Role of due diligence clause during sale of property

© Sergey Nivens – 123RF.com

The fact that the clause is suspensive implies that should the potential buyer not be satisfied with the outcome of his investigations, he may refuse to waive the suspensive condition and the agreement will fail.

The suspensive condition is usually designed in such a way as to give the potential purchaser sweeping powers to request any document or relevant information that they may deem necessary to make a fully informed decision.

When it comes to industrial property, the potential purchaser will need to critically investigate the following:

• The condition of the property and any potential repairs that may need to be taken into account.
  
• A full set of approved plans.
  
• All expenses associated with the property with an emphasis on the monthly rates amount.
  
• If there are leases in place - as in an investment scenario - then all leases and conditions of the leases are scrutinised.
  
• Any levies and association levies that are payable in respect of the property.
  
• A copy of the property title deeds, listing any servitudes, land claims or other special conditions.
  
• The boundaries of the property are to be confirmed.
  
• A full zoning certificate which details any inclusions or exclusions on the property which may prohibit certain activities.

Each investor and or purchaser has a personal view; however, the above would meet with the primary criteria.

Whilst not legally essential, a cautious purchaser should insist that he is made aware of any and every idiosyncrasy of the property. A sensible agent would insist on a due diligence clause to ensure that the transactions decision is not made solely on the agents representations.

Relevant documentation

The commercial property agent acts as an intermediary in that they assist the buyer in attaining all relevant documentation from the seller. However the agent is not legally bound to be responsible for the due diligence. This is up to the buyer.

"However, the commercial property agent generally has a vested interest. As a result, apart from facilitating the collection and dissemination of the relevant information requested by the potential purchaser, the agent should recuse him/herself from any 'advice' or influence," says Ivor Smith, principal agent at Strathmore Commercial and Industrial Property.

"Ideally, an independent specialist familiar with due diligence investigations should be appointed to collate the information and make a recommendation. Architects, engineers and valuers are often suitable candidates."

Checklist is helpful

It is helpful for commercial property agents to have due diligence checklist to ensure that they assist their client in the best way possible. These checklists can include the following elements and documents: property zoning and details, details of current rates, surveyor general diagrams, title deeds, approved plans for all improvements including renovation work, confirmation of concluded leases, and addendum to lease agreement.

It has become common practice for potential purchasers to use a cleverly constructed due diligence clause as a sweeping 'back door' to an offer. Very often the clause is constructed as a suspensive condition with no guidelines or parameters to the potential purchaser's decision options.

It is advisable for all agents to carefully consider their role in the process of proceeding with the process of due diligence - in the interest of all parties involved.