In a typical significant institutional property sale as part of the process the seller:
(a) financial records relating to outgoings and tenancies (including incentives and arrears);
(b) all tenancy documents (including incentive deeds and disclosure statements);
(c) all service and maintenance contracts which are to be novated;
(d) land identification surveys;
(e) structural, electrical and mechanical reports;
(f) contamination reports;
(g) geotechnical reports (if applicable);
When a clear price leader emerges in the sale process, despite whatever has been disclosed in the data room, it is common for the preferred buyer to negotiate for the seller to give extensive warranties.
These warranties not only relate to the completeness of materials disclosed in the data room but extend to specific warranties regarding matters from title through to planning issues and environmental issues. In order to get the deal done, sellers tend to accommodate the buyer to some extent when the buyer requests warranties. However a seller needs to focus on the process by which it does this. For example a seller that is a responsible entity under a managed investment scheme will wish to demonstrate that is has met its obligations under Section 601 FC of the Corporations Act.
In addition if there is a possibility that following completion of the sale the seller entity will be wound up or stripped of its assets, the buyer will seek that a material part of the price be quarantined as a retention amount to be held to secure any warranty claims successfully made during the warranty period.
From a risk management perspective, the seller is well advised to have a planned strategy in place regarding identification of risk issues which might emerge during the sale process so that:
Ideally when bringing a property to market, a seller should carry out a targeted due diligence on the property.
The focus should be on identifying and dealing with each of the issues that a well-advised buyer would raise.
To this end our clients have found it helpful for Corrs to take a direct role in reviewing seller due diligence materials, preparing questionnaires for managers and, if appropriate, interviewing managers with a view to:
This strategy, if efficiently handled, is a very cost effective part of the sales process.
In short the costs of carrying out vendor due diligence are outweighed by the benefits.
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.