Due diligence is vital
When buying any business, assets or property it’s important to undertake a due diligence investigation into what you are looking to buy. If you’re buying rural property, it comes with its own unique set of issues for which you need to take particular care.
The due diligence process is to inform the purchaser fully about a property to ensure that once purchased, there are no surprises. Due diligence can be carried out before entering into a contract or subsequent to entering into a contract by ensuring there’s a due diligence condition in the contract.
Where property is being purchased by auction or tender, there’s obviously no option to buy conditionally on a due diligence investigation. As a prospective purchaser, to carry out a due diligence in this scenario means you’ll be put to some time and expense, which could prove fruitless if your bid is not successful at the auction or tender.
Extent of due diligence
The extent of a due diligence investigation will vary depending on what’s being purchased. The due diligence requirements for a sheep and beef farm will be different from a kiwifruit orchard or a dairy farm or a vineyard.
You could have been provided with an Information Memorandum by the vendor or the vendor’s agent. Whilst this is a useful document it usually carries a disclaimer along the following lines:
"The agent is acting solely as the selling agent for the vendor of the property, and is not responsible for the accuracy and completeness of the information contained in this document. The agent has not verified the information and, accordingly, will not be liable to any party for the accuracy or completeness of such information."
The standard form of Agreement for Sale and Purchase of Real Estate contains very limited warranties by the vendor. Any valuation or other report provided by the vendor for the purchaser’s information will usually have a disclaimer saying that the report is provided to the vendor only, and any liability to a third party is excluded. Therefore it’s up to the purchaser to make their own investigations, either pre-contract or post-contract as per a condition in the Agreement, into the matters that are important to them when assessing the value and purchasing the property.
If you’re considering buying a rural property, some of the due diligence investigations you should be looking at are:
- The terms of any easements affecting the property or whether rights of access to water, power, etc are properly secured by permanent registered easements
- Any necessary resource consents that might be required, the terms of those consents and any history of breaches of those consents
- Fertiliser application
- Spray diaries
- Any requirements that might be necessary for exporting produce from the farm whether it is milk, meat or crops
- If stock is being purchased, you’ll need to see veterinary records, vaccinations, etc
- If staff are being employed, you’ll need to check the employment contracts, health and safety, and the ACC history
- Any resource consents granted for neighbouring properties that might affect the property
- Any covenants such as Queen Elizabeth II covenants or land covenants that may restrict the use of the property or parts of it
- Any development expenditure or other information useful for tax purposes
- For farms with planted forests, whether or not the vendor is in the Emissions Trading Scheme
- Any Building Act issues
- Contamination issues arising from historic uses, and
- Contractual arrangements such as supply contracts, plant variety right issues, Fonterra or Zespri contracts or requirements.
You will be able to collate and assess some of the due diligence material yourself. Some of this, however, may need professional advice from us, your accountant and so on. Good due diligence is a team job and the benefit is you will be able to accurately assess a prospective property to ensure that as a purchaser you get what you pay for.