A due diligence clause is a not-so-common clause that buyer’s sometimes request to be put in a contract. They come in many and varied forms.
However, they are not well understood and can often make sellers or agent nervous.
So what does it mean?
What is a due diligence clause?
As a general rule, due diligence clauses allow a buyer to undertake searches on the property and to terminate the contract as a result of receiving any adverse results. Generally, buyers are not required to provide the reason for termination and are not required to act reasonably.
A due diligence clause may cover a buyer if they want to undertake surveys, soil tests, body corporate inspections, council searches or just the standard conveyancing searches including a building and pest inspection.
Why would a buyer want a due diligence?
A due diligence clause is highly desirable where a buyer wishes to undertake searches that, if adverse results are returned, the buyer would not otherwise have a right to terminate under the contract or at law.
Can a buyer terminate the contract for failing to have Council Approvals?
For example, where a buyer is buying a standard residential house, the buyer is unable to terminate the Contract if the house does not have council approval. This extends to any house or property improvements that require council approval; such as a pool, extensions, a pergola, deck etc.
Not having council approval for the house or improvements could have major ramifications for buyers. If the buyer bought the property without council approvals, the council would later force the buyer to make applications and bring any work done up to building code specifications. Depending on the work required to be done, this could result in a very costly exercise for buyers.
Can a buyer terminate the contract for adverse Body Corporate Inspection Reports?
Another example is if a buyer wants a Body Corporate Inspection Report done for a townhouse or unit. Under standard contract terms, a buyer is not able to terminate the contract if the results came back adverse.
This search gives buyers a good understanding of the ‘goings on’ in the body corporate. For example, if major repairs or maintenance are about to be done, if the body corporate is struggling financially, or if there are engrained disputes between owners. A Body Corporate Inspection Report will also show if there are any exclusive use car parks, patios or garden areas.
A properly worded due diligence clause will cover and protect a buyer in these circumstances.
Do seller’s agree to a due diligence period?
As a result of the generality of due diligence clauses, seller’s sometimes feel uncomfortable or nervous granting buyers such seemingly wide rights to terminate.
Therefore, it is good to note, asking for a due diligence clause may be the difference between your offer and someone else’s offer for the same purchase price or less.
Please contact our property team should you have any questions regarding your property contract.
The information provided in this article is for general information and educative purposes in summary form on legal topics which is current at the time it is published. The content does not constitute legal advice or recommendations and should not be relied upon as such. Whilst every care has been taken in the preparation of this article, FC Lawyers cannot accept responsibility for any errors, including those caused by negligence, in the material. We make no representations, statements or warranties about the accuracy or completeness of the information and you should not rely on it. You are advised to make your own independent inquiries regarding the accuracy of any information provided on this website. FC Lawyers does not guarantee, and accepts no legal responsibility whatsoever arising from or in connection to the accuracy, reliability, currency, correctness or completeness of any material contained in this article. Links to third party websites or articles does not constitute any endorsement or approval of those sites or the owners of those sites. Nothing in this article should be construed as granting any licence or right for you to use that content. You should consult the third party’s terms and conditions of use in relation to any third-party content. FC Lawyers disclaims all responsibility and all liability (including liability for negligence) for all expenses, losses, damages and costs you might incur as a result of the information being inaccurate or incomplete in any way. Appropriate legal advice should always be obtained in actual situations.
Prefer to get in touch?
With offices in Brisbane, Sunshine Coast, North Queensland and Sydney, our team is well equipped to provide both advice and support across a broad range of legal areas.
