Our last article explored what it means to purchase “off the plans” (OTP) and some of the pros and cons associated with it. In this article we go deeper: what are the key terms and conditions in an OTP contract and why do you need to understand them?
Most OTP contracts have some conditions that benefit the developer and others that benefit the buyer. It’s worth understanding them because on occasion you can get them varied before you commit.
Most people know that a sunset clause is essential in an OTP contract. But what is it? Generally speaking, a sunset clause allows you to cancel the contract if certain key milestones – usually title and code of compliance certificate – do not occur before a specified date. The sunset date is usually around 1 year after the expected completion date of the development.
Without a sunset clause, you could be waiting years for the developer to complete the build without being able to cancel the contract, get your deposit back, or buy somewhere else.
But not all sunset clauses are the same. Some sunset clauses may also be available to the vendor. A “two way” sunset clause is not great for buyers (in a rising market) as it potentially allows a developer to take advantage of delays in the development to cancel the contract and sell the property for a higher price to somebody else. And you could be priced out of the market in the meantime. We are also seeing clauses that only allow buyers to cancel within 1 or 2 weeks after the sunset date.
Two way and time-limited sunset clauses usually need some negotiation or concessions between lawyers.
The most common purchaser conditions allow you to conduct all of your necessary due diligence investigations on the property and get finances sorted within 1-2 weeks of signing. Once you are comfortable with finance and due diligence, you instruct your lawyer to confirm your conditions which means you have unconditionally agreed to buy the property (subject to the sunset clause). However, even if you obtain finance approval at the beginning, this does not guarantee finance at settlement as most bank approvals expire after 90 days. If you cannot buy the property at settlement because you can’t get finance then you will be in default, forfeit your deposit and potentially be liable for other losses such as decrease in subsequent purchase price. Please talk to your bank or broker about your situation so you are comfortable with this (unavoidable) risk.
Once you satisfy your conditions, a deposit (usually up to 10% of the purchase price) is payable. It is essential that the contract says that the deposit will be held in the developer’s lawyer’s trust account until settlement. This protects your money if the development doesn’t proceed, the developer becomes insolvent or goes into liquidation or receivership.
Depending on the progress of the development (if any), OTP contracts will usually be conditional on a number of vendor conditions such as the developer obtaining sufficient unconditional sales, suitable finance and necessary council consents. These vendor conditions are for the sole benefit of the developer and can provide an avenue for the developer to cancel the contract (and in a rising market, sometimes they use that leverage to request a higher purchase price).
Plans and Specifications
As the construction of the property is yet to be completed, the contract will contain plans and specifications for the property you are buying. The plans should contain details such as the layout of rooms, size of garaging and outdoor areas, fittings and fixtures, lighting, heating, and what appliances the property will come with. The more detailed the plans the better and we often ask for better plans with measurements.
In some instances a show home will be available to view to give you an indication of what the completed product will look like (although usually the contract will say that the finished product may not match the show home, as the vendor will need some leeway to make changes). More often than not you won’t get an opportunity to actually see what you are buying until the day of your pre-purchase inspection.
The developer usually has rights to alter the materials or finishes from what is shown on the plans or listed in the specifications. While each contract will be different, it is important to impose limitations such as notifying you of changes or that substitutions must be of similar quality and nature.
The size/area of the section or dwelling may also change from what is indicated in the contract and shown on the plans. We look for contracts with a right to reduce the purchase price or cancel the agreement if the size difference is material.
When buying OTP, the property title (called the Record of Title) may not issue until months or years after you signed the contract and you must generally accept the title with all registered interests at settlement. Usually that means you will take title subject to any easements, encumbrances, and covenants that the developer deems necessary or desirable for the development or are required by Council. This does mean that the property may be subject to unexpected restrictions that you were not expecting e.g. a prohibition on pets or a rubbish bin area located next to your house. Your lawyer should be able to give you some comfort about the title or request some limitations that restrict the developer’s rights.
Guarantee of works
All OTP properties automatically have a 12 months defects warranty and 10 year structural warranty under the Building Act. This also applies to consecutive owners. However, if the developer is not operating, there is nobody to fix the problem. A third party guarantee such as a Master Build Guarantee provides more protection because Master Build will be available even if the developer is not. However, these guarantees are notoriously difficult to claim under and there has been recent publicity about whether they are worth it. Our advice is read the guarantee, adhere to the technical requirements and seek legal advice early.
Off the plan contracts are complicated, long and are almost always drafted in the developer’s favour – so there is no substitute for expert legal advice before you sign! A lawyer will spot the risks and can answer any questions that you may have. If you need advice on purchasing OTP, please call one of our OTP property experts Shelley, Pierre, or Amie at Henderson Reeves Lawyers.