A due diligence clause can make all the difference in a conveyancing contract. This insight will guide you through the meaning of due diligence, what it can tell you, why it is important and how you can use it in your conveyancing contract. In essence, a due diligence clause allows you a period of time to undertake searches and investigations of a property and provides you with a right to terminate if these results are unsatisfactory. This clause is particularly important when you are buying a property for a specific purpose, as it generally allows to get out of the contract with your deposit fully refunded and does not require you to act reasonably in your termination. If you are thinking of purchasing a property and would like to include a due diligence clause in the contract, Standard Law Co is here to help.

What is due diligence?

‘Due diligence’ refers to all of the searches and inspections that a buyer may undertake when purchasing a property. These searches may be on the property and on the land that the property sits on. They may be searches of local, state or federal government records, tribunal and court records, or even of private companies.

Of course, some of the searches may return results that a buyer might not like. To provide the buyer with rights to terminate in such a situation, a prudent lawyer will request to insert a due diligence clause as a special condition to the contract before it is signed.

Generally, a due diligence clause will provide a buyer with a time limit to undertake searches on the property and land and a general right to terminate the contract if these searches are not satisfactory to the buyer.

It is important to note that the standard REIQ contract does contain provisions that allows the buyer to terminate. For example, if the building and pest provisions in the reference schedule are completed, a buyer can terminate a contract if they reasonably find the building and pest report to be unsatisfactory.

Another example is if there is a material error as to the boundaries of the land. Of course, these provisions are specific in nature and do not give the buyer the general right to terminate the contract like the due diligence clause does.

What can due diligence tell you?

There is a myriad of searches and inspections that a buyer can make in relation to property and to land. The usual searches that a buyer will undertake include a title search, survey plan, rates searches and land tax searches. Other non-standard searches that a buyer may undertake include soil tests, building inspections, sewerage, town planning and body corporate inspections.

These searches can be pivotal in deciding whether to continue with the purchase of the property. For example, say you are buying a house with a view to using it as a rental property. The advertisement lists it as two-bedroom. You undertake a building inspection which tells you that the ceilings of the bedroom on the first level are too low and cannot be considered as a bedroom under local council regulations. If you want to legally rent the property, you cannot advertise it as two-bedroom. You may have lost rental income due to this oversight. With a due diligence clause, you are able to terminate this contract and do not need to act reasonably.

To provide a further example, let’s say that you are looking for a home that has a pool or enough space to build a pool. You find a property that fulfils the latter criterion. You conduct a Sewerage and Drainage Plan search and find that the position of the sewerage and drainage pipes mean that you cannot build a pool where you wish. Because you have a due diligence clause inserted in the contract, you are able to terminate the contract and are refunded your full deposit.

Why is it important to undertake due diligence?

A due diligence clause presents many advantages to a buyer. As we have seen, the key advantage is that you are able to get out of a contract if you later find out that the property cannot be used as intended or is not what you thought you were buying. This clause can mean the difference between walking away having lost only your own solicitor’s fees or defaulting on the contract and being sued for damages by the seller. The due diligence clause presents other advantages to the buyer as well. The existence of a due diligence clause gives the buyer the upper hand if they wish to renegotiate the purchase price as a result of the unsatisfactory search results, as they can simply walk away if you do not receive the reduction you desire. Further, with a due diligence clause, buyers are not generally required to provide the reason for the termination or required to act reasonably.

How can ensure you have due diligence in your contract?

You may be wondering why a seller would consent to inserting a due diligence clause in a contract when it is so detrimental to them. Of course, sometimes the request for a due diligence clause may mean the difference between the seller accepting your offer or accepting another person’s offer for the same purchase price or less. However, the prudent lawyer will know how to negotiate with the seller to ensure you receive the most favourable contract in the circumstances. A good lawyer will know the state of the market and what is reasonable to request in the circumstances. Whatever stage you are at in your conveyancing, Standard Law Co is here to help. Whether you are still searching for a property, drafting a contract or close to settlement, we can assist you.