Due diligence clauses are common features in commercial property sales contracts these days, and yet there can be a lot of confusion around how they impact the roles and responsibilities of the parties involved.
Gregoriades says to understand where responsibilities for building plan verification fall under a due diligence clause, you need to understand what the clause is, and what it’s designed to do.The verification of building plans is a prime example of a popular component in due diligence clauses that can cause a lot of dissension if not fully understood.
This is according to Jason Gregoriades, a member of the Rawson Property Group’s commercial division, who says to understand where responsibilities for building plan verification fall under a due diligence clause, you need to understand what the clause is, and what it’s designed to do.
Typically requested by the prospective buyer and agreed upon by the seller, a due diligence clause allows for a period of investigation to take place, after signing the offer to purchase but before the finalisation of the sale.
“Its intention is to give the buyer a chance to verify any facts and claims made by the seller that might affect the viability of the property for their purposes,” says Gregoriades.
To facilitate the process, the seller is required to provide the purchaser with any information such as building plans agreed upon in the due diligence clause. However, the onus is on the buyer to verify the information provided, and that responsibility extends to the verification of the building plans.
“Potential confusion comes in because of the way things work with building plans when there is no due diligence clause. Sellers are always obliged to ensure that their buildings comply with proper building standards, irrespective of due diligence,” he says.
“That includes having properly drafted and approved building plans which should be passed onto the new owner during the course of the sale. When there is no due diligence clause and those plans are not up-to-date, accurate, or properly approved, the risk is not automatically passed on to the purchaser.”
However, when a buyer makes building plans part of the due diligence, the balance of responsibility potentially shifts somewhat.
“The seller still has to provide the building plans and make any amendments if necessary, but it’s up to the buyer to have them verified by an architect, quantity surveyor, or other qualified professional,” says Gregoriades.
“If no concerns are raised and the sale proceeds, the seller has strong grounds to argue that the buyer had plenty of time to take counsel on the building plans and failed to do so, thereby diluting his right to hold the seller liable.”
He says a prudent commercial property investor always seriously considers the building plans before making a purchase.
“By including plans as part of due diligence, you not only get a far more accurate idea of your potential investment, you also have the opportunity to ensure any issues are remedied before the sale is finalised. This puts you in a much stronger position than if you discovered those issues after transfer had taken place.”
Gregoriades says it is important to use a recognised industry professional to verify the plans.
“If you miss any issues during this phase, you don’t have as much recourse down the line, so it’s definitely not advisable to cut corners and try to check them yourself.”
Due diligence clauses are valuable tools for commercial property buyers, but must be handled properly in order to avoid unnecessary complications, he says.
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