My lawyers not working today
She left a message for me saying the contract is good to sign with the due diligence clause, but Im wondering what it really means.
I quote:
"This contract is subject to and conditional upon the buyer making due diligence enquiries in relation to the property within 14 days from the date of this contract. In the event the result of such enquiries are not satisfactory to the buyer, the buyer may terminate this contract……."
Now as my understanding goes (which may well be off) good enquiries in realtion to the property could mean asking their mother if they should buy it? To me its a get out of contract free clause correct?
Knowledge anyone?It basically means that they want 14 days to check things out (check something with the council, do some numbers etc) and if as a result of their investigations the property doesn't stack up, then yes, it's a get out of contract free clause. Usually the clause is placed there with the best intentions (I have used one in the past when buying), usually because they have not had the time to do these enquiies and they don't want to miss out on the deal. I wouldn't be too worried about it, unless you have another buyer that wants your property and is willing to put down a contract without a due diligence clause, when you would obviously go with the contract with the least conditions. If you don't have any other buyers, it's better to have a "maybe" contract rather than none at all!
So they can use any random reason? Or do they need a reason relating to the information I have given them? This clause could come in handy for future deals…..
No, they can use any reason.
A due dilligence clause is simply a timeframe for you to make a decision, without risking losing the property to another buyer. However, the vendor doesnt have to agree to it
I use them exclusively when buying, less inclined to when selling.
It sound to me like you are the vendor, so you have 3 choices
- accept the offer, yet understand that anytime in the next 14 days (make sure it is not 14 business days or you are then out to near 3 weeks) the purchaser can just walk, and take any deposit with them
- refuse the offer with a DD clause
- try to negotiate something inbetween. maybe a shorter DD time?
I think circumstances would impact your decision. If you have other interested buyers who it is likely will offer you similar price, then tell the purchaser the reason why you wont accept the clause. if there are no other potential buyers around that price, then it may be worth the risk if they wont budge
The type of deal may play a part too. If they are just buying a PPOR or rental, then apart from building inspection & finance, there is not a lot left to do. However if it is a potential development site, there are many things to be checked out & this takes time. I wont buy a potential development site without a DD clause
Good luck, and I hope you get a good result for yourself
Troy
4 A DD clause with specific issues eg: satisfactory building/pest inspections, finance approval – this way there is only limited recourse not open slather eg mum didn't like it.
In fact, a purchaser relying on a clause such as the one you have quoted doesn't have to give a reason at all. They can just advise that they are terminating the contract under that clause.
Cheers
K
Hi again
Sorry. I meant to put this in my above post but got distracted.
This clause is actually a very poorly worded clause. That clause is essentially an extended cooling off period. As I said above, a purchaser is under no obligation to advise of the reasons for not proceeding with the contract but rather can just inform you that pursuant to that clause they are exercising their right to terminate the contract.
The clause should be much more specific using terms such as the ones suggested by Scott No Mates above. Find out what the purchaser intends to do with the property. Is it get council approval to do something? Then specify that in the contract. Is it building/pest/electrical inspections? Then specify that in the contract (and don't just put "subject to satisfactory … inspections". Get your solicitor to draft the due diligence clause to limit the circumstances under which the purchaser can pull out. What if the only thing I am not happy about wrt a building inspection is the colour of the shirt the inspector is wearing? Of course I shouldn't be able to get out of a contract but if the contract says "subject to satisfactory building inspection" then I can.
if you have very specific clauses and purchaser wants to get out of a contract due to the results of inspection, then you can call them on that and have them explain to you their grounds for wanting to terminate. They can only terminate if those grounds fall within the terms set out in the clause. For example, you could have a clause that says that a building inspection will be deemed satisfactory unless the problems detected in the inspection will cost more than $2000 to fix. The purchaser will then have to show you the inspection which sets out the costs to repair the faults if they want to use that clause to terminate.
However on the clause currently in your contract if you query why the purchaser wants to terminate all they will be obliged to tell you is that the results of their enquiries weren't satisfactory. That could mean that their mum didn't like it.
Get your solicitor to change it. He or she should know the wording to use to minimise the circumstances under which a purchaser can get out of the contract.
I hope that helps. It's late and I could well be rambling on.
Cheers
K
Earthling,
you've have good advice above. I personally wouldn't accept such a fluffy clause unless the property I was potentially selling was going stale and giving the perception of being a lemon if was on the market for a long time. They will tie it up for two weeks and have easy exit if they wish or they may begin discounting wars with you.
The use of such generic DD clauses tends to be more common with larger high end commercial transactions. Very uncommon with simple residential sales which I'm assuming yours is.
Make the terms of the "subject to clauses" tighter and more specific as mentioned above. Your solicitor needs to guide you with this. No one likes clauses. I rarely sell mine, however the few I have sold have always been unconditional. In a slow market clauses such as pest and building are a given. In a hot market properties virtually sell themselves
I've said it already, but again…………consult your solicitor.
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