Common issues in Commercial Property Transactions

Property

Typically most transactions go smoothly as both parties have a mutual goal of the sale and purchase of the property and work together to get it achieved. Often, however, issues arise during the transaction that neither party expected.

This article is the first of a series that examines various case studies of problems that often arise, how they can be avoided and what, if anything, could be done to avoid these pitfalls. For a start we will look at confirmation and due diligence.

Scenario 1 – Matt is buying a commercial property from Trevor.  The agreement is conditional upon a due diligence investigation by Matt.  Matt wants information from Trevor prior to confirming the agreement, but despite his requests Trevor will not provide Matt with the information required.  Trevor does not provide the relevant information despite Matt’s requests.  The confirmation date passes and Trevor cancels the agreement.  What can Matt do?

Here Trevor has presumably had a change of heart and has little interest in the transaction anymore.  It puts Matt in a tough spot.  He wants information from Trevor, but Trevor has no interest in providing it.  Whether Matt can obtain the information and complete the transaction is dependent on the wording of the due diligence condition.  If Matt and his solicitor inserted wording that required Trevor to provide any relevant information to Matt then he can argue that Trevor has breached the agreement and is not in a position to cancel it.  Put simply, Trevor has not fulfilled his end of the bargain and cannot take advantage of his breach.  If Matt and his solicitor did not include wording requiring Trevor to provide the information then unless Trevor gave assurances to Matt that he would provide the information, Matt will find himself in a difficult positon.  Point to take away, if you think you will need information from the Vendor include a clause that requires the Vendor to provide it to you.

Scenario 2 – Matt is buying a commercial property from Trevor.  It is conditional upon Matt’s due diligence.  He gives himself 10 days to complete a due diligence investigation of the property.  9 days into his investigation he realises that he needs more time to finish his investigations.  He doubts Trevor will grant it.  What can he do? 

Matt has three options.  He can confirm on the basis of his not yet finalised due diligence investigation, he can ask Trevor for an extension of the due diligence timeframe or he can continue on with his investigation not ask for an extension and hope that Trevor does not cancel.  None of these options are overly satisfactory for Matt.  If he takes the first option there is risk that had he continued his investigation he might have unearthed information that would affect his final decision.  Without that information he may enter into a deal that does not stack up. If he takes second option it is solely up to Trevor as to whether the extension is agreed to.  If Trevor does not agree he can cancel and walk away.  Matt would have to look elsewhere.  If Matt takes the third option he runs the risk of Trevor cancelling at any time after the confirmation date passes.  Again, not a satisfactory position to be in.  Point to take away, always give yourself as much time for the due diligence investigation as you believe you will need. 

Scenario 3 – Matt is buying a commercial property from Trevor.  He enters into it quickly as time is of the essence and makes it conditional upon his solicitors’ review of the agreement and the title.  After entering into the transaction he has a change of heart and decides that he does not want to confirm the contract and his instructs his solicitor to cancel the contract.  Trevor wants the deal to go ahead and sues Matt on the basis that he should have confirmed the agreement.  Can Matt cancel?

The starting point is that a person who has the benefit of a condition in an agreement must do all things reasonably necessary to fulfil the conditions.  Simply cancelling the agreement and not having a solicitor review the agreement is not doing all things reasonably necessary to fulfil the conditions.  Whether or not after the review of the agreement and title by Matt’s solicitor he is able to cancel will be dependent on what is in the agreement and what instruments are on the title.  Each case will turn on its own circumstances, but if the agreement is pro forma and the title is fine then there is a good chance Matt will be required to complete the purchase.  Point to take away, you are limited to the subject matter of your conditions.  If you want to undertake a full investigation of the property then include a wide condition that enables you to do this.

Careful consideration of your due diligence requirements and appropriate drafting to reflect your requirements can pay dividends during the confirmation process.  Please do not hesitate to contact a member of our expert property team to discuss your requirements

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