There’s good news for investors nervous about purchasing property ‘off-the-plan’. Recent changes to NSW property laws will make it harder for unscrupulous developers to back out of off-the-plan contracts for residential property.
What are off-the-plan contracts?
An off-the-plan contract is a contract to buy a property which has not yet been created. That property may be vacant land to be created on registration of a plan of subdivision (e.g., the Shearwater Landing development at Greenhills Beach), an apartment to be constructed and created on registration of a strata plan (eg. the Woolooware Bay apartments) or anything in between.
For the ordinary purchaser, entering into an off-the-plan contract will mean handing over and tying up a significant wad of cash for the promise, but not guarantee, of something wonderful a couple of years down the track.
Usually, a developer will enter into contracts to sell these yet-to-be created properties a year or two in advance of them being ready to hand over to the purchaser and will require the deposits paid under those contracts and the “pre-sales” in order to secure funding to proceed with the development.
What are the main issues with off-the-plan contracts?
There are many unknowns at this stage of the project. The developer may not have development consent to undertake the development, they may not have secured a builder and one can never predict the weather!
Accordingly, an off-the-plan contract will usually include rights for the parties to pull out of the contract, or “rescind”, if certain milestones haven’t occurred by a specified date known as the “sunset date”. For example, if development approval has not been obtained by 31 July 2016 or if the plan of subdivision isn’t registered by the date 12 months after the contract date.
Apart from the uncertainty as to whether a development will be allowed to proceed or proceeds on time, there is also uncertainty as to where the property market will be sitting at the time of settlement. If the market has dropped significantly between the time that the contract was entered into and the time of settlement, the purchaser may have overpaid. In a booming property market, like that we’ve seen in recent years, a developer may be left wondering if perhaps a better price could be obtained for the property.
What are these changes in the law?
Unfortunately, over the past couple of years, there have been reports of certain developers deliberately holding off completing developments by the sunset date and then rescinding contracts to obtain a better price. As a result, the NSW Government was prompted to do something about this problem.
In late 2015, the NSW Government introduced new laws that will apply to all off-the-plan contracts, including those that have already been entered into. Under the new laws, if a developer wants to rescind an off-the-plan contract under a sunset clause, it must first give 28 days notice to the purchaser setting out why it is rescinding and the reason for the delay. It must then obtain either the permission of the purchaser or an order from the Supreme Court to proceed to rescind the contract. The Supreme Court can only make an order permitting rescission of the contract if it is satisfied that rescission is just and equitable in all of the circumstances.
How will these new laws affect you?
- If you are a purchaser under an off-the-plan contract for residential property and the developer attempted after 2 November 2015 to rescind that contract relying on a sunset clause, please seek legal advice. If the developer has not provided you with the required notice and does not have legitimate reasons for the delay, you may be entitled to claim.
- If you are a purchaser under an off-the-plan contract for residential property and you’re worried about the developer leaving you high and dry after holding your hard earned deposit for two years, you can sleep a little easier!
- If you are a developer intending to rescind off-the-plan contracts in reliance on a sunset clause (obviously, for very legitimate delays in the development), please seek legal advice. In particular, it is important to ensure that you comply with the new notice requirements and that you have regard in your notice to the circumstances that the Supreme Court will consider when deciding whether rescission of the contract is “just and equitable.”
If you have any questions concerning these changes, contact Southern Waters Legal’s dedicated Property Law team on 9523 5535