Due diligence special conditions: court upholds validity of contract termination

In brief - Court finds that contract validly terminated by buyer after due diligence period

The Supreme Court of Queensland has held in Northbound Property Group Pty Ltd v Carosi and Ors [2013] QSC 159 that a buyer validly terminated a contract despite having failed to notify the seller of the outcome of its due diligence enquiries by the date required under the contract. The court awarded the buyer a refund of the deposit paid.

Contract allows for 100 days to notify satisfaction of due diligence enquiries

The contract under dispute was entered into for the sale of a residential property in Gladstone. It provided that the buyer was allowed 100 days from the date of the contract to conduct its due diligence enquiries.

The contract also provided that the buyer could terminate it by written notice to the seller at any time within the 100 day period if it was not satisfied with its due diligence enquiries. In this case the deposit would be refunded to the buyer.

Further, if the buyer failed to notify the seller of whether or not it was satisfied with its due diligence enquiries within the 100 day period, the contract would automatically be at an end and the deposit would be refunded to the buyer.

Buyer asks that contract be conditional on development approval being issued

Prior to expiry of the due diligence period, the buyer’s solicitor advised the seller’s solicitor that the buyer was satisfied with the "technical" side of its due diligence enquires. However, the sellers were also advised that the buyer’s financier was not prepared to proceed without an appropriate development approval being issued by the local authority.

The buyer requested the contract be varied so as to be conditional upon an appropriate development approval being issued by the local authority. No agreement was reached to vary the terms of the contract.

Buyer sends letter terminating contract after 5pm on final due diligence day

On the final day of the due diligence period, the buyer’s solicitor advised the seller’s solicitor that unless agreement could be reached to vary the contract, the buyer intended to terminate the contract. A letter confirming the buyer’s termination of the contract was sent after 5pm on the final day of the due diligence period.

The seller’s solicitor argued that the buyer had not validly terminated the contract.

Supreme Court holds that due diligence condition was not satisfied

The questions considered by the court were whether the buyer had notified the seller that it was satisfied with its due diligence enquiries and, if not, whether the buyer was entitled to terminate the contract after 5pm on the due diligence date.

In its decision, the court held that the buyer raising the issue of its financier requiring a development approval in order to proceed with the contract, did not amount to confirmation of satisfaction of the due diligence condition.

The court held further that both parties retained the right to terminate the contract at any time after 5pm on the due diligence date, with the deposit to be refunded to the buyer, if the due diligence condition was not satisfied.

The buyer was held to have validly terminated the contract and the deposit was awarded to the buyer with costs.

Need for clear communication regarding special conditions in contracts

The case highlights the importance of parties understanding the operation and scope of special conditions in contracts, including being mindful of the implications of failing to give or receive valid notice by the due dates.