‘Reasonable’ due diligence is an essential step in your rent roll sale or purchase, but it’s important to clarify what it actually means in practice.
Buying a rent roll means buying a business, and due diligence is a big part of the process.
This stage is where the buyer ‘lifts the hood’ to verify the numbers and stability of their purchase. However, because the parties are relying on contracts and legal requirements, one word often causes confusion: reasonable.
When a contract stipulates a rent roll buyer is entitled to conduct "reasonable due diligence", the definition of ‘reasonable’ can vary. This can lead to delays and frustrations because of differing expectations.
The legal and practical meaning of reasonable due diligence
In legal and commercial terms, ‘reasonable’ describes the kind of care and investigation a prudent person would carry out in the same situation. It’s not about perfection and exhaustive searches for every single document. But it does mean being sensible, thorough and fair.
In a rent roll context, this means the buyer can’t demand the impossible, but they are entitled to ask for clear, accurate records so they can see the actual performance and condition of the portfolio. They need enough information to assess the risk and make an informed decision, and they’re entitled to ask for it.
What’s considered reasonable will depend on the specifics of the sale. For example, a larger or higher risk portfolio with hundreds of PUMs will require more documentation and records than a boutique roll with 200 properties. Similarly, if the rent roll is made up of homes spread across several jurisdictions or includes complex managements like short-stay or commercial leases, more detailed checks may be needed.
Due diligence should be conducted with care but at the appropriate speed. Buyers need to be diligent, but they and their team also need to act promptly and avoid prolonging the process unnecessarily.
For sellers:
Sellers sometimes worry ‘reasonable due diligence’ gives buyers a licence to go fishing until they ‘catch’ a detail which gives them negotiating power. This is not how it works. Due diligence is about balancing the buyer’s need for information with the seller’s right to transact efficiently.
This is where a structured, pre-prepared due diligence pack can help. At BDH Solutions, we recommend sellers complete a pre-listing audit using a detailed checklist covering:
Signed management agency agreements / authorities
Up-to-date ownership records
Verified commission rates and trust account entries
Copies of body corporate by-laws and insurance details
Renter agreements and bond lodgement evidence
Maintenance logs and arrears audits
Service and compliance documentation (e.g. smoke alarm, pest, pool fence compliance, etc.)
It is reasonable to have these items ready, and it makes the due diligence process faster and easier because the buyer and their representatives will have access to what they need without having to wait.
For buyers:
If you’re buying a rent roll, reasonable due diligence is a safety net. It allows you to verify the asset you’re buying in terms of revenue and risk.
These are the questions asked throughout the process:
Are there any red flags in rental arrears?
Are the records consistent and complete?
Are all contracts up to date?
Are assignment letters complete?
Is the business being run in a compliant way?
Do financial records reflect your expectations for the roll?
The seller should have information available, so due diligence can be conducted in a thorough and efficient way.
Step by step, reasonable due diligence:
Here’s how ‘reasonable’ tends to look during a rent roll sale:
Buyers will typically review agency agreements, tenant files, ledgers and service contracts. The buyer can ask follow-up questions if something doesn’t add up, but they’re not entitled to stall the sale or make ‘unreasonable’ demands (there’s the ‘r’ word again… if you have an experienced rent roll broker they’ll be able to flag when someone is going overboard with due diligence)
Sellers should respond promptly, provide access to requested documents and be transparent about any anomalies. The sellers don’t need to provide every scrap of historical data, but they do need to demonstrate the business has been run in a professional way.
If disputes arise, it usually comes down to whether both parties have acted fairly and in good faith. This is the spirit of ‘reasonable’, and why clear communication is so important.
When contracts refer to ‘reasonable due diligence’, it’s not a vague throwaway line; it’s defined by previous benchmarks and the experiences of others in the industry. At BDH Solutions, we help buyers and sellers navigate due diligence with clarity and confidence, so the process is thorough and fair to all parties.