Buying Off the Plans - What You Need To Know

Aug. 30, 2020

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Buying an apartment, townhouse or even standalone home off the plans can be an attractive option for purchasers. The up-front cost is often low, the home is brand new, and the overall cost of getting involved at an early stage is often cheaper than purchasing the finished product.

 

While these features may be attractive, it is important to note that this form of purchase is riskier than your standard sale and purchase. A contract with a developer will typically involve far more of an imbalance between vendor and purchaser, and the long lead time between contract and purchase means the purchaser is subject to the fluctuations of the market. 

 

If you decide to proceed, there are certain things you can do to help protect yourself:

 

 

1. Carefully review plans and specs 

 

Buying off the plans differs to a typical purchase in that you are entirely relying on plans, specs and marketing material to give you an idea of the finished product. It is important to note that marketing material is not part of the actual agreement and will often be explicitly excluded from the contract through an 'entire agreement' clause. 

 

You should carefully review the plans and specifications in the contract itself and ensure you understand them - if you are unsure, ask questions and get someone experienced in reviewing plans to go over them for you.

 

 

2. Involve a solicitor early

 

Building contracts and off the plan agreements are often very long, entirely bespoke agreements which heavily favour the developer. While your solicitor will not be an expert in plans or specifications, you should get them involved very early in the process to review the legal aspects of the contract. Certain elements of the contract will be set by the developer's lender and be non-negotiable, however there are certain elements your solicitor may be able to negotiate into the agreement for you.

 

It is important to involve your solicitor before anything is signed, to ensure they can effectively negotiate on your behalf. Do not rely on a "solicitor's approval" clause in the contract to get you out of it if need be - these are read narrowly and may not give you the protection you need.

 

 

3. Research the developer

 

After the due diligence process is complete, purchasers will have little control over the development process and very little involvement with the development until completion. The purchaser is entirely reliant on the developer and their team to ensure the property is completed on time and to a high standard. As such, it pays to do some research on the developer and their past projects.

 

Once you have a sense of the developer's reputation within the industry, you may have more confidence entrusting them with your hard-earned cash.

 

 

4. Understand what type of property you are purchasing

 

There is a great variety in the type of property sold off the plans. While you will get a sense of the design and physical elements from the plans, specs, and marketing material, it is important that you understand the legal title you are purchasing as well.

 

House and land packages are likely to have a fee simple ("freehold") title, but for an apartment or townhouse this will vary between developments. The property could be fee simple, unit title or even a cross lease. It is important to discuss this with your solicitor and ensure you fully understand what you are purchasing as there are big differences between each type. For example, a unit title will be subject to body corporate rules - which are unlikely to be finalised at the time you enter into the contract.

 

 

5. Exit strategies 

 

One of the most crucial aspects of the agreement is ensuring you have an 'exit strategy' to recover your deposit and end the contract if something goes wrong or if the development drags on for too long. You should ensure your deposit is held by a third party (usually in the developer's solicitor's trust account) and is recoverable if something goes wrong. You should also ensure your contract has a sunset provision, which would allow you to cancel if the developer has not begun work on the development or made reasonable progress by a certain date.

 

You should be aware that it has become increasingly common for developers to include sunset provisions for their benefit as well. These give the developer the right to cancel their contract if the development is not completed by the sunset date. The risk is that your money may be tied up in the development for months or even years, before the agreement is eventually cancelled and the property invariably relisted at a higher price.

 

 

If you would like advice on a purchase 'off the plans', or for any property enquiry, contact our experienced team on property@becker.co.nz for advice on your circumstances.

 

 

Nina Becker

Staff Solicitor

 

_{Disclaimer: The information contained in this article is general in nature and not tailored to your personal circumstances. It is only current as at the date posted and should not be relied upon as legal advice. If you require legal advice, please contact us for further assistance.}