Due Diligence Clauses - Why you need one before buying a commercial property or business
When purchasing a commercial property or business the purchaser faces the risk of undisclosed or unknown issues that can potentially be both costly and time consuming for the new business or property owner to resolve.
Including a due diligence clause in the purchase agreement is the prudent way to manage that risk by enabling the purchaser to undertake an investigation into the property or business before committing unconditionally to the purchase.
A due diligence clause can be drafted broadly to include any matters the purchaser thinks may be relevant to the particular property or business or can be drafted narrowly to allow the purchaser to investigate only specific matters of concern.
Examples of matters that are frequently investigated under a due diligence clause include:
- reviewing the certificate of title, Land Information Memorandum and/or Council records relating to the property along with any resource consents or zoning rules that apply so that the purchaser can be certain that the property will be able to be used for their intended purposes;
- checking the terms of any leases or tenancy agreements relating to the property and undertaking meth testing in respect of residential accommodation that has been tenanted on the property;
- obtaining valuation advice and/or historical accounts of a business to ensure that the financial calculations of the purchaser in terms of the funding and on-going operation of the property/business are realistic and sustainable;
- checking debt recovery in the business, customer payment terms, claims by customers in relation to faulty goods;
- reviewing employment agreements and any disputes or grievances raised by employees.
Where matters of concern are identified during due diligence they enable the purchaser to negotiate further with the vendor to either adjust the price, include additional warranties or require the vendor to undertake specific actions/work prior to the settlement date of the purchase.
Guides to the law
Here are links to the New Zealand Law Society law awareness pamphlets.