What should my lawyer do during due diligence on a property? + due diligence clause example

A lawyer is the first port of call during the due diligence process. Earlier than even a mortgage broker. The role of a lawyer is an important one - and one of the most expensive.

In this article you’ll learn exactly what you need to know about the services a solicitor should provide during the due diligence process.

Do you have a question or comment about this article? Feel free to leave your thoughts in the comment section at the end of the page.

Due diligence clause example

Just before we get into what a solicitor does during Due Diligence, you probably want to know what a due diligence clause looks like.

Often, a due diligence clause is included in the "Further Terms of Sale" in the sale and purchase agreement when purchasing a property.

This clause allows you to get a property under contract – at a price you are willing to pay – so you can then decide whether it is the right property for you.

The exact wording used in the clause will change based on who wrote the contract. But, generally, it will read something like this:

• 33.2 This Agreement is conditional upon the Purchaser undertaking and being entirely satisfied in its absolute discretion, with the outcome of a "due and diligent" investigation of all aspects and all areas of enquiry in relation to the property, which the Purchaser deems appropriate, including (but not limited to) investigation and satisfaction of the following:
  • (a) the Record/s of Title and any Encumbrances; 

  • (b) the overall financial suitability and commercial viability of the Purchaser's proposed investment; 

  • (c) any outstanding requirements or requisitions; 

  • (d) any zoning, statutory requirements and any consents; and 

  • (e) any tenancies or lease arrangements. 


• 33.3 The Purchaser may cancel this Agreement without having to provide any reason. The Agreement shall then be void and neither party shall have any claim against the other. 

• 33.4. The parties acknowledge that the conditions contained in Clauses 33.1-33.3 and 36.1 are inserted for the sole benefit of the Purchaser and the date for satisfaction of those conditions shall be fifteen (15) working days from the date of this Agreement.

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Which lawyer should I choose and what can I expect them to do?

Prospective buyers can choose any lawyer they want to work with. Most don’t even require a face-to-face meeting, so they can be from anywhere in the country.

Solicitor Jenny Turner, a partner at Wynn Williams, says a lawyer’s role is to guide investors through the entire due diligence process. This starts from the date the contract is signed until the purchase is finally settled.

This includes reviewing the contract, LIM (Land Information Memorandum), and the title of the property.

Usually, your lawyer will start by reviewing and negotiating the Sale and Purchase Agreement (the contract), then move on to reviewing the LIM and Title. But only once the contract is acceptable.

For instance, here is an excerpt from a LIM report. Your lawyer will review this to make sure it’s acceptable.

The example below shows a resource consent application that enabled the construction of an apartment building. Your lawyer will check this 60+ page document looking for risks like the potential for flooding and amendments to the property that haven't had the right consent.

Contracts are littered with jargon and fine-detail fodder.

But because lawyers deal with this kind of speak day-in and day-out they can distil it into the key points needed for you, the investor, to make an informed decision.

In other words, don’t stress too much about trying to understand everything in the contract before talking to your solicitor. They will explain it to you … and will ensure sure you are comfortable with it.

When it comes to choosing a lawyer, be wary of going overly cheap. And it’s absolutely essential to find one who has experience with turnkey contracts if it’s a new-build.

If you are looking for information on good property lawyers out there, Opes Partners reviewed its top 5 property lawyers here.

What clauses do I need to look for before signing a contract?

If you are going to sign a contract before talking to your lawyers, at a bare minimum there are 4 clauses you should look for before you sign:

• Due Diligence – the right to not buy the property if you decide it’s not right for you after doing your research within the 10-day period.
• Right to Cancel – the same as a Due Diligence clause, but explained in plain English and included for the absence of doubt.
• Finance – the right to not proceed with the contract if the bank won’t lend you the money for the property.
• Solicitor Approval – the right to cancel the contract if your lawyer is unhappy with the LIM and title.

Here is an example of some of the further terms of sale that were included in one of our investor’s contracts here at Opes Partners.

These right-to-cancel clauses are important because if you sign a contract to buy a house before talking to your lawyer, you need to make sure there is a way out.

For any standard agreement, the right to cancel clause should, literally, be in bold.

How much will a lawyer cost?

A lawyer’s bill will be about $2,500 to $3,500 for services provided during the due diligence process.

The difference in cost comes down to how complex each case is. The level of work varies from person to person, investment to investment.

For instance, if you call your lawyer every day asking questions throughout the 10-day due diligence period, you’re naturally going to get a higher bill at the end.

But not every investor will use their lawyer to this extent. Here's an example of an investor who didn't spend a lot of time talking with their lawyer.

Payment of lawyer services often happens at settlement, once the property is complete.

Many investors will receive a cashback from their bank when they take out a mortgage, and some will use this to pay the lawyer’s fees.

It is important to note, if you decide not to purchase the property you have under contract, you may still have to pay your lawyer for supplying you with services up to this point, such as reviewing your contract, LIM and Title.

Some, but not all, lawyers will consider offering a discount to recognise the situation. This is a conversation to have before setting out.

Why not head for the cheapest firm?

Any lawyer can transfer the property into your name.

The difference between a quality lawyer and one who is more run-of-the-mill is all about the care taken in reviewing the specific construction-based clauses in the contract.

A lawyer should be reviewing and checking for irregularities in your LIM, the title of the property and any body corporate or residents’ association rules and minutes.

These are the sorts of checks and protections that may not be included by the cheapest firm, or with a lawyer who doesn’t have experience with construction or turnkey contracts.

A small warning: you definitely want a lawyer who is going to protect you, but you also don’t want a lawyer who is too cautious who may lose you the deal.

What are turnkey contracts and why do I want a lawyer who specialises in them?

Turnkey clauses come into play when investors buy houses or a property that has not yet been built.

Investors buying off the plans will be best served by working with a solicitor who specialises and has experience working with construction contracts.

Why? Because there are clauses in construction contracts you won’t see when buying an existing property.

For instance, under-construction properties do not have their own title, and buyers can’t “walk through” a blueprint. The terms of the contract will just say: “This is what it will look like”.

Even seemingly “black and white” contracts can often give the developer a lot of flexibility in the fine print. Some flexibility is necessary, but there might be some clauses you are uncomfortable with.

For example, a developer who is building for over 12 months may not be able to get the exact black corrugated iron stated in the initial specifications. Instead, the builder will need the flexibility to get grey.

It is important the clauses in the contract do allow for some flexibility, but you don't want the high-quality materials listed in the original spec exchanged for lesser quality.

An example of something an investor might not be comfortable with is if you think you’re buying high-quality Fisher and Paykel appliances, only to find the developer has replaced them with a cheaper, more budget brand.

A lawyer will go through these clauses and make sure there are appropriate protections.

If you aren’t comfortable with some of what the contract allows, there are instances where a lawyer can argue the contract is too in favour of the vendor (the person selling the property) and request a variation.

However, the likelihood of your variation being accepted by the developer’s lawyer comes down to the current state of the market, and demand for the build.

If you’re asking too much, the developer may decide it’s easier to sell the property to someone else.

It never hurts to ask, but you also don’t want to lose the good deal in front of you.

Should I buy a property in a trust, company or in my own name?

The best way to own your property, whether it be in a trust, a company, or in your own name, will be discussed with your lawyer in conjunction with your property accountant.

The ultimate decision on structuring property ownership is highly personal depending on what else you have going on.

For instance, if you are the director of a business, facing higher personal risk through your liability, then you may decide it’s best to hold your properties in a trust.

Similarly, if you have a partner and would like to structure ownership so it is not subject to relationship property, then your lawyer may decide it’s best to hold it in a company or a trust.

But using these different entities (ways of owning property) also comes with higher costs.

So if your personal situation is more normal, meaning you work a job and earn salary or wages, then it may be better to simply buy the property in your own name.

This simple structure is the cheapest way of owning property and it happens more often than not.

Again, you’ll decide what’s right for you based on talking to your lawyer and property accountant, and the IRD’s rules and policies at the time you make your purchase.

Every case is different, and in some instances the ownership might not have the best ‘legal structure’, but it might save you significant amounts of tax.

Looking for more information about due diligence?

If you're looking to learn more about due diligence, check out these articles about: how to work with an insurance broker during due diligence, how to work with an accountant during due diligence, how to get finance during due diligence, what to do on a site visit, and everything you need to know about signing a sales and purchase agreement in NZ.

Write your questions or thoughts in the comments section below.