Buying off the plan can be a smart investment strategy, but everyone acknowledges that it has risks. One risk – that construction will be inordinately delayed while the developer holds onto the buyer’s deposit – was to be solved through the mechanism of a sunset clause. Either party can call the deal off if construction is delayed beyond certain period, often a year, and the buyer recoups the deposit. Problem solved, it would seem.
But sunset clauses themselves have caused problems for buyers in the booming Sydney real estate market. Recent legislative proposals would fix the fix but, at this point, real property investors can hardly be blamed for some caution.
Why buy off the plan?
Buying off the plan is a strategy that can work for real property buyers who have time and some tolerance for risk in a rising market. The idea is to buy housing units before they are built in anticipation that the price will have risen by the time the development is completed. For $900,000, for example, a buyer can ultimately move into housing with an appraised value of $1.3 million.
But it is not for the unsophisticated buyer operating without the benefit of legal and financial advice. In addition to the risk that the developer will abandon the project, buyers have recently found themselves the proud owners of units that bear very little resemblance to the product initially contracted for — three one-bedroom flats, for example, in lieu of one three-bedroom apartment. These dismal tales of shape shifting usually involve an unwary buyer who had agreed to a contractual clause that permitted the builder to vary the footprint of the unit by more than a certain percentage. Need we say more about the importance of having the contract of sale carefully reviewed by independent legal counsel?
Another issue is the proliferation of get-rich-quick seminars led by speakers who encourage potential buyers to seize the opportunity to make a fortune by buying properties off the plan and negatively gearing them. In a rush to help investors make their millions, the speakers neglect to disclose that they are actually being paid by developers to promote properties. An unwary investor and his money are soon parted.
Sunset clauses and sunset clawbacks
The specific problem of sunset clawbacks, however, arises under somewhat different circumstances. The sunset clause included in most contracts was originally intended to protect buyers, but actually usually permits either party to cancel the contract in the event of delay in completion.
Recent reports have suggested that developers have deliberately delayed construction in order to claw the unit back for resale at a higher price. The buyer recoups the deposit, but has wasted time and effort, and is ultimately left without the benefit of the bargain. The seller has protected itself against the risk of a falling market during the construction period and ultimately receives a higher price than initially negotiated.
The situation has garnered the attention of NSW Minister for Innovation and Regulation Victor Dominello who looks to overhaul numerous aspects of the law covering off the plan developments in the state. He has asked the Fair Trading property working group to look into these issues and with respect to sunset clawbacks, he has outlined two basic options and invited public comment.
Two ways to protect buyers off the plan
Option 1: would be to imply a term in all off the plan contracts allowing only the purchaser to rescind.
This option would require an amendment to Schedule 2 of the Conveyancing (Sale of Land) Regulation to prescribe a further implied term for off the plan sales. The provision could provide that only the purchaser has the right to rescind a contract where a plan has not been registered before the sunset date.
This would address current problems of vendors cancelling contracts when the market has risen.
Option 2: would similarly imply a term requiring that in circumstances where a vendor terminates a contract under a sunset clause and resells the same unit within, for instance, six months, the purchaser would be entitled to damages equal to the difference on sale price between the two contracts. Where the purchaser reaps the profit, the vendor loses the incentive to terminate the contract on the sole basis of potential for further gain.
As with the first option, this second choice would also require an amendment to Schedule 2 of the Conveyancing (Sale of Land) Regulation to prescribe a further implied term for off the plan sales.
If you are considering buying off the plan property, especially in the hot property market of NSW, by all means take the time to get sound legal and financial advice. Waiting to move into the home of your dreams only to lose it before settlement is a deeply disappointing experience.
At Owen Hodge Lawyers, we want to help you protect and enjoy your investment. Our lawyers are experienced in all aspects of off the plan purchases and we look forward to speaking with you at your earliest convenience. Call us for your free consultation at 1 800 770 780.