On 20 April 2020, we posted our conversation with Luke Havler of ARL Lawyers entitled “COVID-19 & Property Settlements”
This week, we asked Luke to comment on purchasing a new property “off-the-plans” as part of a development. Since purchasers may be required to sign a contract at a time when the property is not yet built, we asked Luke to discuss the advantages and disadvantages from a legal perspective.
Our conversation was as follows:
“Luke, are there advantages to purchasing “off-the-plans”? I’m essentially buying a house that doesn’t yet exist, right?”
It’s true that the house may not be constructed when you sign the contract to buy it. However, for many people, the opportunity to buy a brand-new property is exactly why they choose to buy “off-the-plans”. Not only will they be the first occupants of the house, but they’ve also received the benefit of choosing a house that fits their requirements. For example, some developments offer houses of differing sizes, as well as specifications and colours which the purchaser may select. These opportunities give the purchaser a degree of flexibility which is not available to them if they decide to buy an existing property.
There are also financial advantages with purchasing off-the-plans. Firstly, savings can be made by purchasing a property when the development is in its very early stages. By getting in early, it may be possible to secure a lower price than if you purchase the property once construction nears completion. Secondly, many off-the-plans contracts have a “fixed price”. This means the developer may not increase the purchase price if for example, materials must be substituted or if variations need to be made to the plans and specifications. The benefit of a “fixed price contract”, is that you will be buying the property at the fixed price you agreed on before construction started, even though the property’s value could possibly increase during the time it takes to construct the house.
“But surely there must be some risks in buying “off-the-plans”?”
Yes, there are risks. However, there are risks associated with purchasing any property, whether “off-the-plans” or an existing property. The good news, is that many of the risks associated with purchasing off-the-plans, can be mitigated if you consult your lawyer before signing the contract.
For example – construction of a brand-new house can take up to 2 years (and sometimes longer). Since it’s impossible to predict with certainty whether the house will be constructed within these 2 years, or whether it will be delayed, it is important to have a “sunset clause”. Ideally, this sunset clause should allow only you (and not the vendor) to cancel the contract and have your deposit returned if the transaction does not settle within say, 2 years from the date you signed the contract.
Your ability to cancel the contract based on a sunset clause will depend on the exact wording of the clause. In some instances, sunset clauses only allow the vendor (and not you) to cancel the contract. This can be problematic. If the property market is taking an upswing, then the vendor could be tempted to delay matters beyond the stipulated time frame, and then cancel the contract on you and sell the property for a higher price to a third party. It is therefore important that you discuss sunset clauses with your lawyer, who will be in the best position to advise you on the appropriate wording.
There are numerous other clauses which can be amended or inserted to an off-the-plans contract in order to protect your position. Clauses concerning your deposit, the remediation of defects at the property, warranties, dispute resolution processes, and price increases are just some of the matters which should be considered.
However, it may be impossible to negotiate any amendments to your contract if you fail to approach your lawyer before you sign it. By approaching your lawyer before signing the contract, you will give him or her the opportunity to assess the best process for negotiating amendments on your behalf. This may be by way of inserting a “solicitor’s approval” clause to the contract, or simply by carrying out all the required negotiations before you sign the contract and lock yourself into buying the property. Seeking legal and financial advice, and completing your own due diligence (such as by reading all the documentation provided to you including the plans and specifications and marketing material), are good ways you can avoid some of the common pitfalls associated with purchasing off-the-plans.
ARL Lawyers can be contacted on the main office line (04 576 1652), by direct dial or by email. Luke Havler can be contacted at luke.havler@arl-lawyers.co.nz.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
