Think Nicholsons

Mar 12

What do you need to know about new property contracts?

Nicholsons' Partner Paul Morris was recently interviewed about contracts for off-the-plan property, and particularly about off-the-plan risks and precautions to take before signing any contracts. The interview is reproduced here:

Q: What are the most common clauses that crop up solely on new property contracts?

A: Buyers have to appreciate the context of this question. There is no “standard” form of contract for “Off Plan” sales in Queensland. Further, there are very many variations to legal and physical structures that are available to developers to bring their product to the market. Consequently, it’s not a matter of common problem clauses, but rather, making sure that the draft contract is appropriate for the development being considered. However, an example of some issues that regularly attract attention include:

  • the extent of a developer’s rights to vary the entire project and/or the lot the subject of the contract;
  • how long the contract is (and should be) able to be terminated by the developer and whether the buyer is aware of the likelihood that the project will be delivered (given the potential opportunity costs for the buyer) and risks associated with that;
  • having some reasonable certainty and expectation in relation to the internal structure of the lot being purchased and its inclusions and how they are being paid for;
  • whether the buyer is paying cash or borrowing funds and the certainty that those funds will be available. Off Plan contracts are not subject to finance as many buyers might be expecting if they have experience in relation to buying existing property;
  • in having a reasonable amount of time for a buyer to be ready to settle after title for the building is registered;
  • in having a functional and meaningful defects liability regime in the contract;
  • paying only an appropriate amount of land tax as an adjustment at settlement.

Q: How can you tell which clauses are to protect you as the buyer and which are to protect the developer?

A: The truth is that off plan contracts are designed to protect the developer. Depending on the complexity of the development being considered, the majority of the contract document may need to be focused on providing the developer with the flexibility they need to deal with the relevant government departments, the nuances of the building process and satisfying their financier’s requirements. These can be particularly complicated matters and the more iconic and significant the development, the more difficult dealing with these external parties generally becomes!

The rest of the contract will be providing mechanics surrounding registration, inspections and settlement. So it becomes an exercise to ensure that the flexibilities within the contract document do not exceed what is reasonable to allow the developer to bring the product to market. Unfortunately, reaching a fair balance involves the application of significant experience to be able to identify the risk created by the flexibility and to be able to explain the risks satisfactorily to a potentially inexperienced buyer, so they can make an informed choice as to whether an aspect of a proposed contract is fair. Of course, what is fair and reasonable for one person will be different for another person. It is all very subjective. There is “no one size fits all”.

Q: Are there any clauses that you should insist are on there to protect yourself as a buyer?

A: Because there is no such thing as a standard form contract, it’s not so much of insisting on standard clauses but recognising important issues and how they are being dealt with to reasonably protect a buyer in the context of the draft contract that has been submitted. The contract needs to provide reasonable certainty as to:

  • what is being sold — the Lot and any exclusive use (“EU”) areas;
  • where the Lot is within the scheme and does the community management statement provide for the Buyer to satisfactorily use its Lot, any EU areas and the Common Areas;
  • what inclusions or special arrangements are being offered to the Buyer and is there any additional cost and how are these reflected in the contract;
  • how important are the expected improvements on the common property to the buyer when entering into the contract, when will those improvements be delivered (if at all) compared to the timing for settlement;
  • what variations to the structure of the scheme and the lot being bought can the developer make;
  • when is the property expected to be delivered and what time periods is the developer entitled to claim by way of extensions beyond the expected settlement date;
  • how long after registration a buyer is required to settle. “Time is of the essence” in Queensland. Most contracts only allow two weeks after registration for a buyer to get their bank in order and settle without fear of being default;
  • a meaningful and workable defects liability clause. It also needs to be written is written in such a way as to take into account the involvement of a tenant if a buyer is an investor;
  • the contents of the body corporate budget and whether it is realistic both currently and in the short term.

Q: Are there any clauses that you should insist are removed before you sign?

A: There could be many clauses that are inappropriate to a buyer depending on whether they are proposing to reside in the property or if they are an investor and depending on the issues I have identified above, for an example. There is no substitute to thoroughly reading the contract and understanding what it is saying from the perspective of what a Buyer was expecting to buy and when. The purchase of a unit is a very significant investment for most people. If there is anything in the draft contract that is contrary to a Buyer’s expectations then they should be insisting that the draft contract be varied to satisfy those expectations. Generally, unless a buyer is being unrealistic, most developers should be able to accommodate some changes to the contract to satisfy genuine expectations. Again, depending on the nature of any particular issue at hand, if a special condition cannot be provided to respond to any particular issue, then a buyer should consider moving on to an alternative investment. There is a lot of competition for developers at the moment and a huge difference between the treatment that a buyer will receive from different developers.

Q: Do you have any contract advice for first-time buyers?

A: Do not succumb to pressure. Read the contract and the disclosure statement and do your due diligence, both on the project and on the developer. If a buyer genuinely believes there is buying competition for a particular lot and believes an opportunity may be lost, see if the developer is willing to waive any cooling off termination penalty and provide you with a time period (say seven days) to review and obtain proper advice on the contract after you sign it. However, you will need a written special condition about this in the contract. Developers who are confident in their product and in the contract documents that they are using should not be offended by such a request.

Alternatively, the majority of developers still proceed by having the agent prepare an Expression of Interest (EoI) which is used to instruct the developer’s solicitors to issue disclosure statements and contracts to a particular buyer in relation to a particular lot. If you are genuinely interested in proceeding, don’t be afraid to complete an expression of interest and pay a nominal holding deposit. If you are unable to proceed for some reason (i.e. if you are not happy with the contract documents) the holding deposit will be refunded.

Q: If you could give buyers of new and off-the-plan property one tip when it comes to contracts what would it be?

A: Research, research, research. Know your market from the perspective of comparative stock and comparative developers. Read and understand the disclosure statement and contract documents.

If you would like to discuss this article, or Property Law issues more generally, please telephone Paul Morris on (07) 3226 3944.