Check before you buy
Don’t try to save money on due diligence, writes Diana Clement , get LIM reports and council files
Should you, or shouldn’t you, get a LIM (Land Information Memorandum) and view the council file on a property before buying? Maybe it’s a brand new house. There can’t be anything wrong can there?
Actually, there can be a lot wrong,says property lawyer Nick Kearney of Schnauer and Co. Even a new subdivision may be on the edge of a flood plain or the land is subject to erosion. Or that organic garden you planned could be a problem if the brownfield site is on formerly contaminated land.
In Auckland, future roads or special housing areas (SHAs) aren’t always easy to spot in a LIM, says Kearney. Perhaps the reserve next to your property that you envisage your children playing in, may be designated as a road or. even worse for some homeowners, it may be a SHA and at some point due to be transformed into 25 apartments. The LIM may contain only a URL link to information about SHAs, says Kearney.
LIMs can also highlight whether there have been weathertight issues.
Something unexpected on the LIM or council file isn’t always a sign of impending doom though. Investor Tony Fu found a mention of unstable ground on the LIM of a property he was interested in buying.
When he researched the council file, it turned out there was a geotech report done before the construction of the house. “I felt like the property files contained much more detailed information than the LIM, but the LIM is a good starting point,” says Fu.
With his mind set at ease he bid at auction, although he didn’t win.
Joanna Pidgeon, president of the Auckland District Law Society, says it’s common with such a notation on the LIM that there will be a report available from council.
“Depending on whether this is a section or an existing property, this may mean that the house has had to be engineered to deal with those conditions, or a new house may need to have that engineering input or it may mean that the land is at risk from future subsidence,” says Pidgeon.
The first step, as Fu took, would be to seek the council report. “It would usually be wise to seek expert advice, or decide not to proceed with a purchase depending on the situation and risk factors,” says Pidgeon.
One of the reasons to get a lawyer on the job is that it’s what’s not said on a LIM and council file that could be the big issue. Different councils have different LIMs. They can run from 10 to 300 pages, says Kearney.
Kearney says a lot of the value in getting a lawyer to review the LIM and council file is what’s not contained in them. For example, illegal works don’t show up because the council doesn’t usually know about them.
Lawyer Jonathan Flaws of Sanderson Weir says while councils are getting better at noting items, sometimes they include too much detail, other times they miss out key details.
“In other words, a LIM is not always definitive about issues with the property,” says Flaws. “My concern for some time has been that a LIM report is too often relied upon by a purchaser as being a definitive confirmation that there are issues, or are no issues with the property.”
For this reason, Flaws advocates legal indemnity (title) insurance to cover issues that are on public records but not picked up a lawyer because they are not included on a LIM, included in an obscure way, or they are misunderstood.
The danger, says Flaws, is that lawyers do not visit the property and can comment only on what is in the LIM, not what is missing. “If the property has been altered and the lawyer is not advised of the alteration then, if it lacks a building permit or code compliance certificate, the lawyer cannot possibly comment. And yet many purchasers assume that by passing the LIM across to the lawyer, they will be able to identify issues.”
Flaws cites two examples where shortfalls in the LIM could have cost buyers had they not taken out title insurance. In one case, the LIM did not highlight a plumbing and drainage issue with a private sewage pump required to push waste uphill. In the second, the LIM showed that a building permit and a code compliance certificate was issued for the house, but it turned out that resource consent conditions had not been satisfied.
“These risks may not be endemic or so potentially damaging as the risk of an earthquake or of a fire destroying the home, but they can cause financial loss and a great deal of stress,” says Flaws. Insurance is the answer to this type of risk. “Hopefully, more purchasers will ask their lawyers to do the same.”
Finally, it’s important, says Kearney to get your own copy of the LIM even if the agent is providing it. That’s because the council has a statutory requirement that the LIM is correct to the person it’s supplied to. There is no comeback if the LIM wasn’t supplied directly to you.