LawBrief August 2020

Welcome to Finlay Wall - Solicitor

Gault Mitchell Law is thrilled to welcome Finlay Wall on to their team.

Finlay, who graduated from The University of Otago in 2015 with a Bachelor of Laws (LLB) and Bachelor of Arts (BA), went on to work in a medium-sized law firm in Invercargill where he grew his experience in property and commercial law.

On moving to Wellington, Finlay joined Gault Mitchel Law in July this year. He enjoys working with clients on the complex issues found in property and commercial law and his practice will focus on residential conveyancing, subdivisions, and commercial law, including commercial leasing and the sale and purchase of businesses.

When Finlay is not at work, you can probably find him cycling and running around the Wellington hills.

Finlay Wall: Tel: (04) 472 5074 Email: finlay@gaultmitchell.co.nz

  

Buying Property ’Off the Plans’

Buying property ‘off the plans’ in one of the increasing number of developments in Wellington can be an attractive opportunity for many people, from first-home buyers through to families and property investors.

The typical arrangement is where a buyer contracts with a developer to purchase a property within a wider development by way of the developer carrying out a subdivision to create the Title for the property together with constructing the household dwelling (whether an apartment within a large complex, a townhouse or a standalone home).

A buyer will usually pay a deposit upon signing the agreement or satisfying their Purchaser Conditions, and the balance of their purchase price on the settlement date, which occurs only when the Title has been created and the household dwelling is complete.

There are some key benefits to buying off the plans from a buyer’s perspective. Perhaps the most appealing is that on completion the buyer acquires a new home, within a new development, which is built to the latest building code and standards, and quite possibly with some input from the buyer on finishing touches.

A buyer also ‘locks in’ their purchase price as at the date the agreement is signed, even if the settlement is some time down the track. This means there is potential (in the right market) for the buyer to make a capital gain before they have even paid the balance of their purchase price.

Naturally, a buyer may be focused on the end product as represented in the often glitzy photos and marketing materials. However, buying off the plans is a considerably more complex process than buying an existing property and there are some risks involved.

It is important for a buyer to work closely with their lawyer to obtain a good understanding of the contractual arrangements and to ensure their interests are protected.

 

GENERAL MATTERS FOR A BUYER TO CONSIDER

What are some of the important general matters that a Buyer should take into account when considering whether to buy property off the plans?

Agreement: Balance of Interests between the Developer and the Buyer

An Agreement to buy property off the plans is typically a substantial document with many pages of terms and conditions together with a large set of plans and specifications. There is no one standard form of agreement and the terms can vary vastly from developer to developer.

Generally, the agreement will favour the developer in some aspects. The developer will be allowed some flexibility in what they are creating by having some scope to depart from the plans and specifications and to allow for a delay in certain circumstances.

While some flexibility is a practical necessity to allow the developer to get on and complete the development, it is important that the agreement strikes a reasonable balance and the buyer is able to have some certainty as to the exact nature of the end product so that there are no surprises or disappointments for the buyer.

Completion Date and Delays

It can take some time to complete a development. There are often unforeseen delays. Sometimes developments do not get off the ground or fail at a much later stage for whatever reason. Despite any assurances offered by the developer at the outset, a buyer will not have certainty as to when the development will actually be completed and when the buyer can take possession of their new property.

Gain or Loss

It is possible that by the time settlement eventually comes around the buyer may enjoy a capital gain. However, the opposite position could apply depending on market conditions. A buyer’s circumstances can also change between the time of signing the agreement and the settlement date. Also, if a development was to fail at a later stage, the buyer could have been out of an increasing property market for what may have been a considerable period of time.

End Product

A buyer places a degree of trust in the developer to carry out the work in accordance with the agreement and the plans and specifications. Ultimately, in our experience, there can be a difference between a buyer’s expectations and the end product.

Reputation

The reputation of the developer and the previous work that the developer has carried out can be an important consideration.

 

KEY PROVISIONS IN AN AGREEMENT FOR A BUYER

What are some of the key provisions from a buyer’s perspective that should be included in an agreement to buy property off the plans?

Prerequisites for Settlement

It is essential that a Buyer is only required to pay the balance of their purchase price and complete settlement when the Developer has provided the following:

  • Code Compliance Certificate for the completed household dwelling (which confirms that the Council is satisfied the building work has been completed in accordance with the Developer’s Building Consent and the Building Code).
  • Title for the Property on completion of the Developer’s subdivision.
  • Generally, a Certificate of Practical Completion is also provided by the Developer’s Architect or Builder confirming that the Property in their opinion is complete in terms of the Plans and Specifications and is capable of being used for residential purposes.

Stakeholder for Deposit

The buyer’s deposit should be paid to the developer’s solicitor to hold as stakeholder until close to settlement when the developer has completed all the prerequisites for settlement.

Purchaser Sunset Condition

A Purchaser Sunset Condition specifies a certain date by which the developer must have completed the prerequisites for settlement or otherwise the purchaser may elect to cancel the agreement. Although this date will generally extend well past the developer’s expected completion date, it provides overarching protection to the buyer against the developer falling into serious difficulty and being unable to complete the development for whatever reason.

A supplementary provision should expressly record that if the agreement is cancelled on account of the Purchaser’s Sunset Condition, the buyer is entitled to immediately receive their deposit back with net interest.

Thorough Plans and Specifications

The plans and specifications contained in the agreement should be thorough and complete. The plans and specifications should include a Scheme Plan of the proposed subdivision together with photos/impressions of the house-hold dwelling and the wider development. Itemised materials that will be used in the construction of the household dwelling together with the fixtures and chattels, should also be included.

Developer Flexibility

In practical terms, a developer requires some flexibility to deal with the demands of carrying out a development. For this reason, it is normal for an agreement to allow some flexibility on the following matters:

  • Reasonable changes to the plans and specifications
  • Substitution of un-procurable building materials from those itemised in the plans and specifications.
  • Variation in the actual size of the Property
  • Registration of interests against the Title of the Property (such as easements for utilities or rights of way).

It is important from a buyer’s perspective that reasonable limits are placed on the developer’s degree of flexibility. In all circumstances, any variations or substitutions should not be permitted if they would have a negative material impact on the value or utility of the property as represented in the plans and specifications.

Purchaser Variations

During the construction phase, a buyer may wish to vary the plans and specifications and customise items (for example by upgrading certain fixtures). The agreement should contain a provision that requires the developer to use reasonable endeavours to accommodate a buyer’s reasonable requests for variations and specify the basis for which the costs of any such agreed variations will be calculated.

Following Completion

An agreement will usually contain an express ‘maintenance provision’ for a certain period of time following settlement where the developer is required to rectify, at their cost, any defects in the property, generally limited to faulty workmanship or materials. The Building Act 2004 also contains consumer protection for a maintenance period of 12 months from the completion of the building work.

Where a Buyer is purchasing a townhouse or standalone home, it is common for a developer to offer a third party Building Guarantee (such as a Master Build Guarantee). The agreement should record that position and require the developer to take all necessary steps to ensure the guarantee is in place and transferred to the buyer on settlement.

 

OTHER PROTECTIONS

Are there any key statutory protections outside the terms of the agreement?

Building Act 2004

The Building Act 2004 contains various consumer protections in respect of the building work in the form of implied warranties from the developer to a buyer. The key warranties include:

  • That the building work will be carried out in a proper and competent manner in accordance with the plans and specifications and the Building Consent.
  • All materials will be suitable for purpose and new (unless specified otherwise in the agreement).
  • That the building work will be carried out with reasonable care and skill.
  • That the building work will be completed within a reasonable timeframe.

Resource Management Act 1991

The Resource Management Act 1991 also contains certain consumer protections that apply under any agreement off the plans (except in the case where the developer has reached a particular stage late in the subdivision process at the time the agreement is entered into). The key protections include:

  • A ‘cooling-off’ period where a buyer may elect to cancel the agreement within 14 days.
  • A condition where a buyer may cancel the agreement if the developer has not made reasonable progress to reach a particular stage late in the subdivision process after two years from the date of the developer’s Resource Consent or one year after the date of the agreement (whichever is the later).

 

BUYING OFF THE PLANS: PRACTICAL MATTERS

In practical terms, what is the best approach to buying off the plans and what involvement does your lawyer have?

In our experience, the best approach to buying property off the plans is completed in three stages as follows:

Stage One – Reach a Deal

The buyer should consult with their lawyer when they have identified a property ‘off the plans’ they wish to place an offer on.

The developer’s agent will usually provide the agreement that has been approved by the developer and the developer’s financer.

The buyer’s lawyer will carry out a preliminary review of the agreement and ensure there is a suitable Approval of Terms Condition together with any other conditions that a buyer may require (generally a wide due diligence condition). The buyer’s lawyer will also ensure that any deposit under the agreement is not payable until such time as the Buyer’s Purchaser Conditions are satisfied.

The buyer is then able to submit their offer and reach a deal with the developer.

Stage Two – Lawyer’s Review and Due Diligence

When negotiations are complete and the buyer’s offer is accepted, the buyer will carry out their due diligence, including confirming their finance arrangement with their bank.

The Buyer’s lawyer will carry out a full review of the terms of the Agreement and assist the Buyer with their Due Diligence more generally.

The buyer’s lawyer will then speak with the developer’s lawyer and negotiate any reasonable variations required to strike a balance and better protect the buyer’s interests.

If the buyer is satisfied with their due diligence and the final terms of the agreement, the buyer will then confirm satisfaction of their Purchaser Conditions and pay their deposit to the developer’s solicitor as stakeholder.

Stage Three – Complete the Purchase

On completion, when the developer has eventually satisfied the prerequisites for settlement, the buyer’s lawyer will attend to the standard conveyancing transaction and assist with all other requirements to complete settlement and to transfer the property to the buyer.

 

CONCLUSION

We expect that buying off the plans will become more popular in an increasing population with higher-density urban living. While there are some key benefits for a buyer, it is important that the risks involved are carefully considered and the terms of the agreement strike a fair balance to protect a buyer’s interests.

Article by Simon Pigou – Partner Gault Mitchel Law – specialising in property, trusts and business matters.

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