A cautionary Christmas tale

Due Dilligence what due dilligence?

I know that this is Christmas and there should be peace on earth and goodwill to all men, but I feel I must warn you that if you are investing in a property or business then you need to practise due diligence.  Let me tell you a cautionary tale.

Our biggest client was looking to leave the city and move to the country.  He wanted a property with some land where he could live the life of a country gent, and let Accommodation Unlimited manage his property portfolio in the city.

He saw an advert for a country house with a 100 acre estate advertised by one of the major national estate agents, and it sounded perfect.  It had:

·         A large orchard providing a bounty of plums, apples, and pears

·         A shoot with a plentiful supply of game birds

·         A working dairy

·         A dovecote

·         A free-range chicken enterprise

·         A lake with extensive wildlife

The property also came with extensive mineral rights, and the vendors had even diversified into running a summer music festival.

It sounded perfect and our client put in an offer immediately, without doing the necessary due diligence.

The trouble began with the music festival.  The vendor had somewhat eclectic tastes in music and was running a niche festival of Scottish music and African drumming.  He had employed twelve drummers from Burundi and eleven bagpipe players from the Gorbals to entertain the crowds. Unfortunately he only sold nineteen tickets – to nine ladies from a local dance troupe who liked to dance to the Afro/Scottish rhythms, and ten members of the local gentry leaping about like idiots – thereby incurring huge losses.

The vendor was so convinced that the festival would be a success that he cleared the orchard to make room for extra car parking in expectation of the crowds that would flock to his festival, leaving just one solitary pear tree left.  The failure of the festival had left the vendor very depressed and in a fit of pique he decided to shoot all the game birds on the estate. Luckily a partridge escaped and took refuge in the pear tree.

The dairy enterprise was exactly as described, however under TUPE regulations our client was obliged to keep the staff on. However, eight female dairy operatives for what was a small-scale dairy enterprise was not feasible and he was losing money hand over fist.

The free-range chicken enterprise was also not as advertised.  The vendor had imported chickens from across the channel. Unfortunately they were not immune to a British chicken disease called Shaky Leg Syndrome and all but three perished.

In fact the only birds that produced any eggs were the six geese that lived by the lake, however they were constantly fighting the seven swans who also swam on the lake and the noise kept our client awake all night.

The dovecote had been home to 2 specialist doves, however they were terrorised by a parliament of four crows or, as they were known locally, Colly Birds, and they flew the coop.

This left the mineral rights.  Our client was led to believe that there was potential to mine for gold and this was corroborated by the vendor producing five circular nuggets which he claimed came from the estate land.  Later analysis showed that these were melted from adulterated gold, possibly five cheap rings of the type that allegedly used to be sold by Mr Gerald Ratner.

Our client spent over £2 million pounds on this estate only to find that apart from the house and the acreage nothing was what it seemed. He decided to sue the agents under the Property Misdescriptions Act, but lost on the basis that it was ‘caveat emptor’ and that by not doing his due diligence he was partly to blame.  We asked local solicitor Grant McCall of AMD Solicitors what our client should have done, and he very kindly wrote to me:

Dear Peter,

Oh dear, your client was certainly not one of the Three Wise Men. Let us rewind to the very start of the transaction. I am amazed that your client should even consider such a complex transaction without engaging a solicitor with experience in purchasing businesses together with substantial interests in land to advise him from the outset.

If he were buying a second hand Bugatti Veyron then doubtless he would  take a test drive, look under the bonnet or at the very least ask his friend (who used to work in admin for the DVLA) to kick the tyres!  A buyer’s only chance to “kick the tyres” in this type of transaction is by carrying out proper due diligence with the help of a specialist solicitor before “taking the keys”.  Afterwards is just too late.

I love world music myself but no matter how enthusiastic your client might be I would always have insisted that the business accounts are produced to enable him to check the “score.” If the accounts were off key I would have advised him to recompose his offer. Provided contracts have not been “exchanged”, which is the act which creates the legal commitment to sell and to buy on the precise terms stated in the contract, then renegotiation or a withdrawal remains an option.

The written contract is usually drawn up by a vendor’s solicitor and a close look at it by a specialist  on behalf of a buyer is essential because the vendor can only be held  to what has actually been spelled out in the contract or has been made as a “written representation“ by him in response to a specific enquiry.  Silence can be golden because if the right questions aren’t asked the vendor cannot be held liable for not answering them!

Specific clauses and safeguards may also need to go in to the contract to protect the buyer’s interests. Often I propose these following the commissioning and receipt of property searches as these serve to flag up any particular planning restrictions or breaches of local laws by the vendor.

In your client’s scenario, a local authority search may have shown Tree Preservation Orders on the trees prohibiting their removal and at the very least the contract should have contained a warranty from the vendor that he had complied with all legislation and would continue to do so.

The typical business contract will also itemise all items included in the sale – both those attached to the land and those included by way of “stock” or assets.  Where any livestock are involved I would expect to include in the contract a warranty that the stock is unaffected by illness/infection and will be so certified by a vet or similar at the vendor’s expense immediately before completion. 

In the transfer of many businesses, future turnover is an important consideration. A prudent buyer who has suspicion that the vendor has overestimated his business can insist that part of the purchase price can be made dependent upon the future performance of the business.  These types of clauses need particular care in drafting.

Looking for that crock of gold was never going to be simple. An environmental and mining search, again carried out at an early stage, would have identified worked out coal mines rather than a seam of gold!

As there are no lords-a-leaping at the chance to employ the dairymaids, this may be costly for your client due to accrued employment rights. Full disclosure of the contracts of employment and all service contracts should have been sought at an early stage.  Your client would have been advised that there are TUPE regulations that protect the rights of existing employees on transfer of the business they are working for and the costs of redundancy if the business needed to be reorganised.

Hopefully your client’s true love will stick with him for longer than the twelve days of Christmas  but if not he still has Accommodation Unlimited to expertly  manage his city property portfolio … and he now knows where to come for a good solicitor.

Yours,

Grant McCall

So there you have it.  A cautionary tale that should be a warning to anyone thinking of investing in either property or a business in the future.

And on that bombshell, I will wish you all a Merry Christmas.

Peter Ellis

For more information regarding your business purchase contact Grant McCall at Amd Solicitors

Website: www.amdsolicitors.com

Email: GrantMcCall@amdsolicitors.com

Tel: 0117 9735647