Description of this module
The process of purchasing a property “off-the-plans” has a mystical allure. You pay a 10% deposit and wait – in two or three years’ time you will be the proud owner of a shiny new property. In the meantime you can save.
However, sometimes three or four years down the track you may be left still wondering when you can settle and move in to your new home.
2018 has been the year of construction companies going bust, media attention on developer’s inability to complete developments and disgruntled buyers.
How did this happen? The property market has shifted, the price of construction has increased and buyers listened to the real estate agent’s promises and latched on to a settlement date that did not yet exist.
A canvasing of recent news articles on the subject has revealed a couple of themes, namely:
Deposit: buyers deposit are “100% safe”; and
Communication: the buyers are being kept updated on the developers negotiations with substitute contractors to complete the development.
Usually, only one of the above plays out in practice.
Deposit: Your off-the-plan agreement will usually provide for the deposit to be held by a “stakeholder” until settlement date is triggered. The “stakeholder” is typically the vendor’s solicitor. If settlement date is not triggered and the agreement is cancelled – the deposit (and the net interest earned) will be returned to you.
Communication: You will be provided with a letter or two from the vendor’s solicitor reminding you that your deposit is safe and the agreement is still on foot. You may even receive a request to extend condition dates and/or the sunset date – a sunset date is the date by which a developer must fulfil their obligations under the contract. But you will not be kept up-to-date on how negotiations are going and you may not receive answers to any questions you raise in a timely manner.
Under the sale and purchase agreement, you must wait until the next conditional date and/or sunset date to roll around before you are able to cancel the agreement for non-fulfilment of the vendor’s obligations under the agreement. Alternatively, you could approach the vendor and request for the parties to agree to cancel the agreement – in our experience this request will go unanswered. The net result is the same – the return on your 10% deposit is a small amount of interest.
This is not to say that all off-the-plan buyers will face this result. An alternative, and more positive outcome, is that you settle your purchase a few years after signing your agreement without any hiccups.
The reality is that there is a risk in buying off-the-plans so you need to ensure you are ready to accept such a risk.
So how do you become comfortable with the risk?
• Do your homework: Research the developer and the contractor and ensure they have a history of completing projects. Keep in mind that the terms of the agreement will stipulate that the developer can choose to switch construction companies mid-development if they choose.
• Think critically about your situation and what you expect your situation to be in five years’ time: Off-the-plan developments take time. You may not settle the purchase until years later. Will the property still be fit for your purpose in five years’ time? We remind you that the capital gain tax governed by the bright line test has now been extended from two to five years. You may have anticipated that you would live in the property as your main home but your circumstances might have changed and you may need to sell the property following settlement. You never lived in the property as your main home = hello capital gains tax.
• Beware of agents’ promises and marketing material: You will be told a lot of things – “the development will be ready in one year max”, “the development is high spec and to the highest quality”. Be aware that these comments cannot necessarily be relied on, and concentrate your efforts on understanding the terms of the agreement. The agreement contains the only promises you can count on.
• Accept the risk: When buying off-the-plan you have little certainty as to time, quality and cost. Unfortunately economic events during the build process may mean that to complete the development the developer may need to cancel your agreement and sell the property at a higher price. You will receive your deposit and net interest as promised – “your deposit is 100% safe”. Following cancellation the developer may even approach you to ask if you would like to purchase the exact same property for considerably more than your original agreement.
Buying an apartment off-the-plan can result in a wonderful new property in years to come, but make sure that you are aware of the risks and of the potential outcomes if circumstances change.
Our role as your legal advisors is to remind you of what could go wrong with this process. If you are considering purchasing a property off-the-plan, please make sure your first and last stop is always us.