In commercial property sale transactions the buyer can request that a due diligence clause be included in the agreement of sale, where, should the seller accept to include this clause, both parties will then negotiate its terms and conditions before the sale proceeds further.
This provision, said Jason Gregoriades, Business Development Officer for Rawson Commercial, can be a fair and equitable arrangement, but is usually very much slanted in the purchaser’s favour. He warned that it can be – and quite often is – used as an escape clause, allowing the purchaser who, for one reason or another, no longer wishes to go ahead with the deal, to opt out.
Asked to give examples of how a due diligence clause might be legitimately used, Gregoriades said that a scenario would be that the purchaser wants to confirm all fire equipment is up to date with current legislative requirements or, another example, he adds, would be that the purchaser wants to check the building is properly insured, or that there are no onerous conditions in the title deed.
What advice can Gregoriades give to avoid holdups or agreement cancellations as a result of due diligences clauses?
Every effort, he said, should be made to see that vagueness, ambiguities or a lack of clarity are eradicated from the due diligence clause. It should never be open ended or general in nature, it should stick to the specifics. The involvement of a reputable commercial property division, such as Rawson Commercial, would greatly assist in composing a due diligence clause which is not grossly skewed in one party’s favour.
Of paramount importance, says Gregoriades, is the fact that the due diligence clause must specify the timeframe in which the purchaser must accept or reject the sale, in writing, on the basis of the due diligence clause and its requirements. This timeframe should not be too long, as it is unfair to expect the seller to withdraw the property from the market, while the purchaser takes their time to do the necessary checks and balances.
Summing up, Gregoriades said that due diligence clauses can be beneficial and can result in very satisfactory sales, but it is important at the outset to see that very specific and clear parameters are put in place in such a way that they cannot be got around.
For further information Jason Gregoriades on 021 658 7100.
