if you are not buying for your own occupation but may rent out immediately or in the future, you would want to check whether the residential dwellings meet current healthy homes standards. If bank lending is involved, the bank may have specific concerns that might need to be checked and resolved as a condition of granting their loan.

If buying an older home, a standard building inspection report may not be sufficient and it may be appropriate to reserve your position to get specialist reports on specific areas such as plumbing and electrical. In acting for purchasers, we have seen instances where standard building reports do not go into significant detail on plumbing work.

A building report was undertaken on a property and within 6 months, the new purchaser experienced consecutive high water bills. A plumber was called upon and a plumbing report was provided. It was found that old dux quest piping was used within the entire property and had burst, causing leaks in multiple places. This plumbing material had been used in older houses and had been known to spontaneously burst. This was something the plumbing industry was well acquainted with and the purchaser was advised by the plumber that dux quest plumbing could be misidentified as another form of plumbing (which it was on the building report the purchaser obtained during their conditional period under the standard conditions within the Agreement).

Given the dux plumbing material has caused issues in New Zealand, many insurance companies refuse to cover damage that may be caused due to the plumbing leaks caused by this particular material. While the cost of the damage was partly covered by the purchaser’s insurance provider, their insurance provider then varied the terms of their policy to no longer cover any damage caused by leaks from the dux quest plumbing.

This left the purchasers with a conundrum as the plumber had advised them that they will most likely suffer further (multiple) spontaneous leaks unless the piping is fully replaced. This did not leave the purchasers with much of a choice as any further damage would not be covered by their insurance provider leaving them out of pocket. They therefore decided to replace all the piping, costing them around $7,000.00.

Had a due diligence clause been included under the agreement, a separate plumbing report could have been obtained at the time the purchasers were completing their checks. The purchasers may have then re-negotiated the purchase price to cover the costs of replacement piping or have the opportunity to back out of the agreement.