Buying ‘off-the-plan’: going according to plan?

Developers often market properties for sale before they have been built or when they are in the course of construction. A buyer cannot physically view the finished property before having to commit to the purchase, so care must be taken to ensure that the legal commitments that are made, are clearly defined and understood so that the buyer can know, with sufficient certainty, what it is he is contracting to buy, and how he will complete the purchase process.

Once a buyer has agreed which unit to acquire, the seller’s lawyer will issue a package of legal paperwork to the buyer’s lawyer. This will typically consist of: a sale agreement, development plans and a specification detailing the materials to be used in the build.

The binding sale agreement
A sale agreement is signed by the seller and the buyer creating a legally binding obligation on both parties to complete the sale and purchase following construction of the unit and satisfaction of other agreed milestones.  In the event that either party fails to complete the purchase on the due date, the sale agreement should outline the consequences for the defaulting party.  Typically this will be the forfeiture of the deposit for the buyer’s default, specific performance or and perhaps damages for the seller’s default.  It is therefore imperative that the parties understand the obligations they are committing to before executing the sale agreement.

Engaging a lawyer to review the sale agreement is recommended as he or she will seek to amend any unduly onerous clauses and properly allocate risk before advising the buyer on the terms thereof. This will also give the buyer an opportunity to raise any concerns, or question any clauses he or she does not understand.  The buyer needs to ensure that the unit and the building within which it is located will be constructed within acceptable time limits, that it is built to an acceptable standard in compliance with plans and specifications and that good title is conveyed following completion and the issuance of a certificate of fitness for occupancy for the unit.

Plans and specifications
As a buyer cannot view the finished product, it is important that he is satisfied as to the plans showing how the property is to be built. A careful examination of such plans should be carried out and any queries put to the developer for clarification. Similarly, the specification should be carefully reviewed as this details the quality of the materials that will be used in the build and the fit-out of the property.  If the buyer thinks they are getting a certain quality of kitchen or bathroom, for example, the specification should reflect that to ensure that there is no misunderstanding as to what is expected of the finished product.

Strata levies
Where a development is a strata development, the buyer will need to understand how the strata is intended to operate and how the costs of maintaining common areas are to be dealt with.  An estimated strata budget should be obtained and the calculations as to how the figures have been reached, scrutinised.  A buyer must be comfortable that the strata levies have been calculated correctly and that he or she can afford to make such payments. A buyer must be satisfied on both matters before signing the sale agreement.

Changes during the build
The sale agreement will refer to the plans by which the unit and the development is to be constructed. It is also likely to permit the developer to make immaterial changes to those plans which may be necessary as the build progresses.  However, if the developer wishes to make material changes to the plans (which are not required by an authority such as the Planning Department), the developer cannot usually do so without the prior consent of the buyer. This protects the buyer against signing-up to buy one thing and finding that, at completion, the property bears little resemblance to what was originally proposed.

Completion
Practical completion of the property and the issuance of a certificate of fitness for occupancy is usually the trigger for completion of the sale and purchase. A good sale agreement will set out the mechanism for triggering completion and should offer the buyer or the buyer’s representative the chance to inspect the property before completion to be satisfied that it is, indeed, practically complete.  If the developer disputes the buyer’s claim that the property is not complete, the sale agreement may refer the matter for determination by an independent arbitrator, or the parties will have the normal recourse to the courts.

Defects
Any new-build will naturally have a number of ‘snagging’ items, that is, defects or incomplete matters which are of a minor nature. The sale agreement should prescribe the way in which such matters are to be dealt with and will usually involve the buyer meeting with a representative of the developer to agree what constitutes a ‘snagging’ item and what does not, whilst settling a programme for putting those agreed matters right. 

It is sensible for a buyer to keep a record (photographic or written) of snagging matters as and when they arise so that they may then be put to the developer at one time, rather than on a piecemeal basis.  A buyer’s lawyer would normally incorporate specific warranties on the part of the seller in respect of the build-quality of the property.  If the finished unit has defects which fall beyond ‘snagging’ matters, these matters should be put to the developer for rectification, subject to the terms of the sale agreement.

The above matters are the basic elements that should be considered when buying ‘off-the-plan’.  Of perhaps equal importance is to consider the reputation of the developer and if the company is known for building a quality product.

Advantages
Buying ‘off-the-plan’ can be an opportunity to acquire precisely the property that you want, at a pre-agreed price, which is often less than the price of the same unit once built. If the issues discussed here are properly considered, buying ‘off-the-plan’ will hopefully go according to plan!

This publication is intended only to provide a summary of the subject mattered covered.  It does not purport to be comprehensive or to provide legal advice.  No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. 

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LEGALLY SPEAKING with Adam Geldard, Appleby

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