I had investors from Malaysia who wished to purchase a commercial building in Auckland to kick start their property portfolio in New Zealand. I sent them information on couple of buildings and they focused on a standalone building that was fully leased on Khyber Pass Rd close to Newmarket. The property was returning $540,000 net pa and the vendor had listed the property for sale at $6.0m.
The purchasers flew in to inspect the property and were very happy with what they saw. They put in an offer at the asking price and the property went under contract.
There were three tenants in the building. One of the tenants had signed an 'Agreement to lease' and had moved into the building. The Law Society lease was not signed as the principals of this company were based in Australia and some of the minor issues were being ironed out. Solicitors on either side of the ditch were in no hurry even though the tenant had moved into the building some 6 months earlier. More letters exchanged meant more billing hours and everyone seemed happy.
The agreement for sale and purchase stated that the Law Society lease was to be signed and handed over to the purchaser's solicitor by the due diligence date as most outstanding issues were of minor nature and the vendor was confident of getting the lease signed.
The purchaser's solicitor was very thorough and asked the vendor for all possible information on the building. Tons of information, engineering reports etc was supplied on request. The purchaser organized his funding and signed up with a property manager. I was in constant contact supplying all the information and making other necessary arrangements.
The remaining issues with the outstanding lease were successfully ironed out. Letters to the effect were exchanged and all amendments had the approval of the purchaser. The final lease was sent for signatures of the tenant's head office in Australia. Everything looked set for the deal to go unconditional. The purchasers were very happy and informed me of his intentions of going unconditional. I had dollars signs all over me and was mentally busy spending my fat commission check and planning my next holiday. I had worked extremely hard on the deal for 4 months and was happy that it was coming to a successful conclusion.
Then the bomb shell arrived. The vendor had ordered a valuation report before the deal had been signed and it came in at $6.7m. The vendor felt that he could have got more for his property had the valuation come in earlier. I emailed a copy of the valuation to the purchaser and conveyed the vendors anguish. I also warned him that the vendor may like to walk out of the deal if given an opportunity.
4 PM Friday arrived.......sure enough the signed copy of the lease had not come back from Australia. I spoke with the purchaser at 2PM and was informed that they were going unconditional.
I spoke with the vendor at 5 PM and was shocked to learn that the deal had not gone unconditional and that he had received a communication to that effect from the purchaser's solicitor. I had a sinking feeling with all the would be earned $$$ slipping from my pocket. I requested him to send me a copy of the fax. To my amazement it read that the 'Due Diligence condition was not satisfied as a signed copy of the lease had not been sighted.' My hard work of 4 months had gone up in a puff !
I immediately rang up the purchaser's solicitor and was told that how could they advise their client to go unconditional if the copy of the lease had not been sighted by them as per the terms of the agreement. The purchaser sounded equally surprised when I spoke with him moments later but thought that may be his solicitor had acted in their best interest. He assured me that the things will be set right as they were very keen on the property.
The signed copy of the lease arrived the following week. The purchaser wanted to go unconditional. The vendor increased the price to $6.7m. The purchaser increased his offer to $6.3m unconditional. The vendor still did not accept the offer. The property was later sold at over $6.5m.
The purchaser was horrified when he received a bill of $15,000 from the solicitor. He was very upset and wanted to sue the solicitor for resulting loss of over $500,000. Better sense prevailed in the end and the purchaser decided not pursues the matter.
OBSERVATIONS:
B. The solicitor did a very thorough job during the due diligence and acted sincerely to protect his clients interest. He was however totally oblivious to the business implications of the deal.
C. The purchaser solicitor could have worded the final communication to read 'The Due Diligence clause is satisfied subject to sighting of the lease that was to have been supplied by the vendor as per terms of the agreement.' This could have protected his client’s legal and financial interests.
D. The purchaser was happy and wanted to go ahead with the deal as is evidenced by his unconditional offer at a much higher price. This was not communicated forcefully to the solicitor nor was financial implications of the deal discussed between the two.
LESSONS TO BE LEARNT
In the present case study the solicitor acted extra cautiously. The agreement to lease had been signed. All the minor amendments to the lease agreement were in letter form and had the approval of the purchaser. The tenant, a reputable company, had physically moved in and was paying the rent. There was virtually no risk in going unconditional. The purchaser was keen to buy but did not communicate his decision clearly to his solicitor. This could be due the fact that they were investing for the first time in New Zealand. The vendor was waiting for the purchaser to slip up and as soon as the contract was breached he increased the price.
Property investment is a business. The support team of solicitors, accountants, real estate agents and financial advisor's can give advice but the ultimate decisions of the business rests with the investor. Solicitors and accountants tend to play it safe and are cautious by nature as they do not wish to be held accountable for any wrong advice or slip ups. The investor is an entrepreneur who is required to take bold business decisions after taking into account risks and returns. Once a decision is reached it has to be clearly communicated to the team. The last step is to monitor and follow up so that the deal goes ahead as desired. It always pays to have advisor's who are also property investors and understand the business aspects of the deal.
I hope you enjoyed this case study. I will appreciate if you will post your comments on my blog. In case you have any interesting story to share please let me know I will publish it in my news letter and post it in the blog.
This is a true case study that happened to one of my clients. It is a lesson for all of us to chew and understand.
COLIN KUMAR
Commercial/Industrial
Barfoot & Thompson Commercial
m. 027 684 1114 | p. 09 358 0989 | f. 09 358 4048
PO Box 1798 . Shortland Street . Auckland City
c.kumar@barfoot.co.nz | www.barfoot.co.nz
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