The law concerning off-the-plan purchases can be complex and as buyers seek affordable entry points into the property market, this kind of purchase is becoming more and more common.
To help demystify this area of law, we spoke to property lawyer Jane Macdonnell, who is a College of Law lecturer in our popular LLM program. We look at the nuts and bolts of off-the-plan contracts and some recent updates in NSW.
What you need to know: extended cooling off period, disclosure requirements, termination rights
Some changes to the legislation that affects off-the-plan purchases came into effect in December 2019 (in NSW). Given legislative change can be quite a long and arduous process, these would still be considered “recent”. Off-the-plan purchases are increasing as they can be viewed as a more affordable entry point and the growing demand for housing means new building projects are on the rise.
Such changes include the following:
- The Cooling-off period for buyers under real estate contracts is usually 5 days. The cooling-off period for off-the-plan contracts was extended from five business days to 10 business days.
- The disclosure requirements for developers have been strengthened, with more detailed information required to be included in the contract and attachment to the contract.
- Buyers now have increased termination rights where the developer fails to comply with the requirements of the contract or the new legislation.
- A vendor may not terminate a contract under a “sunset clause” unless a purchaser agrees, or the vendor obtains an order from the Supreme Court.
- There may be certain stamp duty concessions buying off-the-plan (to be clear, this is NSW).
In Queensland, strong disclosure requirements for vendors have been in place. The further disclosure statement (required if there are any changes to the development) must be given at least 21 days before the contract is settled. If the changes would materially prejudice the purchaser, the purchaser may terminate the contract. If no further statement is required to be given, settlement may not be less than 14 days after the purchaser is given notice that the scheme has registered.
In all states the “unfair contract terms” legislation applies to these contracts, meaning that purchasers have more ability to negotiate with vendors for terms in the contract.
How have these updates impacted protections for purchasers, and obligations of developers?
Generally speaking, developers had previously far more bargaining power with off-the-plan contracts and if a purchaser wished to purchase in the development, it was often a situation of “take it or leave it” with the contract.
Now there is greater balance, with the purchaser having more opportunity to request amendments in the contract. There is also greater protection for a purchaser. This is particularly so with vendors in NSW.
Previously, in a rising market, there were situations where vendors were able to simply delay aspects of the construction until the sunset date had passed and then terminate the off-the-plan contracts and sign contracts for the same property with a higher purchase price. The introduction of section 66ZS of the Conveyancing Act has put an end to the ability of developers to simply wait out the sunset date and terminate the contract.
Advice for dealing with off-the-plan contracts: comprehensive disclosure requirements and more bespoke contracts require thorough review
Off-the-plan contracts are complex because not only is comprehensive disclosure required to be given to a purchaser before the purchaser signs a contract, but the contract itself is a far more bespoke document than the usual contract for the sale of residential property.
If you are not familiar with off-the-plan contracts, when acting for either a purchaser or a vendor, you must familiarise yourself with the legislation.
In Queensland, this legislation has been fortunately contained within the Body Corporate and Community Management Act with some inclusions within the various regulation modules. The cooling off period provisions are contained within the Property Occupations Act. (There is no longer need to refer to the Land Sales Act for purchases of “proposed lots”.)
In NSW, the legislation is within the Conveyancing Act and the Conveyancing (Sale of Land) Regulation. However, you must be aware that the disclosure requirements necessitate reference to both pieces of legislation and the Schedule 1 of the Regulation.
A thorough review of the documents is required if acting for a purchaser, with sufficient attention given to the rights of the vendor to make changes, delay settlement, and the defects period, and what rights the buyer has to terminate. The lawyer should also review the strata management statement (NSW) or community management statement (Qld) and determine if any exclusive use areas are provided for the proposed lot, or if areas such as car parks are to be on title. Consideration should also be given to the proposed levies and any contracts that it is proposed the owner’s corporation, or body corporate, is to enter into.
This is a brief list only.
If acting for a vendor, you must be aware that a defect in the provision of the disclosure documents may give rise to a purchaser’s right to terminate. In addition, if the vendor is obtaining construction finance it is more than likely that the financier will require certain clauses to be included in the contract to protect its rights as a financier, and also to limit a purchaser's ability to terminate for minor changes.
How to avoid the most common mistakes when dealing with off-the-plan contracts: purchaser and vendor
ACTING FOR A PURCHASER:
The main mistake lawyers, unfamiliar with off-the-plan contracts, make is to assume that all these contracts are largely the same. This is not the case. As is the case with leases, some lawyers will draft these documents to be far more one-sided to their client, necessitating negotiations on terms.
A lawyer acting for a purchaser should never hesitate to request amendments to the contract terms if it is necessary.
A lawyer must also review thoroughly the disclosure documents. Remember, if it is disclosed, as long as it is in accordance with the legislation, a purchaser cannot raise an objection to anything that was contained within the disclosure document once the contract is signed. Disregarding the contents of a disclosure statement can result in a client not being informed of something that would have resulted in the client not signing the contract, and blaming the lawyer accordingly.
Vendors will usually agree to a finance clause for purchasers to obtain finance. However, this finance period will be calculated from the date of the contract and will usually be no longer than 14 or 21 days. Given that a development may take anywhere from 12 months to a number of years to complete, and the financier will usually require a valuation before providing funds, a purchaser must be fully advised of this before signing. That is, what stacks up to a financier as a reasonable loan to value ratio at time of contract signing, may not be when the time comes to settle and the financier may refuse to loan the amount previously agreed. A purchaser must be sure of its capacity to pay the purchase price at settlement and this should be discussed with a purchaser before the purchaser signs the contract.
ACTING FOR A VENDOR:
As mentioned, when acting for a vendor and drafting an off-the-plan contract one must be careful to ensure the relevant legislation regarding disclosure is complied with.
Also consider that a financier will require certain clauses in the contract itself, which will usually include, at the least:
- “Step in” rights for the financier should the vendor become insolvent;
- No ability for the purchaser to terminate should the vendor become insolvent, or for minor variations to the proposed lot or the development (within legislative allowances);
- A defects period that is limited to the vendor being required to attend to defects, but giving the purchaser no right to terminate;
- No rights for the purchaser to lodge a caveat or delay settlement;
- The deposit being the maximum allowable under statute.
A financier will have certain requirements for a limitation of the number of foreign investors, due to a difficulty in recovering if there is a default, but this will be a requirement for construction loan approval, not a clause to include in the contract. Of course, there must be a “subject to FIRB approval” clause in the contract if the purchaser is a foreign resident. This is usually dealt with by inclusion of a tick box, and a clause in the contract that applies if required.
The vendor itself will require clauses similar to those mentioned above with the possible addition of a right to terminate should:
- A minimum sales threshold not be reached and/or finance approval for the construction is not obtained;
- The development approval is not obtained or is obtained on terms not satisfactory to the vendor.
Regardless of acting for a purchaser or vendor, a lawyer must always ensure that they do not agree to act beyond that lawyer’s capabilities. Should a lawyer not have experience in a particular area, time must be spent researching and consulting with other more experienced lawyers, if possible.
PLEASE NOTE, THE ABOVE IS GENERAL ADVICE IN NATURE AND MUST NOT BE RELIED UPON OR REFERRED TO IN ANY SPECIFIC CIRCUMSTANCE.
For more course information on the College of Law postgraduate property courses please head here.
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