Buying off the Plans

Recent trends towards apartment living has seen a significant increase in building consents issued for apartments or multi-unit developments. With many buyers now purchasing apartments or units off the plans, we discuss below how a buyer can be protected in order to obtain the best possible outcome.

Multi-unit developments provide developers with good opportunities to maximise profits on any given piece of land.

As a result this type of development is becoming an increasing part of the New Zealand landscape.

Before approval is given for construction funding, a lender may require a developer to achieve a certain level of sales, ie: a demonstrable commitment from the marketplace. It is, therefore, commonplace for multi-unit developments to be marketed on the basis of plans and artists’ impressions of the proposed building.

Buying property on such an intangible basis has both potential benefits and serious risks. We are all familiar with stories of buyers suing developers only to discover that the development was carried out by a company which, shortly after construction was completed, is then placed into receivership.

Accordingly it is important for a buyer to protect their rights at the

point the agreement is signed, rather than at any time later.

Agreement often unique

The standard Auckland District Law Society agreement for sale and purchase has been developed over the years to strike a fair balance between the rights of a buyer and those of a seller.

However, because of the unique nature of a sale from plans,

developers are more likely to prepare their own sale and purchase agreement.

Buyers need to be particularly alert as the inherent balance that is in the standard agreement will not necessarily be present in a developer’s own agreement. Each agreement must be carefully

reviewed because of its uniqueness.

Some developers will provide certain levels of comfort for buyers in an agreement; others will try to weight the agreement in their favour.

It is not uncommon for buyers to fall prey to clever salespeople, or be seduced by a view or upmarket specifications, and overlook any pitfalls in an agreement before signing on the dotted line.

Control retained by developers

Developers will often ensure that they retain control over the construction until at least the point of settlement (and sometimes for a period afterwards).

Selling from plans can take place at specific stages of a development. Initially a developer may not have resource consent for the development and needs to test the marketplace to ensure finance can be obtained before proceeding with an application for consent.

As the developer may be anxious to achieve some initial sales there may be more inclination to

accept a lower offer than later on in a development.

A development’s last few units are often sold at a higher price as the market may have moved up during the planning and construction phase, and the developer may have moved past the break even point.

However, those who buy in the early stages will have the longest wait until settlement, and also the most uncertainty.

Often the first few agreements on a particular development will be conditional on such things as the developer obtaining finance and resource consent.

Therefore, if buying at this early stage a purchaser must be prepared to commit to the purchase and pay a deposit even though the development ultimately may not proceed.

In this situation an agreement should include a ‘sunset clause’ enabling either party to cancel if the unit being purchased is not completed by a certain date. If a unit is being sold prior to resource consent being granted, most developers will include a provision where the buyer is deemed to accept the vendor’s title.

Therefore, if, as a condition of resource consent, a developer

is required to place a charge or use restriction (encumbrance) on a title, the buyer will be unable to avoid the contract, despite not knowing of such encumbrances at the time the contract was signed.

Deposit

Most agreements require a deposit to be paid. If the developer is placed in liquidation prior to completion it is unlikely the deposit would be recoverable, unless the agreement provided for the deposit to be held by a third party stakeholder.

There is also the question of who should be credited with the interest earned on a deposit.

Body corporate

Most multi-unit developments have unit titles issued. Each owner has a separate title for their unit, but is also deemed to be a member of a body corporate which not only owns and is responsible for common areas, but is also responsible for the general management of the complex.

A body corporate can sue and be sued, and the members must contribute towards any

of its liabilities. Owners must contribute to a body corporate to defray its costs and they must abide by its rules

Standard rules for a body corporate are prescribed by statute, however these can be amended. A developer, while owning all of the land, may write specific body corporate rules and provide in the

agreement that a buyer will simply accept whatever body corporate rules are in existence at settlement.

Another recent trend is for agreements to provide that the buyer give a proxy to the developer for 6-12 months following settlement so the developer can retain control of the body corporate for that period.

Due diligence

Whether or not a particular development ‘works’ once completed will have little to do with the original artist’s impression or any sales talk. Whether the buyer plans to occupy a unit or is speculating, the outcome will be more positive if due diligence is done.

Common complaints in multi-unit developments include noise and management of the development.

Investigating the extent of noise reduction and the body corporate rules can be a stitch in time which saves nine. Buyers should investigate expected sunlight and views, and the general aesthetics of the development.

It is also worthwhile researching and viewing the developer’s previous projects to determine what issues may have arisen.

Post settlement

Settlement will typically occur on the latter of three events: title issuing, practical completion being achieved and the final code compliance certificate being issued by the local authority.

The question of practical completion can be uncertain. An agreement will typically provide that ractical completion will be decided by the developer’s architect.

Care should be taken to consider what maintenance and/or repair periods are provided for in the agreement so when a buyer takes possession, there is still an opportunity to have any defects remedied.

Conclusion

Buying a property ‘off the plans’ can be a complicated transaction and may involve significant expenditure and consequent risk. A buyer should ensure: The agreement being used is carefully examined by their lawyer A sunset clause is included in that agreement Appropriate due diligence is undertaken

The deposit can be funded for the duration of construction, and it is clear where and by which stakeholder it is being held, and Adequate and enforceable maintenance provisions are imposed on the developer post-settlement.

Buying off the plans can be exciting. However a buyer will only come out positively if they carefully and diligently go about the purchase in a thorough manner.

Source: This article first appeared in Finepirnt, client newsletter or New Zealand Law Members Limited www.nzlaw.co.nz

Posted: 28 Mar 2008