I’ve recently had a few clients who have signed off the plan contracts to purchase land with an associated building contract. At the time, the client would have expected that their home would have been built within 2 years or so.
In these cases, the contracts were signed in 2021 with separate deposits paid under each of the land and building contracts. However, Covid and other complications seem to have delayed the process.
In some cases, the purchaser has had very little by way of progress updates until recently when they have been advised that the plan of subdivision is about to be registered and settlement is imminent.
The first issue is that some purchasers have moved on in different ways over the past three years. They may have moved interstate, changed jobs or made other investments which means that they may struggle to get the loan required to settle within a relatively short period of time.
The second issue is that the builder is typically unhappy with the contract price under the building contract – as building costs have risen over the past three years – and seeking an increase in the build price which only compounds the client’s difficulty in getting finance.
The Land Contract.
With substantial interest rate rises over the past few years, first-home buyers are finding it increasingly difficult to obtain finance approval. This means that prices of subdivided land have been relatively static over the past couple of years. In addition, many of these packaged land and build contracts may include substantial commissions.
That is to say, the value of the land may be less than the price that was agreed three years prior. This means that on-selling the land in one form or another will be difficult and the vendor is likely not to be prepared to agree to cancel the contract. In a recent newsletter we explored the rights of purchasers who don’t want to proceed with an off-the-plan contract – click here.
The Build Contract
On the contrary, with the recent increase in building costs the builder is likely all too keen to cancel the building contract – but likely less keen to refund the deposit paid by the client.
The builder’s solution is to press for the contract price to be increased – often by 10% or more. Failing this the builder may allow the client to terminate the contract on the basis that the deposit is forfeit.
However, even if the client forfeits their deposit under the build contract – this doesn’t satisfy their obligations under the land contract. If the client proceeds to settle the land contract the client will typically have an obligation to commence construction within 12 months – again likely at an increased building cost. If the client doesn’t settle the land contract they will forfeit their deposit – and their liabilities under the land contract could exceed the deposit paid – leaving them with a further financial obligation.
Concluding Thoughts
Sadly, there are no simple solutions for clients who face these situations. However, it is worth seeking advice so that you understand what rights you do have so that you can explore possible solutions to minimize your losses.
It’s easy to think of other industries where consumers would be protected from situations like this or there would be a popular demand for consumer protections. However, such is the influence of the real estate and construction industries that these issues seem to pass without comment.
This leaves many well-intentioned first-home buyers facing the loss of their life savings.
At Lewis O’Brien & Associates we continue to offer fixed-price building contract reviews for $750 plus GST to ensure that clients are well-informed when they sign building contracts and have the knowledge required to negotiate better special conditions.
We also review a wide range of other contracts including loan documents, joint venture agreements and much more!
Lewis O’Brien
Your Preferred Property Lawyer