How a Real Estate Solicitor Lost Half a Million Dollars for His Client in One Deal

This is a true story…….. How a real estate solicitor lost half a million dollars for his client in one deal. This case study holds a very potent lesson for all property investors.

I had an investor from Malaysia who wished to purchase a commercial building in Auckland to kick start his 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 , Auckland, New Zealand. The property was returning $540,000 net pa and the vendor had listed the property for sale at $6.0m.

The purchaser flew in to inspect the property and was very happy with what he saw. He put in an offer at the asking price and the property went under contract. He had friends in Auckland who suggested him a real estate solicitor to act on his behalf.

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 were supplied on request. The purchaser organized his funding and signed up with a property manager.

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.

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 the purchasers that the vendor may like to walk out of the deal if given an opportunity.

The date of going unconditional arrived. 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 rang up 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 requested the purchaser solicitor to send me a copy of the fax he had sent to the vendor. To my amazement it read that the 'Due Diligence condition is not satisfied as a signed copy of the lease had not been sighted.'

I immediately rang up the purchaser's solicitor for clarification 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 his best interest. He assured me that the things will be set right as he was 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 for $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:

A. There appeared to be total lack of communication between the purchaser and his real estate solicitor.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

Solicitor's natural instinct is to act 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 were 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 real estate 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. You as an investor and entrepreneur are required to take bold business decisions after taking into account risks and returns. Once you take a decision 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 a real estate solicitor in your team who is also property investor and understand the business aspects of the deal.

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.

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