Deeming Conditions – why they’re best avoided!
If you have ever purchased anything by contract, be it your home, an investment property or a business, you will probably be familiar with due diligence conditions (“DD Conditions”).
In basic terms, a DD Condition gives a buyer a certain amount of time (usually a period of say 14 days after the contract is formed) to carry out satisfactory searches in respect of the property before they are legally bound to proceed with the purchase. If the search results are satisfactory, the buyer notifies the seller in writing before the end of the 14 day period that the DD Condition is satisfied. Contract unconditional, settlement here we come! Conversely, if the search results are unsatisfactory, the buyer can terminate the contract by notice in writing to the seller before the end of the 14 day period. Contract at an end, deposit refunded, see you later!
Problems can arise however when the Buyer neither satisfies or terminates by the end of the 14 day period. This is where the wording of the DD Condition is critical.
If the condition has been prepared as a deeming condition, the condition will be deemed to have been satisfied at 5pm on the 14th day of the due diligence period if the Buyer has not either satisfied or terminated by notice in writing to the Seller. From a Buyer’s perspective this can have some extremely unpleasant consequences – particularly if the Buyer’s failure to give the notice is inadvertent and there is something seriously wrong with the property. Worst case scenario, the buyer can be forced to buy a seriously defective property just because they inadvertently missed the deadline on the DD condition. Not a great outcome.
This disaster can be easily avoided at the time the DD Condition is drafted by removing the deeming provision and inserting a right for either party to terminate if the Buyer neither satisfies or terminates by 5pm of the last day of the DD period. Then the worst thing that can then happen as a result of the Buyer missing the deadline is that the Buyer misses out on the property and gets their deposit back. A way better outcome than being forced to buy a seriously defective property.
The two lessons to take from this are that:
1. deeming conditions are usually best avoided; and
2. you should get advice on the wording of contracts BEFORE signing.
Contact us today and we will help you avoid a possible disaster.
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