Be Careful of the Traps in ‘Off the Plan Contracts’
By Cally Tam 11/09/2017
The prices for real property in the Queensland market is comparatively lower than the prices in other States in Australia, and therefore it is no surprise that there has been an increasing number of people interested in buying property in Queensland whether it be for investment or for personal use.
Investors are not limited simply to foreigners but also there are domestic investors from different states.
In particular we have found that whether you are an investor or a first home buyer, the choice of purchasing a property “off the plan” is becoming increasingly popular. For first home buyers this may be because they can take advantage of the Great Start Grant (formerly known as the first home owner’s grant) if they meet all of the requirements of the Grant they can receive government assistance to the tune of $15,000.00. For investors, it may be because of the property prices in Queensland are so much lower compared to those in their States particularly New South Wales and Victoria.
However, if you have decided to commit to purchase an off the plan property you should review the Contract thoroughly prior to signing the contract. Generally buyers may be informed that they are signing a standard contract, but, what may be the development’s standard contract does not mean it is a standard or normal contract that is used for all purchase Contracts. Each development will have its own standard contract with their standard terms and conditions can vary a great deal.
Furthermore, the agent’s advice regarding settlement is often an estimate only, and their advice is not binding on the developer/seller unless it is written into the terms of the Contract. Therefore prior to signing the Contract, you should always check what is the sunset date of the contract. The sunset date is the last day upon which final condition of the contract must be completed, for example the date by which the construction of the property you are purchasing must be completed. If it is not completed by the sunset date then the contract of an off the plan property usually provides that either party may terminate the Contract, and in that event that the deposit shall be refunded to the purchaser. But it must be noted that pursuant to current legislation a developer may nominate a settlement date of up to 5 ½ years the date of the Contract.
The sunset date also has another very important significance relating to the value of the property. When buyers sign an “off the plan contract” to purchase a property they agree to a price which they believe the property is worth at the present time or at least at the time when the property is expected to be completed. However, as we have all witnessed, for example, during the global financial crisis, property values can drop 50% or more during economic downturns. With this in mind where a buyer signs a off the plan contract with a significantly long sunset date, by the time it is completed the property may not be worth what they had anticipated. This was evidenced in Queensland on the Gold Coast in particular with the Hilton Development and Soul Development which saw many buyers suffer a loss when the property value decreased between 30% – 40% by the time their apartments were completed and the contract was ready to settle.
Although it is not possible to foresee all possible circumstances that may occur prevention is always better than cure. By equipping yourself to be in the best position by seeking the appropriate legal advice is better than trying to resolve an argument when something goes wrong.
Therefore we recommend that you may wish to consider some other matters when purchasing off the plan contracts including but not limited to:
- When is the deposit payable? – Most off the off the plan contracts will require a significant sum of deposit to be paid as soon as the contract is signed. You should consider when the deposit is payable and whether you are prepared for these funds to be locked away for the next few years.
- Who keeps the deposit and when is the deposit refundable? – It is paramount that you ensure the contract provides that the deposit must be retained in a Trust Account of the Agent or Lawyer and not to be released to the developer. Because if the deposit is released to the developer and the developer defaults on the contract or terminates the Contract you may never see your deposit again. Further, you must ensure that the Contract provides that the deposit is immediately refunded to you if the developer cannot satisfy the terms of the contract by the sunset date.
- How will you finance the purchase – Most off the off the plan contracts will not allow you to make the contract subject to a finance approval for a long period of time. On the other hand, most bank approvals are only valid for a few months. After you sign the contract if there is no finance condition to allow you to terminate the contract then you must find the funds to complete the settlement.
- Body corporate levies and charges – you will be provided with a disclosure statement of essential information that the developer is required by law to provide to you. This information will include your contribution to anybody corporate levies and charges as a lot owner.
- Sunset date – despite what the agent tells you, look in the terms of the written contract. What is the last date which the development has to complete the development. This date is important because this may be the date that you may have to wait to for the property to be completed and becomes legally yours.
With this type of contract, as with all contracts relating to real property or relating to business you will be far better informed and protected if you seek legal advice prior to signing the Contract.
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