Off The Plan FAQ
Think of buying real estate "off the plan" as being similar to contracting an artist to paint your portrait. What if the portrait is not quite what you expected? What if the finished portrait is a little smaller or a little larger than you thought it would be? What if the artist can't complete the work on time? What if mistakes have been made, or you simply don't like the finished product?
There are risks associated with buying something before it is completed. Similar problems arise for purchasers of real estate when buying off the plan.
Before committing to an off-the-plan purchase you should seek legal advice. This is particularly so if the purchase involves an apartment building, as these have attracted a great deal of critical interest in recent times.
To assist consumers who are not familiar with the risks and benefits associated with off the plan purchasers, we have prepared the following set of Frequently Asked Questions:
What does it mean to buy "off the plan"?
Imagine a large paddock surrounded by a single fence. The owner would like to divide the land into small lots and sell them off, but he may not have enough money to do this, and he may not be sure that people will want to buy them.
To minimise his risk, the landowner can "sell" the blocks first, and then divide them up later. This is done by entering into contracts with potential buyers on the basis that the landowner (vendor) will do his best to sub-divide the land, and if he is successful the sale will be completed. Usually, the vendor has a limited time (from 18 months to 3 years) to have the land sub-divided. If the land cannot be sub-divided within the time specified in the contracts, the contracts can be cancelled, and the purchasers will get their money back.
The vendor has plans prepared, showing the paddock divided into smaller lots. Potential purchasers select lots as depicted in the plans, and if everything goes well the purchasers will eventually receive individual titles for the blocks of land they have chosen.
The situation is the same with unit developments. Building works may not have commenced, but purchasers can enter into contracts to purchase units, chosen by reference to plans of the proposed building.
NOTE: It is important to bear in mind that an "off the plan" purchase is the purchase of real estate that does not actually exist at the time the contract is signed. Even though the purchaser may have walked through a completed house or unit, if the plan of sub-division has not been registered the land does not exist as a single lot. It always remains a possibility that the property will not be approved for sub-division, or that settlement will be delayed for many months for a variety of reasons. This is the inherent risk in buying "off-the-plan".
What are the benefits of buying off the plan?
There are numerous perceived benefits associated with off the plan purchasers, some of which are as follows:
Stamp duty savings
One of the most common reasons given for buying off the plan is the perceived savings in stamp duty.
Stamp duty is payable on the value of the land and building as at the date of the contract of sale. Therefore, if construction or refurbishment is yet to be commenced, a reduced amount of stamp duty is payable as compared with buying an existing or refurbished building.
But be warned, stamp duty concessions are NOT based on what the land value stated by the estate agent or the vendor or the advertising brochure. They are based on the value of works performed on the property after the contract has been signed. The concession will be greatest if the property is sold before construction commences. If the sale takes place after construction has commenced concession will apply only to the work yet to be completed. If all works are completed before the contract is signed it is unlikely that there will be any stamp duty concession.
In order to determine the extent of the concession available, the purchaser must establish the cost of the works performed during the contract period. This can be done by having the vendor provide a Land & Building Packages statutory declaration at settlement. Again, it is possible that the figures stated in the Land & Building Packages statutory declaration may differ from those quoted in the contract or advertising material.
Some purchasers buy off the plan because of possible tax benefits. Off the plan purchases can realise significant depreciation tax savings that are greater than those available on existing buildings if purchased for investment purposes. Depreciation expenses that can be claimed may include building, furniture and fittings.
In addition, a rental property is negatively geared when it is purchased with the assistance of borrowed funds, and the net rental income, after deducting other expenses, is less than the interest on the borrowed funds.
Of course, advice from a financial adviser or accountant should be sought before committing to an off the plan purchase.
Lower purchase price
Developers are often keen to sell as many properties as early as possible, and so prices are usually very competitive. In addition, demand may increase as the development takes shape, the possibility that similar properties purchased closer to completion will be more expensive than those purchased early.
It is often the case that the best properties are sold first.
Lock in the price
The price of the property can be locked in as at the contract date. One or two years down the track you can watch the value of your property grow relative to market movements. Generally, property values increase between the period of buying off the plan (signing the contract) to the date the development is completed.
Time to save for deposit
Off the plan purchases often allow for payment of the deposit by way of a deposit bond, giving purchases time to save enough to cover the 10% ordinarily required as deposit.
Choice of finishes and fittings
Buying off the plan provides the opportunity to put forward any suggestions for design and finishes in the property being purchased, allowing the purchaser to customise.
What are the risks associated with buying off the plan?
In our experience, purchasers of off the plan developments tend to focus on the positive aspects of the transaction, without paying sufficient attention to the negatives. Some of the risks associated with buying off the plan are set out briefly below. Particularly nasty risks are discussed in more detail under specific headings on this page.
Complexity of documents
Contracts and Section 32 Vendor's Statements for off-the-plan matters are usually lengthy, and can be extremely complicated. It is not unusual for lawyers to find that a client who has purchased off the plan is not aware that the transaction is subject to very restrictive terms and conditions, or that hefty penalty interest and costs can apply in the event of a default.
Cancellation by the vendor
Developers take risks when they invest in real estate developments, including the risk that permission for the development may be refused or that the development may become unviable. In such cases the developer needs to be able to cancel the sale contracts.
Most off the plan sale contracts contain special conditions allowing the vendors to cancel the contract in certain specified circumstances. In addition, the developer is usually able to cancel the contract if the plan of subdivision can not be registered within a specified period of time, commonly between 18 months and 3 years from the day of sale.
If the contract does not specify a period of time, either party may cancel within 18 months of the day of sale if the plan of subdivision is not registered.
Unable to cancel despite long delays
While either party can end the contract if the plan of subdivision is not registered within the specified period (e.g. 18 months to 3 years), neither party can cancel until this period has passed. Thus, a purchaser who buys in the expectation that the property will be completed an ready to occupy by Christmas may find that settlement is delayed for a year, and that she cannot cancel the contract until at least 18 months have passed since the contract was signed. If the plan of subdivision is registered within that time she must proceed to settlement.
The dimensions may change
Developers are sometimes taken by surprise if the local council or other authorities put conditions on the granting of approval for a development.
For example, the developer may be required to set aside some land for public open space. If the developer has not anticipated this, the plan may have to be amended. It may be a simple matter of amending all of the boundaries of the individual lots by a few centimetres in order to provide the extra land required for public space.
Most contracts for off the plan purchases contain a special condition which prevents the purchaser from ending the contract on the basis of minor adjustments to the dimensions or area of the lot purchased.
Finishes and fixtures may change
What if the developer has specified a certain brand of dishwasher to be installed in each unit of a residential development, and the brand or models specified is no longer available? Or, the patterns or styles of finishes specified in the contract have been changed by the manufacturers or were discontinued?
Again, most contracts for off the plan purchases contain a special condition which prevents the purchaser from ending the contract because of such changes.
You may not like it when it's finished
It is possible that when the development is finished you simply won't like it.
Perhaps it's the unit on the 20th floor of a residential tower and sunlight reflected from other buildings causes problems. Maybe the air-conditioning unit, or the goods lift create noise nuisance. In a recent case the purchaser of a unit in a high-rise development was disappointed to discover that the local council was refusing to issue parking permits to residents in the tower because of parking congestion near by.
There are all kinds of unforeseeable issues that can arise after completion.
Why can't I rely on the settlement date?The settlement date can be a problem, because it remains unknown until such time as the plan of subdivision has been registered. Generally, unless the contract provides otherwise, a purchaser may end a contract if the plan of subdivision has not been registered eighteen months from the date of the contract of sale.
The settlement date is usually meaningless
The contract may set a specific settlement date, but the date is generally meaningless. The specified date is provided so that if the plan of subdivision is registered before the specified date, then settlement can take place on that date. However, it is rare that the plan of subdivision is registered before the specified settlement date. A cynic may suggest that the specified settlement date is provided in order to make the deal look more attractive to a potential purchaser, and that it never has any basis in reality.
14 days after registration of the plan of subdivision
Usually, after the settlement date, there will be words similar to "...or 14 days after registration of the plan of subdivision whichever is the later". Effectively, this means that if the plan of subdivision is not registered in time for settlement to take place on the specified settlement date, the purchaser will be on notice to settle no later than 14 days after the plan of subdivision is registered. This usually appears after mention of registration of the plan of subdivision:
Settlement will take place on 30 October, 2007, or
Until both of these events have taken place, settlement cannot take place. And when these events have occurred, settlement MUST take place within 14 days. In some cases the contract will allow only 7 days!
14 days after issue of a certificate of occupancy
Perhaps the specified settlement date has come and gone, and eventually the plan of subdivision is registered. However, settlement may still be postponed if the contract is also subject to the issue of a certificate of occupancy. This usually appears after mention of registration of the plan of subdivision:
Settlement will take place on 30 October, 2007, or
Until all 3 of these events have taken place, settlement cannot take place. And when these events have occurred, settlement MUST take place within 14 days. In some cases the contract will allow only 7 days!
It is not uncommon for a purchaser to be taken by surprise, perhaps many months after the specified settlement date, with a notice from the vendor requiring the purchaser to settle within the following fortnight. This can be a serious problem if the purchaser's lender is not ready to settle, and can result in the purchaser becoming liable for penalty interest and costs.
Most problems in an off the plan transaction are associated with the settlement date. Purchasers tend to believe that there is a likelihood that settlement will take place on the specified settlement date, when in fact this is highly unlikely.
It is important for an off the plan purchaser to be aware that settlement is unlikely to take place on the specified date, that settlement can be postponed for weeks, or even months, and in extreme cases for years. This must be taken into account when arranging finance, particularly where the purchaser's finance approval is likely to expire after a set period of time, and there is the risk that finance approval may lapse before settlement takes place.
Can they deliberately delay settlement?
No, not legally, but we have experienced situations where developers have deliberately delayed settlement in order to have contracts expire. When the contracts had expired, the vendor offered to enter into fresh contracts, but with a higher purchase price. Obviously the clients were incensed at the unethical conduct of the vendors.
In both of these situations the purchasers could see that work was proceeding at a much slower pace than it had been in the early stages, but they could not prove that the vendor was deliberately stalling.
What can I do if they deliberately delay settlement?In the absence of firm evidence that the vendor is deliberately delaying settlement, there is probably nothing a purchaser can do. The costs associated with investigating the delay, and the taking of legal action, would probably cause the purchaser more loss that the delay itself would cause.
Can settlement be delayed indefinitely?
Not really, but it certainly may seem that way. If settlement does not take place on the specified settlement date, the parties must wait for the events which will trigger settlement. As noted above, the trigger may be the registration of the plan of subdivision, or it may be the issue of a certificate of occupancy.
A purchaser may have to wait years for settlement, or for the opportunity to cancel the contract, if the vendor experiences difficulties in having the plan of subdivision registered or building works completed.
Can I move in before settlement?
It is highly unlikely that a property will be fit for occupation before settlement. However, in the rare event that the building works are complete and a certificate of occupancy has been issued before the plan of subdivision has been registered, it would be possible for the vendor to grant a purchaser access. Of course, the vendor is under no obligation to allow the purchaser to take occupation of the property, even if the vendor has somehow contributed to the delay in the registration of the plan of subdivision.
If access is granted, it would most probably be on the basis of a Licence Agreement, and the vendor would be entitled to require the purchaser to pay for the cost of preparation of the Licence Agreement plus rent in the form of a "licence fee". Where occupation is permitted under a Licence Agreement the purchaser will be required to accept the property "as is", and may not be able to insist on repairs or the completion of further works.
Can they change things without my permission?
The answer to this question is not straight-forward. While the vendor is not permitted to make changes without permission, few purchasers are aware that the contract probably provides for the making of "minor" changes.
Problems arise where a change the vendor regards as minor is regarded by the purchaser as major. Arguments over changes are rarely resolved to the full satisfaction of the purchaser.
Can I change things after the contract has been signed?
It is unlikely that a purchaser will be permitted to make changes after the contract has been signed, and so all checks, investigations, enquiries and inspections must be undertaken prior to the purchase.
How does a purchaser inspect or check a building that has not yet been built? She cannot, and she accepts this as one of the risks associated with purchasing a property off the plan.
Can they cancel the contract?
Off the plan sales contracts invariable contain special conditions that allow the vendor to cancel the contract if the plan of subdivision is not registered by a certain time, if the development becomes unviable, or for any other reason specified in the contract.
While it is appropriate that the developer should be permitted to call the deal off if the development cannot proceed, we have seen some examples of illegal and unethical behaviour by developers. (See "Can they "gazump" me?" below).
Can I cancel the contract?
A contract to purchase real estate cannot be cancelled just because the purchaser has changed his mind about the purchase, or because he become frustrated over delays. However, if the purchaser has been wronged in some way cancellation of the contract may be an option. For example, illegal conduct on the part of the vendor or the estate agent may give the purchaser the right to cancel.
Also, the contract itself provides a mechanism by which the purchaser can cancel. For example, if the purchaser has bought "subject to finance" and her loan application is rejected, she may end the contract.
What if the building is different when it's finished?
It becomes a matter of how "different" the property is from what was expected. Remember, most off the plan contracts provide for variations in terms of size, area, fixtures and fittings etc.
If it can be said that the finished product is not what the purchaser bargained for, then the purchaser may be in a position to negotiate or to cancel. For example, a client of ours had purchased a unit off the plan, and the plan depicted a double bed in the main bedroom. A change in the plans and construction meant that a small corner of the bedroom was removed, with the result that the room would not accommodate a double bed. We were able to require the developer to adhere to the original plan because a main bedroom that could not take a double bed was too far removed from what had been bargained for.
At all times, a
purchaser must be prepared to compromise. It is always easier and cheaper to compromise where possible, as taking legal action is very costly in terms of both money and stress.
What if I'm not happy with the workmanship?
Usually, where a dwelling is being bought off the plan there is a "maintenance period" during which the developer will attend to small repairs and rectifications, such as sticking doors, cracked plaster etc.
However, poor workmanship can often be a matter of opinion. For example, landscaping may be completed to a professional standard initially but drought conditions may kill off the plants and lawn, leaving an ugly and unusable area. It is unlikely that the vendor will accept responsibility in such circumstances. Similarly, a purchaser complained about a footpath which had a sideways slope which made it difficult for people with disabilities to use. The vendor argued that the footpath was constructed in accordance with correct standards and specifications. The purchaser's only option was to proceed to settlement, and then to take legal action against the vendor.
Can I delay settlement until they fix things?
It depends, but in most cases no (see "What if I'm not happy with the workmanship" above). Of course, if the problem is such that it renders the property uninhabitable, such as water or sewerage pipes disconnected or broken, settlement may be delayed until the situation is rectified.
Can they "gazump" me?
We have seen two examples of purchasers being "gazumped" by unethical developers.
In one case the client had bought a block of land in a development in rural Victoria just before the area "boomed". He then expressed concern as development works began to slow down, and asked us to write to the developer to complain. The developer denied any wrong-doing, blaming shortages of materials and equipment. Eventually the period of 18 months had passed, triggering the right of either party to terminate the contract. The vendor terminated all contracts associated with the development, and invited all purchasers to pay an additional $20,000 per block. Our client paid the additional cost because he realised that taking legal action in the circumstances would have been futile.
The second case was similar, but involved a simple sub-division by the owner of a large residential block. The vendor became aware that another person was interested in purchasing the block for a higher price, and took his time in attending to council requirements for certification. When the 18 months had passed, the vendor invited our client to equal the offer made by the competing purchaser. Again, our client was very angry about the situation but realised that taking legal action would cost him more than the price increase.
What can a purchaser do about unscrupulous developers? Not much, because improper delays are extremely difficult to prove.
Can I lodge a caveat?No. Although all purchasers are advised to lodge a caveat to protect their interest in the property, off the plan purchase contracts usually contain a special condition prohibiting the lodging of a caveat, and providing for costs and penalties if the condition is breached.
How much Stamp Duty can I claim?
Purchasers are often given conflicting information about the stamp duty benefits associated with an off the plan purchase. Our advice to clients is:
The only way to determine the extent of the stamp duty concession available is for the purchaser to establish the cost of the works performed between the day of sale and the day of settlement. This is normally done by having the vendor provide a Land & Building Packages statutory declaration, which is handed over at settlement by the vendor's solicitors.
The State Revenue Office will examine the Land & Building Packages statutory declaration and determine the amount of concession to be provided.
What if the stamp duty savings are not enough?
The harsh reality of the situation is that if a purchaser has made assumptions as to the amount to be saved in stamp duty, without properly investigating the situation, the purchaser will have to accept responsibility for the problem.
Consequences of making incorrect assumptions about stamp duty include not having sufficient funds available for settlement, delay in settlement, the risk of legal action, penalties, costs, forfeited deposit or being forced to proceed with the purchase regardless.