It may feel like a risky path, so you need to understand what you are in for and what is in your contract from the outset and give yourself the peace of mind that you are actually making a good investment.
Can I complete?
Over the past year there has been an alarming trend of purchasers failing to obtain finance.
When buying off-the-plan, you are given a lengthy time between exchange and settlement – many years in some circumstances – and during that time, things can change. Financiers require a loan to value ratio that is within the lenders acceptable range. We have had:
- Clients whose apartments significantly decreased in value to an extent where financiers would no longer lend the amount required to settle or would require the purchaser to provide more funds towards the purchase price to ensure that the banks loan to value ratio is within the lenders acceptable range; or,
- Clients whose personal circumstances have changed, meaning they have been unable to obtain a loan.
This has placed our clients in difficult and stressful situations.
I’m not cashed up. What should I do?
Some strategies our clients have considered are:
- Finding an alternative source of funds: this is one possibility. However, it is becoming more difficult given the tighter lending criteria. The key here is to act as early as possible to ensure you can meet the settlement deadline by obtaining finance from a different financier or even obtaining assistance from a family member;
- On- selling the property: in some circumstances, clients have been successful in on-selling the property so that their purchase and the on-sale, settle simultaneously. This has allowed them to settle and move on. However, the problem with this solution is that there may be restrictions in relation to on-selling in the Contract. Further, at times, clients have not recouped the purchase price, leaving them to cover the shortfall as well as cover their out of pocket expenses; or,
- Negotiating a rescission: some clients have been successful in negotiating a rescission by mutual consent with the developer or (less frequently) terminating the contract. Terminating the contract is unlikely, given that the purchaser can only terminate the contract if the developer is in default. However, rescission by mutual consent can occur especially if the developer perceives they can sell the apartment for a higher price than they sold it.
What if the developer fails to complete?
Even if you are ready to hold up your end of the bargain, it does not mean the developer will. There are many reasons why developers simply fail to construct apartments even though they have entered into numerous contracts for the purchase of their apartments. These include a lack of presales required to obtain sufficient finance, banks tightening their lending criteria on developments, or developer insolvency.
In the event this happens, purchasers have limited options. In some circumstances the development will be acquired by another developer who will continue and complete the building. Sometimes, but not always, purchasers can rescind their contracts and get their deposit back. In other circumstances, the developer will assign the contract to another developer which can cause delays. It is very important to understand the terms of the developer’s contract and the purchaser’s rights and entitlements in each of these scenarios.
Post settlement qualms
More recently there have been several high-profile cases of major defects such as the Opal Tower scandal, which has left many purchasers questioning what to do in such circumstances.
One big issue that purchasers face when buying into a development over 3 storeys, is that they do not receive the benefit of the home-owners warranty scheme. Whilst there have been recent reforms requiring developers to lodge a Bond with the NSW Fair Trading for residential and mixed-use high-rise strata buildings of four storeys and over, the Bond is held to ensure that defects due to defective building works are rectified.
For buildings that are 3 storeys or under, legislation requires the developer to have taken out insurance known as the Home Building Compensation Cover. Purchasers having difficulty with any major defect rectification can lodge a claim through the insurance. In these circumstances purchasers should be prepared for the fact that they may have to face lengthy insurance claims or even litigation.
NSW government stepping in further
To enhance purchaser protections, there have been recent legislative reforms to address off-the-plan risk issues. For example, in recent years laws were enacted to ensure a developer could not rescind a Contract as a result of the sunset date expiring without seeking leave from the court.
Further amendments commencing 1 December 2019, seek to further enhance consumer protection and cover the following issues:
- New disclosure statement requirements: In the past a developer did not have to disclose all aspects of the development, in some situations Contracts did not even hold an appropriate Draft Strata Plan. This essentially meant that a purchaser did not have a clear indication of a number of things including the size, inclusions, any easements or by-laws anticipated to be registered. From 1 December 2019, the developer is required to provide a disclosure statement in an approved form, which outlines much of the above and it must be attached to an off-the-plan contract before it is signed by the purchaser. Failure to provide a disclosure statement will allow the purchaser to rescind the contract within 14 days after the contract is entered into.
- Requirement to notify the purchaser if the disclosure statement is incorrect: In the past developers would usually not provide a purchaser with any updated draft plans or documents after contract signing, until the property was completed and settlement was called for, catching purchasers by surprise at settlement. New legislation imposes a requirement for the developer to serve a notice on the purchaser if anything in the disclosure statement is incorrect or inaccurate. If the changes are substantial and would have a detrimental outcome on the property being purchased, within 14 days, the purchaser may then either make a claim for compensation or serve a notice of rescission.
- 10 business days cooling off period: the purchaser will now receive a 10-business day cooling off period, which is an additional 5 days on top of the usual 5 days. The cooling off period can be waived or shortened by a certificate signed by the purchaser’s lawyer, which is often required by developers.
- Deposit to be held in trust: In the past many developers would have a condition in the Contract allowing the deposit to be released to the developer. The new legislation requires the deposit or instalment monies paid by the purchaser be held either a solicitor’s, conveyancer’s or real estate agent’s trust account until completion.
- Purchasers are not required to complete until 21 days after receiving registered plan and documents: it is common practice for completion to take place 10-14 days from the date on which the purchaser receives written advice that registration has occurred. The amendment will ensure the purchaser has more time, namely 21 days after receiving full copies of the registered strata plan or deposited plan and ancillary documents relied upon for registration, before completion takes place. This will ensure that the purchaser has sufficient time to ensure their lender is ready to settle and their solicitor or conveyancer will have sufficient time to prepare for settlement and obtain and searches that may be required.
Buyer beware
The Sydney property market and apartment market has endured a rollercoaster ride over the past few years. With increasing auction clearance rates in Sydney and Melbourne, the market is starting to gain traction and will likely result in more off-the-plan apartments coming on the market.
Conclusion
With many purchasers signing contracts at display suites without legal advice, it is important that purchasers understand their rights and obligations early from the outset to ensure that their investments and the purchase process result in a positive experience without any surprises.
If you are considering purchasing an off-the-plan property or you are a developer or agent and need more information on the legislative reforms, we strongly encourage you to contact a member of Coleman Greig’s Conveyancing team, who would be more than happy to assist.
