The most common condition for a developer to include in a contract when buying a development site is a subject to due diligence clause. It is common for a developer or agent to use a clause they have acquired along the way from a previous deal without giving any thought to whether that clause is properly drafted for them.
All due diligence clauses are not the same and small differences in drafting can have a drastic impact on how the clause operates. Due diligence clauses can be anywhere from extremely restrictive to essentially a ‘get out of jail free card’. The subtle differences separate the good property lawyers from the rest.
What is a due diligence clause?
A due diligence clause is used to allow you the opportunity to carry out investigations regarding the property and your proposed development. If you are not satisfied with those investigations by the end of the due diligence period, then the developer will usually have a right to terminate the contract and have any deposit paid refunded to them.
A usual due diligence period is anywhere from 14 to 60 days after the date the contract is signed. We recommend at least 30 days for a development site as this allows you enough time to seek advice from your town planner, seek advice from your Queensland property lawyer and even organise a pre-lodgement meeting with the local council.
What to look for in a due diligence clause
The saying ‘the devil is in the detail’ could not be truer than drafting of due diligence clauses. Here are some things to look out for.
There is always a standard of discretion included in a due diligence clause that outlines when the developer can terminate. The most common standards are:
- Absolute discretion – This drafting allows the developer to terminate the contract if it is not satisfied with its due diligence enquiries in its full discretion. This is the broadest right of termination and this standard of discretion is recommended where you are the developer, not the land seller.
- Reasonable discretion – This drafting requires the developer to act reasonably when terminating under the due diligence condition. If the seller was to argue that the termination was not valid, then it would be up to the developer to satisfy a Court that there were reasonable grounds for the termination. This is a more restrictive right of termination and is recommended where you are the land seller, not the developer.
Scope of enquiries
The scope of enquiries deals with the due diligence investigations to be carried out. Is the clause restricted to specific enquiries, such as the ability to remove a pre-war home, or is it broad enough to cover anything to do with the property and your proposed development?
For a developer, we recommend the due diligence clause covers all due diligence inquiries regarding the property and your proposed development of the property. This is the broadest drafting possible and allows you to terminate for reasons such as feasibility, rather than there being an issue with the development site itself.
It can be difficult to carry out a full due diligence without being able to access the property during the due diligence period. If the clause is not properly drafted, then the land owner has no obligation to allow you or your consultants access to the property.
While a broad and general access provision is best for a developer, a good property lawyer acting for the land owner will often try and negotiate in some or all of the following:
- An obligation to give notice before accessing the property, especially where there is a tenant.
- A restriction on the activities that can be carried out, such as no tree clearing or heavy machinery.
- An indemnity in favour of the seller so that the developer is responsible for any damage caused by its consultants accessing the property.
Consequences of failing to give notice
The clause will require the developer to give notice under the due diligence condition by the due date, however what happens if notice is not given? A few different ways this can be dealt with:
- Either party has a right to terminate the contract at any time until the developer gives notice satisfying the condition. This is the most common method and our recommendation for developers.
- The contract is automatically terminated. Developers should be aware that Courts have held that these clauses are generally not effective, and the contract does not automatically end even if it is drafted to say that it does. These clauses are not recommended.
- The due diligence clause is deemed to be satisfied. We strongly recommend against deeming clauses for developers as they can result in the developer accidentally satisfying the condition or more commonly, the developer has to terminate the contract to prevent the clause from being deemed satisfied even though they are trying to negotiate an extension with the seller.
Got more questions?
McAndrew Law is a leading Brisbane Property Development Law Firm. We have extensive experience in drafting due diligence conditions for developers to ensure your rights are protected. Call us on (07) 3266 8555 or get in touch with us online to get started. We offer a FREE initial consultation to discuss your needs.
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