Why you need a Due Diligence clause when buying commercial property

The recent earthquakes in Christchurch and Kaikoura have been a good wake up call for buying and selling commercial property.

As Hawke’s Bay is also a region with seismic activity, our commercial lawyers strongly advise you include a due diligence clause into a sales and purchase agreement for commercial property because earthquakes aren’t the only potential risk.

What’s the advantage of a due diligence clause?

If you make your sale and purchase agreement subject to due diligence you are able to cancel the contract if you find an unwelcome problem.

In no particular order, here’s what to look for…

  • First, older buildings may not be up to code for earthquake strengthening, although you should never assume newer buildings are up to code either. Ask a surveyor experienced in earthquake assessment to check the building for issues. It would be prudent to ask the surveyor for information about neighbouring buildings too, as these also present a risk to your property in the event of an earthquake, i.e. damage resulting from collapse.
  • Check the building for sprinklers, smoke detectors, fire alarms, emergency lighting and any other safety features. If the building has any of these features, you’ll need to provide an annual Building Warrant of Fitness. As part of your due diligence, check the latest BWOF to identify actual or potential issues.
  • Check the title for anything that may affect the building or its use. If you need help, our commercial lawyers can explain the implications of easements and other conditions specific to the title.
  • If the building is tenanted, ask for a rent report to see if payments are up to date or if there have been any rent concessions made for tenants, which would indicate an inability to pay.
  • Do a thorough investigation at your local council. First, consult the District Plan to check that current and future uses for the building are allowed. Check for consents if the building has had any alterations or additions. If you’re considering a change of use, find out what extra costs may be involved to satisfy the Building Code. Make sure the building has the required utilities and amenities.
  • Finally, get a building valuation from an experienced commercial valuer and contact your insurer to see if they have any issues with insuring the property. This is a good way to validate your due diligence checks, especially if the building is old.

This is not an exhaustive list, so speak to our commercial lawyers for comprehensive advice about due diligence clauses. We can also provide specific advice about what to look for when inspecting Hawke’s Bay commercial properties.