In an earlier article I wrote about making your offer stand out without dropping your guard. That one was about the four conditions you see in most agreements, finance, LIM, building report and title, and how to keep them lean so your offer looks good to a vendor. If you have not read it, it is a good place to start.
This article is about a different kind of condition. The broad due diligence condition. It does not show up in every deal, and it should not. But there is a place and a time for it, and when the property calls for it, it is often the better tool.
What the clause looks like
Wording varies from agreement to agreement, but the version below is one of the most common we have seen over the years. It goes into the further terms of sale.
A few words do most of the work here. “Any aspect”. “Absolute discretion”. “No obligation whatsoever to supply any reasons”. Those are what make the clause so useful to a buyer, and not so popular with vendors.
The clause can also be tailored. We sometimes add specific matters to it, so it is clear on the record what the buyer intends to look into. But the core stays the same.
How it differs from the standard conditions
The standard conditions in the agreement are each tied to one topic, and each one comes with rules about how you can use it.
- LIM: Your approval cannot be unreasonably or arbitrarily withheld. If you do not approve it, you have to give notice of the particular matters you are unhappy with, and the vendor gets the chance to fix them.
- Building report: The report has to be satisfactory to you “on the basis of an objective assessment”. It must be prepared by a suitably qualified inspector. If you pull out, the vendor can ask for a copy of the report. And no invasive testing is allowed without the vendor’s written consent.
- Finance: If you cancel because you could not arrange finance, the vendor can ask you to explain the steps you took, with supporting evidence.
- Title: A title condition is about what is on the title and what it means for the property. It is not a general way out.
On top of that, the agreement puts what is called a positive obligation on the party a condition benefits. You have to do all things reasonably necessary to get the condition fulfilled by the date. In practice, that means you have to actually apply for the finance, actually order the LIM, actually get the inspector through.
Put together, this means a specific condition is not a way to walk away because you have gone off the property. Buyer’s remorse is not a reason you can rely on under a LIM, building report or finance condition. You need something real, connected to that condition, and you may have to show it. That is exactly why vendors prefer them.
A specific condition protects you against a particular risk. A due diligence condition protects you against the risks you have not thought of yet.
Why it suits buyers
With a due diligence condition, the test at the end is yours. You still need to genuinely carry out your investigation, because the general obligation to take reasonable steps still applies. But once you have, the question is simply whether you are satisfied. If you are not, you can cancel, and you do not have to explain why.
It also does a lot with one clause and one date. Instead of tracking five or six separate conditions, each with its own date and its own notice rules, everything sits under a single heading. Finance, the LIM, title, a building report, body corporate documents, insurance, anything else the property throws up.
Why vendors push back
From the vendor’s side, a due diligence condition looks a lot like an option. The property is effectively off the market for the due diligence period, and at the end of it the buyer can walk away for any reason, or no stated reason at all. Vendors and their agents know this, and some will resist the clause or ask for a shorter timeframe.
That is fair enough. A broad condition is a big ask, and it should be used where the property genuinely needs it. Which brings us to when that is.
When it is the right tool
Buying off the plans or a very new build
If the title has not issued yet, or the code compliance certificate has not been issued, the usual checks do not quite fit. There may be no title to approve. The Building Report may not be appropriate because the building work is not finished. What you really need to look at is the development itself: the plans and specifications, the consents, the proposed unit plan, the developer’s obligations and the timeframes. None of that fits neatly into a LIM or title condition.
Unit title and body corporate properties
Apartments, townhouses and other unit title properties come with a body corporate, and a body corporate comes with paperwork. The seller has to give you a pre-contract disclosure statement under the Unit Titles Act 2010. Behind that sit the AGM and committee minutes, the long-term maintenance plan, the financial statements and budgets, the insurance, the body corporate rules, and sometimes a ground lease if the property is leasehold.
That is the kind of review that tells you what you are really buying into. Planned maintenance, how well the building is funded, any remedial works, how the committee runs things. Again, none of that sits comfortably under finance, LIM, building report or title.
When the conditions start to pile up
As a rule of thumb, once you are past five or six conditions, a due diligence condition is usually the tidier option for everyone.
We regularly see agreements with the standard four, LIM, building report, finance and title, and then on top:
- invasive testing for asbestos;
- insurance;
- a toxicology (meth) report.
That is seven conditions, each with its own date and its own rules. At that point it is much easier for both parties to have one broad due diligence condition, with one date, than to manage seven separate ones. It is also cleaner for the vendor, who gets one answer on one day.
Making it work for both sides
A due diligence condition does not have to be a blunt instrument. A few things help:
- Keep the period realistic, but not long: Ten working days is common. Ask for what you need, not the maximum you think you can get.
- Line up your team early: Have your mortgage adviser, your building inspector (if appropriate) and your lawyer ready, and ask the agent for the body corporate pack or development documents early. The earlier we have the documents, the more of the period goes on review rather than waiting.
- Think about the market: In a multi-offer situation, a broad due diligence condition can make your offer look weaker than one with a short list of specific conditions. That is where the earlier article on making your offer stand out comes in. Sometimes doing some of the work up front, like a building report, and keeping the condition lean is the better play.
- Do the work: The condition gives you the right to walk away. It does not do the investigation for you.
What to look at during due diligence on a unit title property
Where your lawyer fits in
Choosing between a due diligence condition and a set of specific conditions is a judgement call. It depends on the property, the market and how much you need to find out. We tailor the conditions to you and to the property, rather than using the same set every time.
If you are looking at an apartment, a new build or a property that needs more than the usual checks, talk to us before you sign. You can read more about how we help on our buying property page.
Ready to take the next step? Thinking about making an offer, or already have one on the table? Contact NZ Legal to get started. Fill out our quick contact form and we will be in touch within one business day.
Sources
- ADLS/REINZ Agreement for Sale and Purchase of Real Estate, 11th edition 2022General terms: finance condition (9.1), LIM condition (9.3), building report condition (9.4), toxicology report condition (9.5) and the operation of conditions, including the obligation to do all things reasonably necessary to fulfil a condition (9.10(2)).
- Unit Titles Act 2010Section 146: the pre-contract disclosure statement a seller of a unit title property must provide to a buyer.
- Building Act 2004Code compliance certificates confirm that building work complies with the building consent.
- Settled.govt.nz, "Understanding the sale and purchase agreement when buying"Conditions you can include in an agreement, including a building report and a title search.
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