Contracts for the sale of commercial premises tend to contain a special condition that allows the buyer the opportunity to make enquiries in relation to the property and to conduct searches (known as due diligence). Due diligence special conditions are usually for the benefit of the buyer and to protect their interests.

If a buyer is satisfied with the results of its enquiries, the buyer will advise the seller in writing that the due diligence special condition is satisfied or that the benefit of the due diligence special condition is waived. If the buyer is not satisfied with the results of its enquiries, the buyer will usually have a right of termination under the contract which it can exercise by notice in writing to the seller.

But what happens if the buyer fails to notify the seller by the due diligence date as to whether the condition is satisfied or waived, or if the buyer wishes to terminate? Does the seller have the right to terminate even though the due diligence special condition was inserted for the buyer’s benefit? In an interesting decision recently handed down by the Supreme Court of Queensland in International Palace Pty Ltd v Novaheat Pty Ltd [2016] QSC 75, the court has clarified that a seller does have the right to terminate in these circumstances.

Facts

On 17 June 2015, a contract was entered into between two parties for the sale of vacant industrial land. The contract contained a due diligence special condition which gave the buyer 40 days from the contract date to carry out its due diligence. The parties agreed that the date for the satisfaction of due diligence was 27 July 2015. The contract also required payment of the balance deposit on satisfaction of due diligence.

The buyer failed to notify the seller by 5:00pm on 27 July 2015 that it was satisfied with the results of its due diligence. Just after 5:00pm on 27 July 2015 the seller sent a notice to the buyer terminating the contract claiming a general right of termination in circumstances where there is a failure to comply with a term or condition of the contract. The buyer disputed the seller’s termination and on 29 July 2015 gave notice to the seller that it was satisfied with its due diligence and then paid the balance deposit. The buyer argued that it had a continuing right to waive the benefit of the due diligence special condition.

Decision

The court found that the buyer’s failure to give notice as to the satisfaction or waiver of the due diligence special condition within the required timeframe gave rise to the seller’s right to terminate the contract. The fact that the due diligence special condition was inserted for the buyer’s benefit did not defeat the right of termination which had accrued to the seller once the required timeframe had elapsed. The buyer’s subsequent waiver of the due diligence special condition and payment of the balance deposit did not affect the seller’s right which had been exercised. The court held that the seller did validly terminate the contract.

Key point

The important message to take from this case is that a buyer needs to be fully acquainted with all key contract dates (especially the date for satisfaction of due diligence) and that a failure to give written notice as required under a contract may give a seller the right to terminate.