Farm Transactions and Due Diligence
Given that we have seen a number of Agreements for Sale and Purchase coming through the office for May/June 2009 settlement, we thought that due diligence in a property transaction context was a fitting and timely topic.
We are often instructed by our clients to review Agreements for Sale and Purchase and complete a due diligence exercise prior to signing.
What is due diligence?
In a property transaction context, due diligence is the process whereby either a vendor or a purchaser investigates the assets involved in the transaction to establish that there are no unforeseen liabilities or issues.
What is the purpose of due diligence?
The purpose of such exercise is usually to lessen the legal and financial risks arising from a transaction, to verify or establish the value of the asset and to ensure that there are no unforeseen liabilities or issues.
Although due diligence is generally assumed to be the domain of a purchaser, due diligence can be just as relevant for a vendor. Particularly where a vendor is looking to auction or tender a property, a due diligence exercise can be very valuable as a preparatory step to sale. The results of such investigation can form the basis of an information memorandum which the vendor can provide to prospective purchasers. An information memorandum may eliminate the requirement for purchasers to include a due diligence condition in offers.
For the purchaser, a due diligence exercise minimises the exposure to undetected risk, and provides a systematic evaluation of the relevant issues and risks involved in the purchase process and the resultant ownership of the property and associated assets. If a purchaser does not have the time to complete a due diligence exercise prior to signing, a due diligence clause can be inserted in the Agreement to enable the purchaser to investigate any relevant aspect of the transaction within a certain number of days of the Agreement being signed.
What should a due diligence exercise cover?
- A review of the title and all interests (e.g. easements) noted on the title
- Property issues (e.g. a comparison of the titles to an aerial map to ensure there are no titles missing)
- Resource Management Act issues (e.g. a review of the District Plan)
- Compliance (e.g. whether all buildings comply with the Building Act 2004)
- Water (e.g. a review all consents held)
- Supply Contracts (whether the purchaser requires the benefit of these)
- Shares (whether the purchaser requires shares in order to carry on the present business)
- Shared facilities (whether any rights to use neigbouring facilities are required)
- Historic Places Trust (whether there are any sites/buildings which may be protected)
- Lease (e.g. a summary of the key terms of the Lease)
- Warranties (whether the vendor warranties are sufficient for the purpose which the purchaser wishes to use the property)
- Health and safety (whether a health and safety audit is required i.e. where there are structures such a bridges or dams)
- GST (e.g. whether the sale is the sale of a going concern)
- Other issues (e.g. tax issues, sustainable farming instruments, animal health issues)
As set out above, there are numerous issues to consider when buying or selling a farm. Carrying out a due diligence exercise allows a purchaser to make a well-informed decision to purchase, and for a vendor it can smooth the sale process.