Vendors Due Diligence Disclosure Obligations Clarified

June 26, 2019

in Corporate & Business

We act for a number of clients involved in acquisitions of businesses and properties large and small.

The larger transactions are commonly subject to an extensive due diligence process but we are finding that more and more transactions even at a smaller level have at least some level of due diligence being undertaken by prudent purchasers.

The nature of the due diligence process has tended to emphasise an obligation on the purchaser to exercise due care with the principle of “caveat emptor” (buyer beware) being relevant to the due diligence process.

The Court of Appeal has recently clarified one salient point in terms of the due diligence process and this relates to the obligations of a vendor in terms of disclosure of information during the due diligence process.

In the case a vendor failed to notify a purchaser of a building that one of the tenants in the building had objected to the calculation of operating expenses under a Lease.

This had significant financial implications for the purchaser.

The Court of Appeal upheld the purchasers claim for damages on the basis that the vendor in failing to disclose the fact that the tenant had raised an objection to opex with the vendor was a materially important point that was not disclosed to the purchaser as part of the due diligence process.

The Court of Appeal said that it would be difficult to accept in the current business world that the doctrine of caveat emptor would somehow limit a vendors obligation to disclose material information to a purchaser when engaged in due diligence.

This decision serves to emphasise for both vendors and purchasers the need for not only correct information to be provided as part of the due diligence process but also for vendors that if they have material information that they failed to disclose they do so at their peril.

We are experts in all aspects of commercial acquisitions and sales and can advise in regard to issues concerning due diligence. We also assist our clients with due diligence at all levels.

If you require any advice or further information on the matters dealt with in this publication please contact the lawyer at Farry and Co. who normally advises you, or alternatively contact:

Paul Farry
pfarry@farry.co.nz
09 353 6671

The information contained in this publication is intended as a guide only.  It does not constitute legal advice and should not be relied upon as such.  Professional advice should be sought before applying any of the information to particular circumstances.  While every reasonable care has been taken in the preparation of this publication, Farry and Co. does not accept liability for any errors it may contain. 

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