Over the last year or so, it’s become much more common for people buying off the plans to run into roadblocks. On a regular basis, we’re seeing major delays and deals falling through.
In this article, Chris Davis talks us through what happens when a developer can’t finalise an off-plans build project and what buyers can do to protect themselves.
Firstly, how does ‘buying off the plans’ usually work?
In an ‘off the plans’ sale, a developer presents plans for a townhouse complex or apartment building 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. The balance is usually due on completion of the unit and/or when title issues.
Until recently, buyers were typically waiting 1-2 years (sometimes slightly longer) for the developer to get consent, acquire funding, complete the build and receive titles. At the end of this timeframe, the buyer would complete the purchase and move in.
What’s changed in recent times?
A couple of years ago, it was almost unheard of that a developer couldn’t finalise a build. Everybody involved in an off-plans purchase simply worked on the basis that the developers would be able to complete the project.
But in the last 12-18 months, things have changed. Developers are often coming back to buyers advising that they can’t complete the development (at least, not at the original price) due to delays caused by COVID and the huge increase in building costs.
What happens when a developer can’t finalise?
Usually, buyers are given two choices. They can agree to increase the purchase price or opt out of the agreement.
The developer’s usual proposal is that, if the buyers choose to opt out of the agreement, their deposit is refunded. The developer is then in a position to re-market the unit to another buyer at a higher price.
Sometimes the buyer won’t be given a choice – their only option will be to opt out. This is often the case when there’s a sunset clause in the sale and purchase agreement that’s been drafted in the developer’s favour.
This type of clause means the agreement is conditional on the developer achieving certain milestones (such as issue of consents, completion of building work and issue of title) within a specific timeframe. If the sunset clause is drafted to favour the developer, the developer can simply cancel the agreement and give the buyer their money back if the conditions of the clause haven’t all been satisfied.
This is why it’s important to have the agreement reviewed by a lawyer – we will ensure there’s a sunset clause in the agreement that protects your interests (not just those of the developer).
What happens if you agree to a price increase?
Often the development will progress smoothly from here, but sometimes the developer will approach the buyer several times.
One of our clients had three approaches from their developer saying they were no longer able to complete at the agreed price. Each time, they were asked to increase the purchase price and extend the agreed timeframe. This particular client went through three of these negotiations and agreed to the increased price each time. Eventually, the developer came back and said they couldn’t complete the build at all, so the agreement was cancelled.
Where does this situation leave buyers?
When a developer can’t finalise, it’s very problematic for buyers. They’ve usually been out of the market for a couple of years by this point, as they’ve been waiting for the development to progress.
If the deal falls over, they’re suddenly back to square one and have to start looking for another property. And in the meantime, property prices have been going up and up – until recently, at least.
It’s often very difficult for buyers to find a replacement property or development that gives them the same value for money as the original purchase.
What can buyers do to protect themselves?
If you’re buying off the plans, here are a few things we’d suggest:
- Firstly, be aware that you’re locking yourself into a contract that could be fairly long term and may keep you out of the market for a lengthy period
- Don’t sign a sale and purchase agreement without asking a lawyer to review it first (standard agreements for off-plan purchases are usually weighted in favour of the developer, but we can ensure the necessary clauses are added for your benefit)
- Always make sure there’s a sunset clause, which protects you, in the agreement – a well-drafted sunset clause is a purchaser’s best friend, but many agreements don’t include them by default (or if they do, they favour the developer)
- If your developer approaches you and says they can’t finalise or asks you to increase the purchase price, don’t rush into making a decision or agree to anything without speaking to a lawyer
That last point is an important one. The developer is essentially asking you to vary the terms of the agreement, which opens up the ability to negotiate terms that will be more beneficial for you.
We can guide you through the process of assessing where the development is at, what your rights are and figuring out the best tactics for dealing with the developer.
An example scenario
One of our clients was recently approached by their developer and asked to renegotiate.
We did some thorough investigation into the developer’s financing arrangements and details of exactly where the development was at in terms of titles and expected completion dates.
Based on this, we knew the developer had gone far enough that they wouldn’t want to lose our buyer, which gave us the negotiating power.
We decided the best strategy was to wait and watch. We waited to see how all the other buyers in the development reacted and chose to respond last. By this stage, everybody else had come to an agreement with the developer about what they were prepared to do. So the developer really needed our clients to agree to something to get it over the line.
As a result, we were able to negotiate and the developer agreed to halve the price increase they’d originally suggested, saving our clients $50,000.
How we can help
Whether you’re thinking about buying off the plans or already have an off-plan agreement in place, we can help. For legal advice and guidance, get in touch with our property law team on enquiries@armstrongmurray.co.nz or 09 489 9102.
This article 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.
