What does due diligence look like?

The Climate Change Commission has recently issued its ’Progress report: National Adaptation Plan (August 2024)’^[1], the first in a repeating series of two-yearly reports to assess adaptation progress. While the report comes at a very early stage in the implementation of the National Adaptation Plan, it highlights that adaptation is not happening on the scale, or at the pace, that is needed.

Property owners are expected to suffer due to this lack of adaptation, with the report highlighting that severe weather events are becoming more frequent and intense, increasing the risk of further climate change-induced damage to properties.

While increased Government and community-led adaptation planning and action is most critical to bringing about change at the scale and pace required, there are some steps that individuals can take to help themselves, and it is now even more important than ever for property purchasers to understand steps they can take during the due diligence and purchase process to reduce their exposure to the environmental risks and pitfalls affecting properties.

In this article, we answer the important question of ‘what does thorough due diligence look like’ with respect to climate related issues when purchasing a property?

The starting point

The standard starting point for any property due diligence is a review of the:

• Land Information Memorandum (LIM)
• Council Property file
• Title (plus all registered instruments)

It is more important than ever for purchasers to understand the significance and value of the information that can be found in the LIM, property file and title, and the possible risks associated with excluding these sources from property due diligence.

Obtaining, reviewing and (where required) reporting on each instrument on the title also remains relevant. There are a range of different instruments now used to record different environmental-related notices or obligations. These instruments, in particular, should be treated as red flags:

• EQC/NH claim notices: the Natural Hazards Insurance Act 2024, which replaced the Earthquake Commission Act 1993 from 1 July 2024) empowers the former Earthquake Commission (now Natural Hazards Commission Toka Tū Ake) to register a notice against a property’s title following a successful EQC/NH Cover claim.  Purchasers should note there is no requirement for EQC/NH monies to be applied to property repairs, purchasers should be satisfied with the condition and purchase price of the property in light of this. Although successful EQC claims were made for the adverse weather events of summer 2023, it is unclear whether the Natural Hazards Commission will continue to register notices against any property titles following a successful claim or if the new Natural Hazards Portal (covered below) will replace this method.
• Building Act notices: a hazard notice may be registered under section 72 of the Building Act 2004 by a local authority as a condition of a building consent for work on a property that has been or is likely to be affected by a specified natural hazard. Authorities also register section 72 notices if they consider the building work is likely to make worse, or result in, a natural hazard. Previously, these notices were called section 36(2) notices if applied under the Building Act 1991 or section 641A notices if applied under the Local Government Act 1974.
• Encumbrances and land covenants: encumbrances and covenants are often used to record a range of obligations owed by a property owner, including in specific situations by local authorities to note unique risks to the property, or that the property is subject to the Future of Severely Affected Land (FOSAL) buy out programme. 

FOSAL property categories

Following the severe weather events of January and February 2023 affecting Auckland, Tauranga, Gisborne and Hawkes Bay, the Crown implemented a scheme where residential properties in these regions were categorised to reflect the potential risk to life that would exist if future adverse weather events of a similar magnitude occur.  The categories are:

Risk Category	Risk Assessment	FOSAL Entitlements	Where this information is found*
Risk Category 1	Low risk These properties do not meet the threshold for intolerable risk to life. Note that this does not mean the property did not suffer flooding or other damage.	Property is considered low risk and no subsidies are available	Typically noted in the property file only
Risk Category 2	Managed risk These properties meet the threshold for intolerable risk to life. Community or property-level interventions can be implemented to reduce future severe weather risk events.	Only owners of 2P properties are eligible for subsidies to carry out repairs and mitigation works at their property.	Typically noted in the LIM and property file
Risk Category 3	High risk These properties meet the threshold for intolerable risk to life, and will be purchased to mitigate the risks associated with future weather events.	Owners may elect to participate in a voluntary buy out scheme.	Typically noted in the LIM and property file

 * Information in this column is based on Auckland Council’s FOSAL category reporting policy

The impact of the three applicable FOSAL categories on an affected property should now be a key consideration during property due diligence. These categories are not listed on one central platform – each local authority can determine where best to note this information.

Notably, only residential properties were categorised due to the scope of the Crown’s FOSAL buy-out scheme. This means that even if a commercial property was damaged beyond repair due to the same flooding events, it will not have been categorised under the FOSAL categories.

If purchasing a Category 2 or 3 property, we suggest that in addition to undertaking comprehensive due diligence, details about the extent and cause of damage, impact on future use and steps taken (if any) to prevent damage reoccurring are obtained.  

Specialist building reports

Purchasers should consider engaging builders who are experienced in assessing environmental damage to buildings for a comprehensive and impartial report on a property. A building report will be particularly valuable for non-residential properties, given there will be no category to flag if any damage has occurred or risks have emerged in the locality.  

It is also worthwhile investigating drainage, stormwater devices and/or catchments that serve the property to determine whether these have been satisfactorily maintained. These types of devices are regularly installed in an out-of-sight location, so are easily neglected.

Purchasers can look for additional protection by requiring the sale and purchase agreement to include warranties that the stormwater infrastructure on the property has been maintained and is in good working order.  

Prudent extra steps 

The following external sources are worth reviewing for further context on the potential impact to a property:

• Natural Hazard Commission’s Natural Hazards Portal: This new public register is a welcome addition to the property due diligence tools. It reports on all EQC/NH claims from 1997 onwards in respect of affected residential properties.  The register also provides helpful context as to the extent to which an area has suffered effects from any natural hazard. You can access it here: naturalhazardsportal.govt.nz/s/claims-map
• NZTA Waka Kotahi/local authority road closure maps: Many landowners are now facing the reality of property access being severed or limited following an adverse weather event. It is worth reviewing NZTA and local authority road maps and work scheme plans to understand if roads around the property have been severely damaged, any impact on property access, and whether mitigation work is being carried out to prevent future damage.

Future-proofing – insurance and finance

Insurers and banks are unsurprisingly becoming more cautious as to what properties they agree to cover. Banks are yet to provide clear guidance on whether they will grant new loans against properties in areas prone to flooding or coastal erosion, so purchasers should allow plenty of time to consider their options and ensure that they are able to obtain bank approval. Purchasers of affected properties should seek a longer finance condition timeframe than the standard 10 working days.

It is also prudent to make agreements conditional on insurance cover being available as insurers likely require additional time to consider the risks associated with insuring an affected property, including whether higher premiums or excess is necessary. As of September 2023, one of New Zealand’s largest consumer insurers confirmed it will not offer ongoing insurance for properties in FOSAL Category 3. An important aspect for purchasers to note is that if a property cannot be insured, it is unlikely any bank would agree to fund the purchase.

Purchasers should also contemplate how their ‘high risk’ property may be viewed by future purchasers when they eventually decide to sell. Key risks are: 

• Decline of Property Value:  This may limit a purchaser’s ability to repay any loan on the property or fund their next purchase. 
• Interested Purchasers Cannot Obtain Finance or Insurance: This narrows the market of prospective purchasers to only those who can afford the property without the need for bank finance – and are willing to risk no insurance!  

Turning tides

In a rapidly changing climate, it is important to look beyond the traditional sources of information for properties so purchasers can gain a greater appreciation of the potential risks. Comprehensive due diligence should extend beyond the property itself, especially following any prior adverse weather events or natural hazards.

Get in touch

For further assistance with understanding the FOSAL buy out scheme, completing due diligence on a property, or understanding property risk profiles, reach out to one of our Real Estate experts below.

Special thanks to Lucy Westenra and Natalie Wilson for their assistance in writing this article.