In our last newsletter, we explored what can happen when you are unable to settle a typical real estate purchase contract. If you missed it, you can access that article by clicking here.
In this article, I will look in more detail at what happens if you can’t settle an off-the-plan contract.
An off-the-plan contract will be used where the vendor doesn’t have separate titles for the lots being sold. This might be because the vendor is selling vacant land that hasn’t been subdivided yet or because the vendor is selling a townhouse or apartment that is neither built nor subdivided yet.
Typically, the settlement periods on these contracts are quite long. For land subdivisions, they can be up to 2-3 years and for some large-scale apartments up to 7 years – although developers usually are trying to settle as soon as possible.
The difficulty for purchasers is that between the date of the contract and the settlement date things can change:
- Your personal situation (relationships, kids, work) may change and the property may no longer suit;
- Your income / financial situation may change;
- Bank lending policies may change; and/or
- The value of the property you are buying can change.
For any or all of these reasons, you may not want to proceed with an off-the-plan purchase contract.
Defective Contracts
In some cases, off-the-plan contracts may be defective or breach the law in some way and therefore be unenforceable.
Whilst this does happen from time to time it is not common. Developers, particularly the larger ones, spend a lot of money to ensure that their contracts are bulletproof. They are often reviewed by construction funders and others – so the chances of these parties missing something are low.
However, it never hurts to check as an unenforceable contract could see your deposit refunded with no further obligation.
Default
Default under an off-the-plan contract is similar to the position under a standard contract – which we covered last week.
You will likely face the loss of your deposit and potentially a claim for any losses suffered by the Vendor in excess of your deposit. Again, you can review that article here.
Nomination / on-sale
As a purchaser, you may be able to on-sell your right to purchase the property.
That is, if you signed a contract with a purchase price of $750.000 you may be able to find someone to step into your shoes and take over the contract – and potentially even pay you a premium. Getting a premium is clearly the ideal scenario – but there are a range of issues to watch:
- Restrictions on Nomination – Most off-the-plan contracts of sale significantly restrict your right as a purchaser to on-sell the property or even nominate another buyer without the vendor’s consent. If the developer has sold all of their stock they may be quite flexible. On the other hand, if they have unsold stock they may not want you competing with them for buyers or even lowering prices;
- Double Stamp Duty – in simple terms if you nominate at a profit stamp duty will be charged on the original purchase price ($750,000) and again on the total price being paid by the new purchaser (on say $800,000 if there is a $50,000 profit). This will be a major disincentive for most buyers. If your markup only covers reasonable estate agent and legal fees then you may not face double duty;
- Agent Issues – on-selling an off-the-plan contract is not something many agents are familiar with. Further, the vendor’s own agent may be best placed to re-sell your contract although often their fees reflect this. Getting the right agent is critical!
On the positive side – if you did sign the contract before construction commenced your nominee, assuming they are an Australian resident that will live in the property, may be eligible for the off-the-plan concession even though the nomination occurs after construction is complete.
If you do find a buyer this can provide a neat exit to an off-the-plan contract you can’t settle. Make sure that you do get a Nomination Deed put in place to properly document the deal!
Cancellation
In circumstances where the value of the property has increased since the date of the off-the-plan contract, the Vendor may agree to cancel the off-the-plan contract. In fact, the Vendor may refuse to allow you to nominate / on-sell with a view to leaving you with cancellation, being better than default, as your only viable alternative.
Ideally this means that the purchaser gets their deposit back and the vendor will then re-sell the property at a higher price (and keep the upside). There are also questions about who keeps any interest accrued on the deposit and the vendor may want their legal fees paid.
There is no standard approach so all these issues remain negotiable. The difficulty for the purchaser is that they really don’t have much of a negotiating position. However, if the alternative is to forfeit your deposit – this may be the best alternative available.
Concluding Thoughts
I have set out above some common scenarios and possible solutions. However, in reality, everyone’s situation is a little different as contract provisions, property prices, vendor attitudes and a range of other factors vary.
I encourage you to seek advice as soon as you are aware that you have a problem.
I have personally helped many clients facing difficulties with off-the-plan purchases. For a fixed fee of $275.00 (inc GST) you can arrange a 30-minute phone or Zoom consultation with me – click here. We can explore your situation and alternatives and get you moving towards the best solution for you!
If you know someone facing issues with an off-the-plan contract – please share this article with them.
Next week we will explore, as a result of a reader suggestion, what happens if you are a purchaser and the vendor can’t or doesn’t settle on time.
Lewis O’Brien
Your Preferred Property Lawyer