What does off-the-plan mean?
So, you are thinking of buying a property ‘off-the-plan’.
It could be that you are looking at buying a duplex, townhouse or unit where the building is yet to be constructed (or is under construction).
It may be that a large block of land is yet to be subdivided into smaller blocks, including the block you are looking at buying.
In either instance, the title to the lot being purchased will not have been created at the time you enter into the contract.
In other words, buying ‘off-the-plan’ means the lot (or property) you intend to buy simply does not exist at the time you enter into a contract. You will not actually be able to see the final result until after you have already contracted to buy the property.
This is what makes the purchase different from buying an existing lot (or established property).
What type of contract is used for an ‘off-the-plan’ purchase?
The standard REIQ or ADL contracts, which are used every day by selling agents for the sale of established properties, are generally not suitable for the sale of an ‘off-the-plan’ lot.
Instead, ‘off-the-plan’ contract documents are prepared by the seller’s solicitors which are specifically tailored for the project you are buying into. These documents comprise a contract and a disclosure statement which are much more detailed than the standard REIQ or ADL contracts.
An ‘off-the-plan’ contract will be binding once you and the seller both sign. Therefore, the only way to limit the risks with buying ‘off-the-plan’ would be to request changes to the contract prior to you signing.
However, the seller will more than likely be reluctant to agree. This is because the seller wants to keep intact their standard ‘off-the-plan’ contract to be able to maintain a consistent approach with all buyers and to preserve the seller’s flexibility to deal with issues should they arise during the course of the project.
Are finance conditions allowed in an ‘off-the-plan’ contract?
Unlike the standard REIQ or ADL contracts, it is usual for an ‘off-the-plan’ contract not to include a finance condition.
This is because lenders generally only provide a 90 day finance approval. This works well with the purchase of an existing property but, ‘off-the-plan’ properties take longer considering the project timeline. Even then, it is usual for any finance approval to still be conditional on registration of the survey plan and a title being created for the lot being purchased.
Where a building is concerned, it is usual for finance approval to also be conditional on completion of construction and the issue of a final building certificate (certificate of classification) so a final valuation can be done before formal finance approval is given.
The risk for the seller in having an ‘off-the-plan’ contract subject to finance, is that the contract may be terminated by a buyer because they simply cannot obtain formal finance approval, or the buyer may seek an extension of the finance condition right up until notice of registration is given (which may or may not be granted by the seller).
The reason for the seller requiring an ‘unconditional’ ‘off-the-plan’ contract as opposed to a ‘conditional’ ‘off-the-plan’ contract is for project (construction) funding purposes. Those contracts form the necessary security a lender requires prior to providing funding to the seller.
If you do decide to enter into an unconditional ‘off-the-plan’ contract, or you satisfy any contract finance condition, then you need to be confident that your financial position will not change between the time you sign the contract and settlement taking place.
You should also take into account the possibility of any interest rate rises during that time.
What is a seller required to disclose to me?
The seller is obliged to make certain disclosures to you about the project prior to you entering into an ‘off-the-plan’ contract. This is because you cannot actually see or inspect the property as it does not exist.
The seller must provide you with a disclosure plan and a disclosure statement clearly identifying the proposed lot you are purchasing. The disclosure statement must also state the period within which settlement is to occur. This applies whether you are looking at buying vacant land, a duplex, a townhouse or a unit.
If the purchase involves a duplex, townhouse or a unit, then the seller must also disclose details as to the proposed body corporate.
If the seller fails to give you the appropriate disclosures, then you may be entitled to terminate the contract at any time prior to settlement.
Any changes made to the disclosure documents by the seller must be provided to you by way of a further statement which must be given to you at least 21 days before settlement. If you are materially prejudiced by any change, then you may be able to terminate the contract before settlement.
How much deposit is required to be paid and how is payment to be made?
As a general rule of thumb, you will be required to pay a 10% deposit under an ‘off-the-plan’ contract. However, a maximum deposit of 20% is able to be paid.
The deposit will be payable by you at the time you sign the contract unless the seller agrees to another timeframe for you to pay.
The contract will also stipulate how you are to pay the deposit but most ‘off-the-plan’ contracts provide for two ways: either a cash deposit or by a bank guarantee or deposit bond.
If you pay a cash deposit, then those funds may be able to be invested pending settlement. The ‘off-the-plan’ contract will state whether this is allowed and if so, how the interest is to be paid.
Usually, any interest is shared between the buyer and the seller, however, you may be able to reach agreement with the seller for all interest to be paid to you on settlement.
The main reason you would choose a bank guarantee or deposit bond would be to allow you to leave your savings in your account to earn as much interest as possible until settlement takes place (remembering settlement could be years away).
However, you would need to weigh up the cost of a bank guarantee or deposit bond -v- the interest on your savings -v- interest on any deposit investment.
How long do I have to wait before settlement happens?
A drawback with an ‘off-the-plan’ purchase is that the exact settlement date is not known.
An ‘off-the-plan’ contract will include a provision for the seller to give you 14 days (sometimes 21 days) written notice of when the survey plan has been registered and a title for the lot being purchased has been created. The difference with an existing lot is that the lot is already titled allowing for a specific settlement date in a contract.
What is a sunset date?
Because the lot being purchased will not exist at the time of entering into an ‘off-the-plan’ contract, then the seller is required to disclose to you the timeframe within which the project will be completed.
This is known as a sunset date and is the date by which settlement must occur. This date will differ depending on what type of property you are purchasing.
With an ‘off-the-plan’ purchase of vacant land, then settlement must occur within 18 months of the contract date.
On the other hand, if you are purchasing a duplex, townhouse or unit ‘off-the-plan’ then, if the contract specifies a sunset date, then the parties can agree upon a settlement date, then the parties can agree upon a settlement date which is up to 5 ½ years from the contract date.
Otherwise, if the contract does not have a sunset date, then settlement must occur within 3 ½ years from the contract date. If settlement has not occurred by the sunset date, then either party may request the other party to extend the sunset date (which may or may not be agreed to.).
What happens if the seller’s project is not completed on time?
No matter what type of property is being purchased ‘off-the-plan’, if settlement has not occurred by the sunset date, then you can terminate the contract by giving written notice to the seller. Your deposit is then required to be refunded to you in full.
It is important to note that there are no statutory rights for a seller to terminate an ‘off-the-plan’ contract if settlement has not occurred by the sunset date. However, it is very usual for a seller to include such termination right in an ‘off-the-plan’ contract.
You need to remember that any timeframes given to you by the seller or the selling agent for settlement or completion of the project are indicative only.
What should I consider before buying ‘off-the-plan’?
Most likely the selling agent will have given you glossy brochures depicting what the finished product will look like.
Make sure you are aware of the risks when buying ‘off-the-plan’ as you will not be able to see the end result until sometime after you have signed the contract.
Buying ‘off-the-plan’ presents both opportunities and risks
- If you get in early you may have a choice of the best lots available in the project.
- The seller may allow you some level of personalisation during the building phase making it more cost effective for you, rather than after settlement. The property may be able to be tailor-made for you as opposed to the existing state of repair and condition of an existing property.
- It could be an accessible way to get into the property market if you are a first-time home buyer as you may be able to access government grants.
- You could be buying in a rising market allowing for instant equity to be retained in the property from settlement. On the other hand, you could be settling on a falling market where a property valuation may not be favourable.
- There is also the possibility of the project not being completed on time or being different from what you expected.
Your decision to buy a property ‘off-the-plan’ will depend on your personal circumstances, your financial position and the amount of risk you are willing to take.
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Our Conveyancing Lawyers can Help
Buying property is the single largest financial commitment you will make. It is important for you to have ‘off-the-plan’ contract documents reviewed by an experienced solicitor before you sign so you understand the terms of the contract and what it all means for you.
There are only limited circumstances where you may be able to terminate the contract at a later stage.
Our experienced property and conveyancing lawyers can assist you before you sign any ‘off-the-plan’ contract documents.
Contact ABKJ Lawyers
If you have any questions about conveyancing or buying a property off the plan, please do not hesitate to contact us for more information or call us on (07) 5532 3199.