How to avoid a million dollar mistake...

January 23 2017

If you’re buying or selling property, it pays for both parties to check the information in the documents supporting due diligence is accurate. As a recent case proves, failure to check the due diligence documentation came with a million dollar price tag.

Buying or selling decisions are made based on disclosures made in due diligence. It’s important for both parties to ensure the information, or due diligence documents are up-to-date and accurate. Here’s what happened when due diligence wasn’t undertaken.

This 2012 case[1] concerns water rights. 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 vendor’s real estate agents relied on a LIM Report issued by Marlborough District Council that misreported the correct water-take figure. This was also missed by the vendor’s lawyers when preparing the agreement for sale and purchase. The vendors were aware of the correct figure but didn’t spot the error when signing the contract. They relied on their professional advisors to get the information right.

If the vendor’s agent or lawyer had checked the very important details regarding the consent with the vendor, or had obtained a copy of the resource consent from the District Council, which is easy to do, the error would have almost certainly been spotted before it was too late.

The price of not checking primary sources

Never rely on secondary sources, particularly when making specific contractual warranties about matters. Always check the actual source documents describing the rights or governing obligations.

As a result of misrepresentation, the purchaser successfully claimed damages of $1,055,907.16, even though the difference in land value with the incorrectly represented water rights was only $125,000.

The court assessed the damages considering the amount it would take the purchaser to put themselves in the position to get what they had 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 sufficient water to take up the shortfall.

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

In this case, there was a specific contractual provision about water rights, so the vendors were found liable for very significant damages because the correct information was readily available and easy to check.

The moral of the story...

Always thoroughly check documentation. Always. No exceptions. This includes easements, leases, crops supply agreements or other resource consents. No document should ever be considered as ‘standard’ and originals should be sourced and read by a vendor to ensure accurate representation in new documents. A purchaser must also check documentation to ensure that what they are contracting to buy is what can actually be acquired.

If the fine print makes you go cross-eyed, then our legal champions are here to make sure you’re not taking a big risk before you sign.

[1]    Marlborough District Council v Altimarloch Joint Venture Limited and Ors [2012] NZSC11


Related Articles

On-farm emissions reduction

Action Plan for Healthy Waterways