Due diligence clauses

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What is a due diligence clause and why should you consider including one in your Agreement for Sale and Purchase of Real Estate?

Purchasing a property is a decision not to be taken lightly. A Sale and Purchase Agreement is a legally binding contract so its only natural that purchasers are sometimes afraid of being tied into the agreement without having time to fully investigate the property, surrounding neighbourhood, rental/resale potential, cost of renovations and other issues.

Due diligence clauses are great for purchasers….

The common conditions added to Sale and Purchase agreements such builders reports, finance and LIM report do not generally give purchasers the opportunity to cancel the agreement unless their finance is declined or there are legitimate concerns raised in the builders or LIM reports that the Vendors are not willing to fix. It is for this reason that some purchasers decide to include a due diligence condition in their Sale and Purchase Agreement. A Due diligence clause gives the purchaser a time frame in which to do their “investigations” on the property and decide whether it is right for them in all respects and most importantly it gives the purchaser the ability to cancel the agreement at their discretion.

….but often discouraged by Vendors and Agents

The problem is that Vendors and Agents are usually strongly opposed to the inclusion of a due diligence condition in an agreement. They often take it as a sign that the purchaser is not serious about the property and is just wasting their time, even though this may not be the case. Another reason for all the negativity surrounding due diligence is that certain property finders and operators of property investment schemes, strategy has been to sign up an agreement with a due diligence clause and then use the time period to find another purchaser to buy the property from them (with a contemporaneous settlement) at an elevated price pocketing a tidy profit in the process.

If you are selling your property and the purchaser wants to include a Due Diligence clause, rather than reject their offer you may want to consider adding a Cash Out Clause. This is a condition inserted for your benefit so if you receive another offer on the property that is in your opinion more favorable you can then give the original purchaser (with the due diligence condition) a time of usually 3 days to go unconditional. If they are not able to go unconditional in this time frame then their agreement is at an end and you can go with the better offer.

Contact the Conveyancing Shop Lawyers on 0800 SOLICITOR to find out more about Due Diligence conditions.

2017-06-27T12:20:42+00:00 Property Law|