Off-the-plan property contracts: how to protect yourself from costly surprises
Buying off-the-plan can offer great rewards — but poorly drafted contracts and developer delays can turn opportunity into risk, writes Tara Jain, Principal, Tara Jain Solicitors.
Off-the-plan property purchases have long attracted both property investors seeking capital gains and first home buyers looking to secure today’s prices while saving during construction.
The landscape, however, has shifted dramatically in recent years, with legislative reforms fundamentally changing the rules of engagement between developers and purchasers.
The emerging question is whether purchasers whose contracts are rescinded without their consent should be entitled to damages for loss of bargain or a share in capital gains resulting from rising land values.
The evolution of legal protections
The catalyst for change came in 2015, when buyers were left vulnerable as developers increasingly exploited sunset clauses to rescind contracts in rising markets, then reselling properties at higher prices.
The public outcry prompted the government to introduce reforms preventing developers from using sunset clauses to terminate contracts without first obtaining a Supreme Court order.
This protection (enshrined in section 66ZL of the Conveyancing Act) was applied retrospectively.
Yet these initial reforms proved insufficient.
By 2019, more extensive changes were introduced to address ongoing transparency concerns.
These reforms included requiring deposits to be held in trust until settlement, mandating a disclosure statement with key information for purchasers, and obligating developers to notify changes to any ‘material particular’, defined as something that adversely affects the use or enjoyment of the lot.
In certain circumstances, buyers gained the ability to rescind contracts. These provisions were consolidated in a new Division 10 (sections 66ZL to 66ZU) of the Conveyancing Act.
The legislative landscape continues to evolve. The NSW government’s discussion paper released earlier this year explores further reforms, including:
- whether to limit the developer’s ability to extend the sunset date and whether the developers should pay a penalty for not meeting the date
- whether the buyers should be allowed to record a caveat on the development land
- whether there should be requirement for developers to disclose the status of their development against construction milestones
- whether the sunset clauses ought to be mandatory in contracts such that buyers can withdraw from the contract if sunset events do not occur by a set time.
Critical considerations before signing
While legislative protections have strengthened, off-the-plan contracts remain far from standard conveyances. Buyers benefit significantly from engaging legal firms with specific experience in these transactions.
Several critical factors warrant careful examination:
Contract language and developer obligations
The contract’s wording regarding developer obligations matters enormously.
Contracts stating the developer will use “reasonable endeavours” to deliver the property need to provide more definitive commitments.
Further, whether the contract is conditional allowing developers an out? Such exit strategies for the developers effectively render sunset clause protections meaningless.
Developer track record
The developer’s reputation, gauged through past projects and, in some cases, the directors, provide valuable insight into likely performance.
This due diligence often reveals patterns of behaviour that may not be apparent from the contract alone.
Sunset date flexibility
Examine whether the contract permits developers to extend sunset dates multiple times. Such provisions can effectively lock buyers into contracts indefinitely.
Project funding and viability
Understanding whether the number of off-the-plan contracts that must be sold before construction can commence is crucial. This reveals whether the developer has the financial capacity to fund the project with their own equity or is dependent on pre-sales for financing.
Buyer protections for developer changes
What does the contract say about the buyer’s rights if the developer transfers the development site to another entity or becomes insolvent?
The ebbs and flows of construction market conditions and legislative frameworks continue to shape the balance of power between developers and buyers.
By carefully examining these critical junctures before signing, buyers can avoid the need to commence costly Supreme Court proceedings to compel developers to perform their contractual obligations.
They can also sidestep the expense and lengthy timelines associated with pursuing remedies under common law and Australian Consumer Law, including claims for unfair contract terms and misleading and deceptive conduct.
In this evolving landscape, informed buyers who understand both their legal protections and the practical realities of development projects are best positioned to navigate off-the-plan purchases successfully.
