To ensure that the purchase of land or a home goes smoothly, due diligence is a very important step. Due diligence allows buyers to understand the risks associated with purchasing a property and is an essential risk-management tool in property investment. For example, as mentioned in the previous article regarding unauthorised building works, if you buy a property with unauthorised structures, you may face serious losses later. However, if you conduct thorough due diligence before purchasing, you can identify the risks in advance and then decide whether to proceed with the purchase. (For the article on unauthorised building works, see Settlement Went Smoothly? Your Newly Purchased Property May Still Carry Risks)

What Is Due Diligence

Due diligence refers to investigating the physical and financial condition of a property, as well as the area in which it is located. The scope of the investigation may include reviewing local, state, or federal government records, and examining the physical and financial condition of the property and its surrounding area. It may also involve: reviewing property value trends, conducting building and pest inspections, checking for notices on the property, and so on. Due diligence is a very important part of the purchasing process. If the buyer still decides to proceed with the purchase after completing due diligence, it means the buyer has been made aware of the relevant risks and considers those risks to be acceptable.

What It Involves

Due diligence generally covers the following key areas:

1. Reviewing the Contract of Sale

Due diligence typically includes having a conveyancer or solicitor review the contract of sale. The contract of sale sets out the terms and conditions of the property sale and directly affects the buyer’s interests, so having a professional review the contract and provide expert advice is critical.

2. Conducting a Title Search

Conducting a title search is a very important part of due diligence. A title search can tell you the following:

The owner of the property. A title search will always reveal who the current owner of the property is. This may be one person, multiple people, or even a company. When multiple parties own a property, the title search will also provide information on how they hold the property — for example, as joint tenants or tenants in common. When buying a property, it is important to check the title search so that you know whether the person selling the property has the right to do so.

The mortgage on the property. A title search will show whether the property is subject to a mortgage. If the property has a mortgage, the title search will reveal who holds it. This is important because when you sell or buy a property, the mortgage needs to be paid out.

Easements. An easement on the title means that another party or parties have the right to cross or otherwise use part of the land. A common example of an easement is a right of way — for example, where A uses part of B’s land as a driveway. It is important for buyers to be aware of easements, because the buyer is obliged to comply with the terms of any easement.

Checking restrictive covenants and other covenants. A restrictive covenant is an agreement that restricts the use or enjoyment of a landowner’s land (the "burdened land") for the benefit of other land (the "benefited land") — usually a neighbour’s land — or for the benefit of a public authority. Restrictive covenants are binding not only on the current landowner, but also on subsequent owners of the land. Examples of restrictive covenants include prohibitions on building apartments or sheds, height restrictions on buildings, and prohibitions on the use of certain building materials.

Caveats. A caveat is a warning to potential purchasers that there may be unresolved issues with the property or amounts owed to the caveator. For example, if family law proceedings relating to the property have not yet concluded, the owner will not be able to sell the property. Due diligence will bring such information to the buyer’s attention.

And so on.

3. Assisting with Review of the Building Report

To assess the physical condition of the property, a third party can be engaged to inspect the property and provide a building report. A solicitor can assist in reviewing the building report issued by the third party to inform the client of the property’s physical condition, including but not limited to the following aspects:

Inspection of structural items such as the roof and foundations

Electrical, plumbing, and HVAC systems

Condition of the rooms

External areas, including driveways, pathways, and drainage systems

Inspection for timber-destroying organisms, such as termites and other pests, and for timber rot caused by water damage.

Final Thoughts

In this article, we have explained the importance of conducting due diligence before purchasing a property. Undertaking due diligence before a property purchase can help you avoid pitfalls and minimise investment risk. If you have any related questions or need a solicitor to assist with due diligence, please contact us — our solicitors will be pleased to provide you with professional legal services.