Don't Get Stuck With a Lemon: How a Due Diligence Clause Can Save You Thousands When Buying a Home in New Zealand

This information is split into two parts: Conclusion and FAQs. Scroll down to find out more.

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Click here to access HouseMe Legal’s 10 Working Day Due Diligence Clause.

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Tell Me What I Need to Know About HouseMe Legal’s Recommended Due Diligence Clause

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What is a due diligence condition?

The "due diligence condition” is a special condition that gets inserted into the further terms of the ADLS Agreement. Doing your due diligence means using the care that a reasonable person takes to avoid harm. Once you have completed your due diligence, you can either declare the agreement unconditional or cancel the agreement. This is a bit like doing a wine tasting before you buy a bottle of wine. If you want to make an unconditional offer, you need to do your due diligence on a property before making an offer.

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Why is it important?

The purpose of this condition is to protect the purchaser by purchasing the property conditional upon the purchaser being able to complete a due diligence investigation (DD phase). This means you can agree on the price first, and then do your research second. Let’s say, during your DD phase you discover any of the following:

1. there is a large shopping mall going in next to your property.

2. a new motorway is going in nearby.

3. the neighbours are problematic.

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Normally, you would not be able to cancel the agreement under a specific and narrow condition such as the finance condition, building report, etc. Because this is a subjective test (the other conditions are objective), this means it is the purchaser’s decision whether to fulfill the condition or to cancel the agreement.

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How does the condition work? What happens?

This is how the due diligence condition works:

1. Understand how the make-an-offer process works.

2. Submit your offer conditional on due diligence.

3. Receive a countersigned agreement from the Seller.

4. Start your due diligence and work with your lawyer and other experts to tick off any investigations you need to make.

5. After completing your investigation, decide whether you will satisfy your due diligence condition or cancel the agreement.

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What else do I need to know?

Please note, that you may be able to request the following from the Seller (but they are not bound to agree to your requests):

1. An extension to your due diligence timeframe.

2. A reduction in the price to reflect any issues you discover with the property.

3. To fix something before the settlement date e.g. broken washing machine, gate, etc.

Remember, you are buying a second-hand good (unless it is a new-build property) so you need to be reasonable about your expectations of the property’s condition.

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How is the due diligence condition different from the building report condition, LIM report condition, and finance condition?

Click here to review our table of examples.

Click here to see our flow chart explaining the differences between these conditions.

How can I make my offer conditional on due diligence? Can you provide me with an email to send the real estate agent?

We sure can! Click here to see how to do this.

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Final warnings

Be aware that New Zealand is a small market. Of course, you are allowed to “low-ball” people with your first offer subject to due diligence, but be aware at some point you need to be willing to be realistic and negotiate with the Seller.

Make sure that when you submit your offer subject to due diligence, you should advise the agent you do not require any of the general conditions on page one of the agreement. This prevents any confusion between the overlapping conditions.

Watch out, the agent will try to change your mind and coerce you into submitting an unconditional offer but remember, the agent acts for the Seller and not for you.

Sure, an offer that is subject to only a finance condition may be more appealing to the Seller however, cash is king and if you have the highest price with a wider due diligence condition, most Sellers will still pick this offer.

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Remember, if you don’t add in the due diligence clause and submit an offer, then you:

1. need to do all your due diligence in advance (even if you do this, the Seller may not even accept your offer and this may be a costly exercise); and

2. won’t be protected (can’t cancel the agreement) if you find out something is wrong with the property after you sign the agreement; and

3. need to pay for your legal costs, building reports, LIM reports, etc in advance of making your signed offer.

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Can I bid at auction subject to my offer being conditional on due diligence?

No, you cannot do this.

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Can I submit a tender subject to a due diligence investigation?

Yes, you can. Your tender can be conditional on any condition you submit with it.

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I am trying to buy a once-in-a-lifetime property that is being sold by tender. How do I make my offer as appealing as possible?

1. Complete all your due diligence in advance. This will cost you extra money in the short term but it may give you an edge when the tenders are opened.

2. Make your offer unconditional.

3. Offer a larger deposit.

4. Find out what the Seller’s ideal settlement date is and submit that date with your offer.

5. Submit your most competitive purchase price with your offer.

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I am a first home buyer who knows nothing about the property. I am cost conscious and need some help making the right offer for me. What should I do?

1. Re-read this blog post.

2. Make sure your offer is subject to due diligence as opposed to a narrow condition.

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