Role of due diligence clause in commercial property sales

1 Sep 2015

In commercial property sale transactions the buyer can request that a due diligence clause be included in the agreement of sale, where, should the seller accept to include this clause, both parties will then negotiate its terms and conditions before the sale proceeds further.

Role of due diligence clause in commercial property sales

This provision can be a fair and equitable arrangement, but is usually very much slanted in the purchaser's favour. However, it can be - and quite often is - used as an escape clause, allowing the purchaser who, for one reason or another, no longer wishes to go ahead with the deal, to opt out.

A scenario would be that the purchaser wants to confirm all fire equipment is up to date with current legislative requirements. Another example would be that the purchaser wants to check the building is properly insured, or that there are no onerous conditions in the title deed.

Avoiding cancellations

Every effort should be made to see that vagueness, ambiguities or a lack of clarity are eradicated from the due diligence clause. It should never be open ended or general in nature, it should stick to the specifics. The involvement of a reputable commercial property division would greatly assist in composing a due diligence clause which is not grossly skewed in one party's favour.

Of paramount importance is the fact that the due diligence clause must specify the time-frame in which the purchaser must accept or reject the sale, in writing, on the basis of the due diligence clause and its requirements. This time-frame should not be too long, as it is unfair to expect the seller to withdraw the property from the market, while the purchaser takes their time to do the necessary checks and balances.

Due diligence clauses can be beneficial and can result in very satisfactory sales, but it is important at the outset to see that very specific and clear parameters are put in place in such a way that they cannot be got around.