When you are buying a property off the plan, it means the property is yet to be created. This means the land may still need some works carried out to it by the seller, and a legal title created for the particular piece you are buying.
The contracts that go along with buying off the plan are more complex than when you are buying an existing property. This is because as work still needs to be carried out, the contract needs to allow scope for some minor variations between the proposed plan, provided that any changes do not materially prejudice you and the most important thing you need to bear in mind, is that the property does not yet exist, so you do not yet know what the final finish will look like.
This blog mentions some of the most important risks and uncertainty that comes with buying off the plan.
If or when settlement will occur
Off the plan contracts have a sunset condition, which for units, can sometimes be up to five and a half years and for land, up to eighteen months.
Developers usually provide an estimate and expected registration period, however sometimes this period cannot be met due to outside factors such as weather, supplies and other unexpected occurrences.
In our experience, it would be very unusual for a Seller to delay settlement once a title for the Lot has registered, however, it is conceivable.
If a developer cannot complete construction due to unforeseen circumstances, then settlement may never occur so if you have been waiting for your unit/townhouse to be built and the seller terminates the contract under the sunset clause, then you will need to ensure you take this risk on board.
The continuing availability of finance at settlement or the terms of finance
Off the plan contracts are usually not subject to finance. This means that if you do not receive finance approval, should you require it to complete the purchase, then you cannot terminate the Contract. You will need to settle regardless, otherwise you will be in breach of Contract.
Regardless of this, your financier may not be able to provide unconditional finance approval until they obtain valuations of the property. The financier may not be able to obtain valuations until closer to settlement.
Further, any approval granted will usually lapse after (three) 3 months. If the development takes longer than (three) 3 months to finalise, then you will need to reapply for finance approval.
In either scenario, there is a risk that you may not have finance approval at the time for settlement. If you were unable to arrange other finance or funds, then you may be in a position where you are unable to settle. For further advice, please contact me to discuss.
The value of the Property at settlement
The value of the property from the date you signed the contract and when settlement occurs may change, if this is the case, sometimes this may impact your finance approval (if you are relying on finance to complete the purchase). This is of course a worse case scenario where the value comes in lower than was initially expected at the time of signing the contract, however it is an important risk to understand and take on board.
Minor changes or variations to, or the workmanship of, the construction
Due to the development not being finalised yet, the Seller is able to make changes. This may include changes to the number of lots or the design or size of the lots.
The seller must provide you with a notice of changes as required if any substantial ones are made.
Some changes which can be made are changes to the building, changes to your Lot, changes to the body corporate scheme and by-laws (if any).
There is legislative protection for Buyers against changes contained in the Disclosure Statement, which overrules any term of the Contract.
If a change is made (to the Lot, an Exclusive Use Area or Common Property), and you are able to demonstrate you are ‘materially prejudiced’ by that change, then you may be able to terminate the contract, in which case the Deposit and any interest earned will be refunded to you.
Material prejudice is an intentionally fluid term and will depend on the nature of the changes as well as the term of the Contracts. It is likely, for example, that if the area size was reduced by more than 5% you would be materially prejudiced, however ultimately it is still up to a court to determine this. For this reason, it is often better to have precise contractual terms outlining what changes are and aren’t permitted (for example, the 5% reduction in area), and express contractual rights for you to terminate if a change is made outside these allowances.
The change clauses and legislative protections are complex.
Your personal financial and health circumstances at settlement
The contract provides that “time is of the essence”. This means that performance of a contractual obligation, for example, obtaining finance or being able to settle on the specified dates must be strictly adhered to and unfortunately if your health and personal circumstances change, it doesn’t allow you to terminate the contract.
If the obligation cannot be met by the specified date, then an extension of time must be formally requested. The seller is under no obligation to provide any extension of time and may elect to cancel the contract.
Sometimes a seller may allow you to terminate the contract and receive a refund of your deposit, or part of it, however this may not always be the case as they don’t have any obligation to do so, therefore it is important that you do keep us updated with your circumstances at the same time as considering this risk factor before entering into a contract.
It is imperative that all dates are strictly adhered to, and all searches and documents are completed well ahead of the settlement date.
How do you minimise these risks?
Our team of experienced property lawyers can guide you through the purchasing process to achieve the dream of owning your own property. As you can see above, there are many issues to consider when signing a contract and it is important you take all of these risks on board when entering into an off the plan purchase contract.
The legislation is a bit different for both unit/townhouse developments and land developments, so it is important you obtain legal advice before signing any contract.
Contact our team today to discuss your property options.
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