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 due diligence or your property contract.