In the context of purchasing property, the term ‘due diligence’ means investigating the property, both physically and ‘on paper’ to check that it is in order, with the aim of minimising the risk of issues arising down the track. In this article, we set out some of the key elements you should generally include in your due diligence, before committing to a property purchase.
Checking the title to a property is essential. The real skill in reviewing a title is working out the issues that are not obvious and putting different strands of information together to get a full picture. Most lawyers would undertake a title search as a part of due diligence, but the experience seems to be that few lawyers go much beyond reviewing what is plainly there. When asking your lawyer to review the title you should ask your lawyer to consider any issues that might be less obvious such as missing easements, encroachments, access rights, drainage issues and the like.
Structural Integrity – Building Report
Under a standard agreement for sale and purchase, the seller does not give any guarantee as to the structural integrity of the property. This means it is up to prospective purchasers to obtain a building report to check that there are no building issues with the property and that it is structurally sound.
Sometimes the seller will provide a building report to prospective purchasers. While this can be a helpful start, most often it is a good idea to obtain your own independent builders report. Generally, if a building report is prepared for sellers to distribute to prospective purchasers, those prospective purchasers cannot legally rely on that report. If there were an omission or some form of negligence as regards the report, it could be very difficult, and very expensive to bring a claim against the builder or the building company that prepared the report.
Land Information Memorandum (“LIM”)
A LIM report sets out most of Council’s records in relation to a particular property generally, other than building files, and resource consent files. A LIM may provide other information relating to the District Plan, zones, heritage information, hazards and the like. One fundamental part of a LIM report is the building consent summary information. When a building consent is obtained from Council for work done at the property, Council will sign the work off and issue a Code Compliance Certificate (“CCC”) for that work, certifying that the work completed is in accordance with the relevant building consent issued. It is important to check that where a building consent has been obtained, the CCC has been issued also.
The other issue that can arise as regards building consents is where work has been done and no consent has been obtained. Detecting this is much more difficult than identifying consents not completed. One way of identifying such issues is to obtain the building files to the property (some LIM’s include this information, some not). Comparing the most recent council recorded layout of the property with what was viewed at the property is one good way of working out whether unconsented work has been done.
Unconsented works can cause major problems. Council may issue a ‘notice to fix’ which could require you to put the property back to the way that it was before the non-consented work was undertaken, or require that a ‘certificate of acceptance’ be obtained, which is another cost, and not as good as a CCC. Issues may also arise in relation to insurance, as many insurance providers do not cover non-compliant works. Being in a position where there has been a loss and then finding out that the insurer will not fully cover that loss can be incredibly distressing, and should be avoided.
It is important to check that you can obtain full and comprehensive insurance for the property. If you are obtaining mortgage finance, your lender will require you to have comprehensive insurance in place prior to drawing down the loans to complete the purchase. Part of the landscape of New Zealand domestic house insurance is now the requirement to specify a ‘sum insured’. This type of insurance is tricky, by specifying too little then the policy at its fullest limit would not be able to replace the property in the event of a total loss. Specifying too much means that the premium paid is higher than it needs to be. It is important to get a good understanding of the cover needed to try to avoid these issues as much as possible.
Purchasers need to be sure that they can finance the property purchase. Many banks will grant a ‘pre-approval’ which allows you to look for a property knowing how much that particular bank will lend to you. Sometimes these pre-approvals may be conditional, for example, upon the bank receiving a valuation report for the property from a registered valuer. It is important to understand the terms of your pre-approval, and make sure you can satisfy all of the bank’s requirements.
There may be other matters to look at, such a body corporate review for unit titles, lease agreements for properties that are tenanted, and other matters depending on the special features of the property.
How to deal with due diligence in a ‘hot market’
In a slow market, generally the advice is to get the property under contract subject to such conditions as are needed to undertake your due diligence, and then work through the checks. This way if everything checks out, you have the ability to complete the purchase at the agreed price. When the market is competitive however, getting a contract on a property with conditions in it is much less likely.
To improve your chances of purchasing a property in a competitive market, generally unconditional offers are submitted. This means doing due diligence ahead of the offer, and unfortunately means that even if everything checks out, the risk of being ‘outbid’ is substantial in which case the money spent on due diligence is wasted. This is a common problem and there aren’t a lot of solutions without taking on more risk (like relying on the vendor’s building report).
Seeking specific legal advice is important, and the earlier this is done the better. When you find a property you would like to submit an offer for, your lawyer will be able to help you identify any other due diligence you may need to do, based on your particular circumstances and the specific property. If the market is in a competitive state, then you can work with your lawyer to identify how much of the due diligence you might be able to undertake yourself in order to try and minimise cost and waste in the event of an unsuccessful offer.
For a complimentary, no obligations meeting regarding purchasing property and assistance with due diligence, please contact our Wellington property lawyers: