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Due Diligence - buying off the plans

18 October 2016

Buying off the plans?

With the current state of the property market it is becoming more common for buildings to be designed for a specific commercial purpose. This sometimes attracts the attention of buyers looking for a commercial investment, or to fill certain needs of commercial tenants. However, relying only on building plans when entering into an agreement for sale and purchase, or tenancy, comes with significant risk and the need for due diligence. Due diligence includes an in-depth review of the plans and specifications, the land being built on, the procedure for variations to the plans and specifications, the timeframe for completion, and other rights and obligations of each of the parties to the agreement.

Plans and Specifications

These should provide a very detailed outline of each feature of the proposed final product. They should specify everything from what it will look like (internally and externally) to the exact measurements and materials. A potential purchaser should have the plans reviewed by an expert, such as a builder or an engineer, to assess the structural integrity of the proposed building and to identify any areas of concern. Expert advice should also be taken on the quality of building and furnishing materials intended to be used. If an issue is found then a change may be proposed before building has started.

Procedure for Variations

It is common for problems to arise during the building process which can result in a change to the original plans. These may be due to unforeseen problems with the land, limited availability of resources, requirements of the local authority, or a range of other matters that can crop up during the building process. The authority of both parties to vary the plans should be established at the outset of the dealing.

Interest to the Property Being Built on

It is essential to check for any third party interests in the property registered against the title to the land. These might include any leases, easements, or covenants that the land may be subject to. The presence of any one or more of these may restrict the design of any building or limit access to certain parts of the land. A title search of the land should show if any such interests are present. It is essential that the purchaser is aware of these and understands how they will affect their future use of the land and the proposed building.

Timeframe for Completion

The accuracy of the estimated completion date is vital for further planning and works. Once the building shell is complete other tradespeople might be engaged to complete works, including any fit-out specific to the building’s operational use. Delays can push back the date the building can be opened for business or occupied by a tenant. Although delays are often unexpected and unavoidable, the proposed completion date should allow time for the unexpected while providing an estimated completion date which is as accurate as possible. The completion date should be reasonable for the magnitude of the project, and should allow enough time spare for a complication or issue to occur without it resulting in a massive set back. Expert advice should be taken to ensure the estimated time for completion is realistic and achievable.

Final points

Maintaining good communication between parties is vital in these types of dealings. This is essential when an issue arises, so the parties can work together to come to a decision quickly and prevent unnecessary delay or expense. The agreement entered into by the parties should share the associated risks fairly, and should be comprehensive so as to cover procedures for things such as late payment and unforeseen delays.

Due diligence is an essential tool for ensuring that parties are aware of what they are getting before they are locked into paying for it. It goes without saying that it is a lot easier to establish something from the outset of a dealing than to spend unnecessary time and money to remedy it after completion.

 

Phil Hyde is an Associate in the Commercial Corporate Team at Norris Ward McKinnon.  Email Phil at: phil.hyde@nwm.co.nz

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Jess Collett is a Law Clerk in the Commercial Corporate Team at Norris Ward McKinnon. Email Jess at: jess.collett@nwm.co.nz

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