Due Diligence When Entering into a Sale and Purchase Agreement

Why Due Diligence Matters

While the warranties given by the vendor under the standard Law Association of New Zealand/REINZ Agreement for Sale and Purchase agreement for real estate offer some important safeguards, it should not be assumed that they provide sufficient protection in every situation. The warranties are limited in scope and, in some cases, may have been amended or deleted by the vendor. They should not be relied upon as a substitute for a comprehensive due diligence investigation.

Under that standard agreement, a vendor warrants, among other things, that:

• They have not received, and are not aware of, any notices, demands, or requisitions affecting the property.
• They are not aware of any matter that may result in proceedings being brought against the vendor or the purchaser.
• The included chattels, plant, equipment, systems and devices are in reasonable working order.
• Any works the vendor has undertaken have the required consents, permits, or code compliance certificates (note, this warranty does not cover works undertaken by a previous owner).
• Rates, water charges, and other outgoings will be paid up to settlement.

However, New Zealand property transactions operate under the principle of caveat emptor (“buyer beware”). For this reason, purchasers should undertake thorough due diligence before entering a sale and purchase agreement or, in the case of an auction sale, before attending the auction. Another option is to make the agreement conditional on certain matters such as obtaining satisfactory finance, and being satisfied with the LIM report and a building report. Increasingly, purchasers are including a “due diligence condition” allowing them to pull out of the agreement if they are dissatisfied with any aspect of the property.

Due diligence is particularly important if you are relying on mortgage finance to fund your purchase. Certain issues with a property, such as unconsented works, unavailability of insurance, and title defects may affect a purchaser’s ability to obtain finance on acceptable terms, or it could result in a lender refusing to lend. It is therefore important to identify these issues before committing to the purchase.

Key Areas for Investigation

 Purchasers should, with the help of the appropriate professionals, investigate the following matters before committing themselves to a purchase:

Title Review

The type of title being acquired, whether freehold, cross-lease, unit title, or leasehold, and the implications of each. Purchasers should also consider matters such as ownership, easements and whether sufficient provision has been made for services to reach the property from the road, and the implications of any interests registered against the title.  These may include land covenants, consent notices, encumbrances, mortgages, access rights, and any restrictions that may affect the use or development of the property.

Finance and Insurance

 Obtain finance and insurance approval as early as possible, ensuring approvals are specific to the property being purchased. Lenders and insurers will be interested in factors such as cladding type, moisture risks, unconsented works, natural hazards and the overall property condition. They will also want to know if anything on the title prejudices their security.

LIM Report Review

 A current LIM report should be reviewed to identify matters including building and resource consent history, code compliance information, rates, drainage, zoning, notices, and natural hazards. Particular attention should be given to any flooding, contamination, or liquefaction risks. If you anticipate carrying out significant works to the property, it may be worth consulting with an architect or planner before purchasing to understand the implications of local planning rules for your proposed development.

Building Report Review

 A professional building report can identify structural issues, moisture or weathertightness concerns, unconsented works, and maintenance requirements that may affect the property’s value, suitability or safety.

Key Questions to Consider

 Is the property suitable for its intended purpose?

• Are the buildings on the property in good condition, weathertight and structurally sound?
• Are there any unconsented works?
• Is the property at risk of flooding?
• Can finance and insurance be obtained on acceptable terms?
• Will local planning regulations allow your intended development or renovation?

Key Takeaway

Due diligence is a critical component of any property purchase. By reviewing the title, LIM, building condition, finance and insurance position at an early stage, and obtaining appropriate professional advice, purchasers can identify issues that may affect value, use, insurability or lending approval, and make an informed decision before it is too late.