Pandemic drives shift in off-the-plan contracts

Developers have become more willing to incorporate valuation or force majeure clauses in off-the-plan contracts following the coronavirus pandemic, as buyers seek to mitigate risks in the wake of the crisis.

Empire Legal senior lawyer Jake Morrison said his firm had experienced a significant lift in enquiry from off-the-plan apartments buyers whose circumstances had changed due to the pandemic, leading to them not being able to settle contracts entered into pre-COVID-19.

Mr Morrison said a recent case involved an apartment buyer in Brisbane who had signed a contract prior to the pandemic, lost their job and was not able to service the loan offered by a major bank.

The buyer was forced to renegotiate with the developer to include an assignment clause in the contract retrospectively, and pay the difference between the contracted apartment price and the current, post-COVID price.

Mr Morrison said in an ideal scenario, a force majeure clause, which allows buyers to exit a contract in the case of events outside of their control, such as a natural disaster or a pandemic, would protect a buyer.

While he said it was rare for force majeure clauses to be incorporated in off-the-plan contracts, the COVID-19 outbreak had prompted developers to rethink their contract terms to secure sales.

“Developers are changing their attitude in terms of working with potential buyers,” Mr Morrison told Australian Property Investor Magazine.. 

“It’s either that option or there are no buyers at all - off-the-plan has been quite slow through the pandemic. 

“So when developers do get a buyer on the hook, they are more willing to amend the contracts in many respects so they can keep that particular buyer.” 

As well as assignment clauses, Mr Morrison said developers were increasingly becoming amenable to negotiate valuation provisions in contracts, to give buyers certainty that apartments would not be worth significantly less than the purchase price once a project was completed.

Mr Morrison said he had recently seen a significant number of valuations coming in at around 5 per cent below the purchase price agreed to prior to COVID-19.

“Obviously buyers didn’t have the foresight 12 months ago when that contract was negotiated to have a clause that settlement would be subject to a satisfactory valuation,” Mr Morrison said.

“And it becomes more complicated when there is lending involved. 

“The bank won’t necessarily pull their loan, they will just reduce the amount that they are prepared to lend based on that valuation.

“That’s played out a little bit in the last couple of months with people that have settled off-the-plan where the valuation has shifted.  

“The bank is certainly not going to leave someone high and dry, provided they are still in employment. 

“But if they have lost their job, that’s a change in circumstances and a completely different contemplation.”

However, while he said it was encouraging that developers were willing to work with buyers affected by COVID-19, Mr Morrison said he didn’t expect valuation or force majeure clauses to be permanent inclusions for off-the-plan contracts.

“What I’m seeing at the moment, is that developers are being more open to contract amendments, but as the market slowly recovers there will likely be a shift back to the norm,” he said.

“At this stage, they are willing to negotiate. They’re not going to change their base contracts for all of their future projects, I think it’s going to be a measure they are willing to accept to get a deal across the line at the moment.

“They certainly won’t be doing that as a permanent measure, it will be an interim measure to get the projects that are currently scheduled finished and settled so they can move onto the next project.”