Background
Buyers are generally required to use reasonable efforts to satisfy any condition in a sale and purchase agreement which is included for the benefit of the buyer.
Some buyers include a ‘due diligence’ condition in an agreement in the belief that this will give them a right to cancel the agreement for any reason whatsoever.
This raises the question as to whether the general obligation of the buyer to use reasonable efforts to satisfy a condition applies to a due diligence condition.
A recent High Court case basically says that this depends on the wording of the due diligence condition.
Facts
The case dealt with a buyer who cancelled an agreement and asked for the return of the deposit. The vendors refused, saying the buyers had not acted in good faith in exercising the right to cancel the agreement for non-satisfaction of the due diligence condition. This was because the main reason for cancellation was that the buyers did not like the colour of the floors and blinds.
Decision
The Court decided that a condition can be worded so as to make the satisfaction of the condition entirely a matter for the subjective decision of the buyer.
In this case, the condition contained phases such as
‘…the purchaser being satisfied…’
‘…such aspects of the property that the purchaser deems relevant…’
‘…in the event that the purchaser is not satisfied with any aspect…’
‘…the purchaser shall not be required to give reasons…’
‘This condition is inserted for the sole benefit of the purchaser’
The Court said that the buyer’s obligation to act in good faith would depend on the wording of the particular condition in each case. If the condition allows for a subjective decision without any obligation to disclose reasons, it is difficult to see how it can restrict the matters that a buyer can take into account. The use of the phrases above showed that the intention was to allow the buyers to make a subjective decision. The Court said that the very reason for a due diligence investigation is to confirm that the property has the value which was being ascribed to it, and the likelihood of it retaining that value.
In this case, the Court said that the colour of the floor covering and blinds was a legitimate concern to be taken into account by the buyers. The buyers were also concerned that the other units in the development had not sold, and they were also concerned with the financial position of the vendor.
The Court confirmed that if there is no express requirement in the clause for the buyer to act in good faith, there is no reason to imply that requirement into an agreement for sale and purchase of land.
Summary
If a buyer wants an absolute right to withdraw from an agreement for any reason, then the wording of the due diligence condition must make clear that it is their subjective decision and that they do not have to give reasons. On the other hand, if the vendor wants the buyer to act in ‘good faith’ in deciding whether to satisfy the due diligence condition, the clause must specifically say so.
Disclaimer: This information is correct at time of publication, designed as a general guide and should not replace specific legal advice on a particular issue.
