Due diligence is a key part of the sale and purchase of property. Due diligence generally takes place in the initial stages of negotiations or before a contract is unconditional and is a key factor in the parties deciding whether or not to proceed.

What is due diligence?

At its most basic level, due diligence is a structured process of enquiries designed to allow you to investigate and assess the asset in question to confirm that you are getting what you expect.

Who can conduct due diligence?

1. Purchasers – prospective purchasers conduct legal, financial and commercial investigations to identify issues and manage risk on any proposed assets they may wish to acquire.
2. Vendors – the owner of a property may conduct due diligence investigations to identify and remedy any issues before the property is marketed for sale.
3. Financiers – where a purchaser requires external funding to assist with the purchaser or an owner is refinancing a mortgage, the availability of that finance may be conditional upon the financier conducting and being satisfied with the results of its due diligence investigations.

Why is conducting due diligence important?

Due diligence is a vital step in the acquisition process. It can assist the party to make an informed choice and may assist the party in:

• gaining insight into the asset being purchased;
• determining whether the asset can be sold in its current state;
• negotiating changes to the transaction to reduce risk or potential liabilities, including conditions precedents or inclusion of seller warranties or any other alternatives to address anything arising during due diligence; or
• determining/reducing the purchase price.

When should due diligence be carried out?

There are 2 options of when to carry out due diligence:

• before a binding contract is entered into by the parties; or
• after a binding contract is entered into, but the contract is conditional upon the purchaser being satisfied with its due diligence investigations.

There are upsides and downsides to both options.

A potential downside of carrying out due diligence investigations before a binding agreement is in place is that the purchaser will incur those costs whether or not the transaction takes place.

However, the upside of conducting due diligence prior is that the party has the opportunity negotiate the purchase price before a contract is signed.

The more common approach is for a binding agreement to be entered into and conditional upon satisfactory due diligence investigations.  If this is the case, the purchaser will need to conduct its due diligence enquiries within a set amount of time and use this time to renegotiate the terms of the contract or the purchase price, depending on the results of the due diligence investigations.

What can I expect as part of the due diligence process?

Each asset is different, and the scope of the due diligence investigations will depend on the asset in question and any particular requirements of the purchaser. What is required for one transaction may not be needed for another. For example, a purchase of vacant land will have very different requirements to the purchase of a shopping centre, high-rise commercial office building or industrial warehouse.

Some common searches and investigations that may be carried out in a real estate transaction include:

• Title search – is the seller the owner of the land? Are there any encumbrances on title that are of a concern?
• Rates and water searches – have rates been paid to date? What are the current charges?
• Land tax – has land tax been paid up to date?
• Company search – if the seller is a company, has a receiver or liquidator been appointed?
• PPSR searches – are there security interests over the assets of the seller? Do any of these relate to the land?
• Contaminated land register – is the land contaminated or subject to any management plans?
• Leases – what are the key terms in pre-existing leases, including any material risks or landlord obligations?
• Planning and building certificate searches – are the correct planning and building approvals in place?

Conclusion

It is prudent that the due diligence process be incorporated into pre-contract negotiations or as a special condition of a contract to ensure that the party’s rights are adequately protected and that there is a right to terminate if the purchaser is not satisfied with the results of its due diligence investigations.

The results of due diligence investigations could assist a party determine how to proceed and if other contract clauses should be inserted.

How Arena Law can help?

Arena Law has assisted in countless transactions where due diligence was performed.  Arena Law has experience in preparing commercial reports with realistic and practical solutions.

Arena Law can assist you in working out what due diligence investigations are required for the particular asset you have in mind and prepare a due diligence report, which provides realistic solutions, such as advice on restructuring the transaction, negotiating in special conditions or seller warranties.

A list of the key searches / questionnaire can be found here

For further information on how Arena Law can help you in any stage of your asset’s lifecycle, please contact our team on (07) 3999 7102.

Written by Vada Sun and Astrid Crowe