Due Diligence - Check the primary documents 08 Aug 2017

Why is due diligence important?

Due diligence is an important aspect of buying or selling a property, both for the purchaser and the vendor. Decisions are made based on disclosures made in due diligence, therefore it’s important for both parties that the documents or information relied on are accurate and correct. Failing to undertake due diligence can have a potentially disastrous consequences, as a 2012 case shows.

In this particular case water rights were the issue. Altimarloch Joint Venture Limited contracted to buy 145.5 hectares of rural land, part of which they intended to plant in grapevines. Under the contract the water rights held by the vendors would be transferred to the purchaser. Those water rights were represented to allow 1,500m3 of water per day to be taken from a stream for irrigation purposes. The reality was that the property held resource consents to take only 750m3 a day from the stream.

The error came from a LIM Report issued by Marlborough District Council that was relied on by the vendor’s real estate agents when they were marketing the property for sale and also by vendor’s lawyers when preparing the agreement for sale and purchase. The vendors themselves were aware of the correct water-take figure but didn’t spot the error when signing the contract, relying as they were on their professional advisors.

If the vendor’s agent or lawyer had checked with the vendor themselves as to what consents they had or had obtained a copy of the resource consent from the District Council, which is easy enough to do, the error would have almost certainly been picked up.

Always check primary sources

The lesson learnt is not to rely on secondary sources, particularly when making specific contractual warranties about matters. Instead, do check the actual source documents that give the rights or govern the obligations.

In this instance the purchaser successfully claimed damages of $1,055,907.16 as a result of this misrepresentation, even though the difference in value of the land with the represented amount of water rights as opposed to the water rights it actually had was only $125,000.

The reason for this is that the court assessed the damages as the amount it would take the purchaser to put themselves in the position as if they did get what they contracted to purchase. The reason the damages were so high was because no further water rights were available from the stream; in order for the purchaser to obtain the increased water-take they had to construct a dam to store the sufficient water to take up the shortfall.

By using primary source documents mistakes like this can be avoided. Where agreements, easements or resource consents are referred to in other documents such as valuations, LIM Reports (as in this case) or property information packs compiled by real estate agents, it’s encumbent on both the purchaser and the vendor to check the source documents of the information.

In this case, because there was a specific contractual provision about the volume of water rights being transferred, the vendor (or in reality their professional advisors) were found liable to pay very significant damages when the correct information was readily available and could have been checked very easily.

Always thoroughly check documentation

The same applies to easements, leases, crops supply agreements or other sorts of resource consents. None of these documents should be viewed as ‘standard’ and the original documents should be read by a vendor to ensure that what they are representing is what is actually in the document. A purchaser must also check documentation to ensure that what they are contracting to buy is what can actually be acquired.

Used by permission, copyright of NZ Law Limited, 2017

Every situation is unique so please discuss your situation with a professional advisor who can provide tailored solutions to you. Please contact Paul Owens at Parry Field Lawyers paulowens@parryfield.com 03 348 8480