Regardless of the type of development, every property developer is keen to sign up buyers of new lots in their projects at the earliest possible opportunity. They afford certainty as to the success of the development, in some cases they are a pre-requisite to drawing down construction funding and they ensure that the cash will start flowing soon after registration of the survey plan.
We have identified four key reasons to exercise a little patience in the early days of your development and to plan your development well, to ensure that your project doesn’t stumble at the final hurdle.
Reason 1 – Being able to deliver what you have promised
The Decision Notice issued by the Council approving the development will contain certain conditions that must be complied with in order for the Council to seal the survey plan for the development once construction has been completed.
In some cases these conditions will include the grant of easements affecting certain lots in the development, or in the case of community titles developments, can include matters which must be included in the by-laws of the new scheme. These by-laws must be disclosed in the disclosure statement given to buyers before they enter into an off-the-plan contract.
Council may also require significant changes to the proposed plans for the development before it is approved. In any event, where there are encumbrances affecting the lot that were not disclosed in the contract or disclosure documents, there are material changes to the by-laws or the lot itself is materially different from that described in the contract, the buyer may have a right to terminate prior to settlement and the benefit of the off-the-plan contract will be lost.
We always recommend holding off entering into off-the-plan contracts until our developers have an understanding of the conditions likely to be required by the Council in the Decision Notice.
Reason 2 – Show me the money
Where your off-the-plan contracts are required to be “qualifying pre-sale contracts” for the purposes of releasing construction funding, your financier will have certain requirements to be met before the off-the-plan contracts will count as qualifying pre-sale contracts.
Before signing up any buyers, you should either know what those requirements are or ask your bank to provide you with a list of their requirements, to ensure that your proposed contracts will qualify. Usual requirements include the provision of personal guarantees where the buyer is a company, settlement within a particular time period after registration of the survey plan for the development and the price being at least the amount contained in an independent valuation approved by the bank. There may well be many others.
It will also be necessary to prove to your bank that the off-the-plan contracts are unconditional (save for registration of the plan) and binding on the buyers.
Reason 3 – To ensure enforceable sale contracts
Without doubt, the biggest problem that we see with off-the-plan contracts is failure to comply with the disclosure requirements set out in the Land Sales Act (for standard format developments) and the Body Corporate and Community Management Act (for community titles developments).
Each piece of legislation requires disclosure to be made to buyers prior to the buyers entering into an off-the-plan contract. In each case, the disclosure statement must be signed and dated by or on behalf of the seller prior to being given to the buyer. Where disclosure isn’t made in the required form, disclosure is made but is deficient or the disclosure statement isn’t signed by or on behalf of the seller prior to being given to the buyer, the buyer will have a right to terminate right up to the point of settlement.
Failure to give proper disclosure may also disqualify the contract as a qualifying pre-sale contract for the purposes of construction funding.
This is a big risk for developers and there are examples of large high rise developments with hundreds of lots where buyers could not be compelled to settle because statutory requirements had not been complied with.
Reason 4 – Avoiding the requirement to give further disclosure
Off-the-plan sales of lots in a community titles scheme have much more comprehensive disclosure requirements than standard format lots.
They require developers to have put a significant amount of work into settling budgets for the new scheme, finalising the structure of the scheme (and any subsequent staged development of the scheme) and engaging a body corporate manager and any other parties such as caretakers or letting agents for the scheme prior to entering into any off-the-plan contracts.
Once disclosure has been made to the buyers in the disclosure statement, any changes must be the subject of a “further statement” to the buyers. Where a buyer would be materially prejudiced if required to settle as a result of anything contained in a further statement, the Buyer will have the right to terminate the contract during the 21 days immediately following the issue of the further statement.
It is critical that the development is sufficiently bedded down at the time of making the initial disclosure such that the chances of needing to make a further statement are either minimised, or that the matters that are required to be the subject of a further statement are not material to the buyers and as such would not create a right of termination.
In a rising property market, a developer may be more likely to “get away with” inadequacies in their disclosure to buyers, however in a falling market, buyers are more motivated to avoid their obligations under off-the-plan contracts, as the valuations to be carried out by their financiers after registration of the survey plan can be less than the purchase price, meaning that the buyers themselves will need to separately find funds to bridge the shortfall. It is in these falling markets that the focus of lawyers for the buyers will be concentrated on the disclosures made by the developer, to identify any deficiency that would allow the buyer to terminate the contract.
Remember, be patient!
It’s important then, for developers to exercise patience early in their project and to take the time to ensure that the property described in the contract and the disclosure documents is exactly what the developer will be delivering at the end of the project.
We have the knowledge and experience to guide developers through these crucial early stages of their projects, to ensure that any off-the-plan contracts that have been entered into are binding and enforceable against the buyers and will result in funds flowing to the developer soon after registration of the survey plan.
If you need advice regarding property development please contact the Commercial + Property Team at Clifford Gouldson Lawyers.
This article was written by Carly Brailak, Special Counsel. For further information please contact Amanda Tolson, Director.