As house prices in Auckland continue to soar, it’s becoming more and more common to purchase an apartment or townhouse. Often, this comes with the requirement to purchase off the plans.
In an ‘off the plans’ sale, a developer presents plans for an apartment building or townhouse complex to prospective buyers and offers units for sale at a fixed price. To secure a unit in the development, buyers need to pay a deposit and sign an agreement, then the balance is usually due upon completion of the unit and/or when title issues.
Buying off the plans can be a great way for first home buyers to get a foot on the property ladder. But with any property purchase comes risk, and an off plans purchase is particularly complex.
So what should you look out for when buying off the plans? And what questions should you ask before signing on the dotted line? We’ve covered some of the biggest risks to consider below.
Ability to secure finance
The settlement date for an off plans purchase is usually a few years after you sign the sale and purchase agreement.
This type of timeframe can be risky, because you may have issues obtaining and retaining the bank’s approval if your circumstances change before settlement. For example, if you lose your job (of particular concern during the current economic climate) or your family dynamics change (e.g. you have a baby on the way), this can affect your ability to obtain finance.
You’ll usually need to re-apply for finance every three months and there are no guarantees the bank will honour your original approval when you re-apply. If your circumstances change from the time of signing to settling, you may not be able to finance the purchase.
In this case, you would be forced to default or look towards second-tier lenders with higher interest rates and unfavourable terms.
Record of title problems
When buying off the plans, the record of title isn’t normally issued until after you’ve signed the sale and purchase agreement. Therefore, you need to find out what will be registered on the title before it has been issued.
It’s a good idea for your solicitor to check the head title (i.e. the title for the entire development) and confirm whether all interests on the head title will step down to your title. Your solicitor will also want to check whether there are any new interests to be registered on your title that could affect the value of your property.
Examples of interests that may be registered on your title are:
- Easements – these give other parties the right to use your land for a specific purpose (e.g. a neighbour might have the right to enter your property to access or repair a shared wall).
- Covenants – these dictate what you can and can’t do on (or with) your property. For example, you might not be allowed to plant trees that will reach a specific height. Or, you may not be able to add a satellite dish or outdoor washing line to your unit.
- Council-imposed conditions – the council can impose conditions which are specific to the development (e.g. owner responsibility for maintaining water tanks).
It is also a good idea to request a copy of the resource consent so we can be sure that any conditions imposed by the council on the development won’t affect your property’s value.
Construction delays
Time is always a factor when buying off the plans simply because the dwellings haven’t been built yet.
This is why we like to ensure a sunset date is included in the sale and purchase agreement when our clients are purchasing off the plans.
If a sunset date is included in the agreement and the title and/or CCC aren’t issued by that date, the purchaser can choose to cancel the agreement and reclaim any deposits they’ve paid.
Some agreements don’t contain a sunset date, which means you run the risk of being stuck in a contract for years until the development is complete, even if it takes much longer than expected or construction is paused.
Force majeure clauses
Some agreements contain force majeure provisions, which essentially allow developers to cancel an agreement due to unforeseen circumstances outside of their control, such as natural disasters and epidemics.
Developers sometimes use this clause to their advantage, cancelling an agreement and re-selling the dwelling to another buyer on a rising market.
The wording of these clauses should always be carefully considered, particularly while we continue to grapple with COVID-19.
Reduced land or building size
There are always margins of error with developments in terms of land size and unit size in comparison to what is written on paper, as changes often need to be made during the consent and building process.
What happens if you end up with a reduced land or building size? When our clients are signing an off plans agreement, we usually like to see a compensation provision relating to this.
Body corporate levies
Most apartments blocks and townhouse complexes are developed as unit titles and are therefore managed by a body corporate.
The body corporate controls the maintenance of (and expenditure for) all units within a development. The body corporate isn’t usually formed until the development is nearly complete, so all annual levies that need to be paid by the unit owners are just estimations until unit entitlements have been valued.
When you’re thinking about buying off the plans, you need to make sure you’ve allowed enough room in your budget for estimated body corporate levies, as well as any unforeseen body corporate costs that may arise.
In addition, you should always ask for copies of all body corporate documents so that you can stay informed. You should also look out for any clauses that allow the developer to vote as proxy (i.e. make decisions on your behalf) following settlement.
Power of attorney
Most developers now require you to enter into a power of attorney, which gives them the right to sign on your behalf to complete the development (or enter into service agreements on your behalf).
You need to ensure you understand the extent of these powers (for example, whether they end once the development is complete) and discuss with your solicitor whether the powers should be minimised.
Control over the agreement
Lastly, sale and purchase agreements for off plan purchases are usually heavily weighted in favour of the developer and many of your rights as purchaser are removed. This tips the balance of power away from you and into the hands of developers, leaving you with minimal rights or remedies to rely on.
It’s always best to seek advice from your solicitor before signing a sale and purchase agreement. If you’re thinking about buying off the plans, please send me an email or give me a call on 09 489 9102. We can check the agreement, ensure the necessary clauses are added and assist in swinging the terms back in your favour.
Note: This post is brief and general in nature. You should not treat it as legal advice and should seek professional advice before taking any action in relation to the matters dealt with in this post. Armstrong Murray accepts no liability for losses suffered by any person or organisation who may rely directly or indirectly on this post.
