Buying off-the-plan

In summary...

If you’ve been shopping around for a new apartment or townhouse, you’ll have probably experienced the flashy marketing materials, attractive showrooms and the rush of other buyers snapping up the units.  However, behind all that, the legal documents containing the offer are usually several hundred pages long, and filled with dense legal conditions that even the most careful buyers would struggle to fully understand. 

In this article, we will cover the key terms that are in most off-the-plan contracts, and help you make an informed decision when buying in this way.


Introduction

Purchasing property off-the-plan is very different to purchasing an established property or vacant piece of land.  Generally:

  • The apartment or unit has not been constructed yet;
  • Settlement is several years in the future;
  • The stamp duty payable on settlement will be lower than for an established house of the same value; and
  • There are several risks that are not present when buying established property.

In this article, we will take you through some of the conditions that are in typical off-the-plan contracts in Victoria, and help you weigh up the risks involved in buying off-the-plan.

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Advantages to purchasing off-the-plan

Before we start, we should note that there are of course significant benefits to purchasing off-the-plan:
  • Stamp duty is typically much lower if you are an owner-occupier buying off-the-plan, especially where construction has not yet commenced;
  • In a rising market, you are locking in a price now for a property that you only have to pay the full price for in a few years;
  • If you are not Australian and do not hold any visa that allows you to stay in Australia for longer than 12 months, then new houses are all that you’re allowed to buy (note you still have to apply for FIRB approval before buying); and
  • You get a brand new house once the project completes

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The key terms in off-the-plan contracts

Most off-the-plan contracts in Victoria contain these features, which will each be described in further detail below:

  • A ‘whole of agreement’ clause, that excludes the effect of any marketing materials and anything that is not included in the contract;
  • The building plans, specifications, colour schemes and optional extras: the key documents that describe what you are buying;
  • Clauses allowing the vendor to change the building plans, floor plans and/or the specifications;
  • One or more ‘sunset dates’ that allow one or both parties to cancel the contract;
  • Details of the owners corporation(s) to which you property will be subject, and likely fees and restrictions imposed by them;
  • For larger projects, the possibility of further construction in staged developments, and disruption to your quiet enjoyment of your property in the first months or years following settlement,
  • How your deposit and the interest earned on the deposit will be paid;
  • How settlement date is set; and
  • Attending a final inspection of the property and dealing with defects.

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The ‘whole of agreement’ clause

Most real estate contracts in Victoria (whether for established properties or off-the-plan) contain a ‘whole of agreement’ clause that essentially states that:

  • You have made all appropriate enquiries about the property yourself;
  • You have not relied on anything that the estate agent or the vendor have told you;
  • You have not relied on any advertising materials, and acknowledge that those materials may be inaccurate; and
  • Only what is contained in the contract has legal effect.  In other words, everything shown to you or communicated to you but not included in the contract has no effect.

So make sure you understand what’s in the contract!


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The plans and specifications

When buying an established property, what you see is essentially what you get.  For off-the-plan contracts, this is far from certain.

Off-the-plan contracts generally contain several technical documents that together describe what you expect to be getting:

  • The proposed plan of subdivision, prepared by the developer’s surveyor.  This shows the outer boundaries of all the units and common property on the lot;
  • The floor plans for each unit;
  • The specifications for the development, listing details of the finishes, appliances, doors, floors, windows and other features of the property;
  • The building plans, a detailed technical document prepared by the architect.  Generally, each room, doorway, window and other structural feature is shown, as well as vegetation details, and elevation diagrams;
  • Some larger developments also allow you to pick a colour scheme for your property, and optional extras (such as an upgrade to the appliances, blinds, carpets, etc).

It is very rare that the advertising materials and artist’s impressions of the property that first drew you to the property will be included in the contract itself.

This is significant because only an experienced builder or architect can fully advise you about the technical documents accurately reflect the advertising materials and what you expect to be getting.  Lawyers and conveyancers do not have the expertise to advise you about this.

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Changes to the plans and specifications

It is very common for plans to change over the course of a project for a variety of reasons, and off-the-plan contracts generally give vendors extensive rights to do so.  Some changes that are routinely made include:

  • Reconfiguration of the car spaces and/or storage lots to improve traffic flow;
  • Another lot is expanded, which reduces the size of the common property;
  • Once construction commences, it became apparent that some aspect of the design does not work well.  For example, if inadequate room was left around a doorway, and a swing door is changed to a sliding door;
  • Change in the finishes (for example, changing a wood facing to brick or rendered concrete);
  • Change in the brand or model of appliances; and
  • Small changes to the floorplan.

Generally, off-the-plan contracts give the developer the right to make any changes to the building plans and specifications as long as it does not substantially and detrimentally affect the purchaser. 
This means that specifications can be changed as long as the resulting quality is substantially similar, floor plans can be changed as long as the change in floor area is no more than 5%, and many changes may be made to other lots in the development as long as they do not directly affect the purchaser’s lot.
This is part of the reason that most purchasers do not engage an expert to review the plans and specifications in a contract before signing: those plans may very well change during construction.  In the end, it is a matter of trusting the reputation of the developer.

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The sunset date(s)

All off-the-plan contracts have a ‘sunset date’ (often defined in the contract as the ‘registration period’), by which the new unit must have been built and registered at the titles office.  If that does not happen in time, both parties have the right to exit the contract, and the deposit must be returned in full.  Typically, the sunset period is around 3-6 years for larger developments, and 1-3 years for smaller ones.  This is often the only right the purchaser has of ending the contract.

Most off-the-plan contracts also give the developer the right to end the contract for one or more of the following reasons:

  • It is unable to get all the planning and building approvals required for the project; and/or
  • if in its reasonable opinion, new requirements on the development imposed by a government authority are too onerous; and/or
  • it cannot get financing to begin construction; and/or
  • it determines that there is any other reasonable commercial reason to not proceed.

Where a contract is ended in one of these ways, the purchaser is entitled to a refund of the deposit.  Typically but not always, they will also be paid a small amount of interest on that deposit, but there is usually no other compensation for the purchaser (for example, for any wasted legal costs or FIRB application costs).

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Owners Corporations

Most off-the-plan residences share common property and common services with other units in the development, and this means that an owners corporation (formerly known as body corporate) will be formed just before settlement in order to manage the shared space and facilities.

For larger apartment developments, your unit could be part of several different owners corporations (for example, one for all units in the development covering building insurance and other things applying to everyone, one for units that have car spaces only and one for the units allocated to a particular set of facilities like a gym or swimming pool, etc).

Each owners corporation will levy fees that must be paid every year, much like council rates and water rates.  Some off-the-plan contracts will give an estimated budget for its owners corporations, which will give you an idea of these ongoing costs.  Many do not, so you just have to be aware that they will be an additional outgoing once you own the property.

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Construction after settlement

For larger developments, units that are completed first are often settled before construction is completed for the entire development.  For owners of these earlier units, this could mean that living on the property right away could be noisy or unpleasant until the development is fully completed.


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The deposit

The deposit paid by purchasers under an off-the-plan contract cannot be any more than 10% of purchase price.  It is typically held in the vendor’s solicitor’s trust account, or alternatively provided by way of bank guarantee to the vendor’s solicitor.

Where the funds are held by the vendor’s solicitor, it is usually invested in an interest-bearing bank account (generally with a fairly low interest rate of 1-2%).  

The contract sets out the rules for who gets to keep that interest in different circumstances.  Generally, the interest ‘follows the deposit’.  So this means:
  • if the property settles and there are no problems, the interest will go to the vendor; and
  • if the contract ends, and the purchaser is entitled to a refund of the deposit, the purchaser will get the deposit.

Many vendors are willing to negotiate this point with the purchaser, so you should ask for it.  Even on a modest $500,000 property that takes 4 years to build at 1.5% interest, that’s still at least $3,000.

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When will it settle?

The last six months leading up to settlement typically happens like this:

  • construction nears completion, and the vendor notifies purchasers that settlement is likely to be in the coming months;
  • once construction completes, a building surveyor issues an occupancy permit for the property, which certifies that it is fit for living;
  • purchaser can set a time to go inspect the property and note any problems;
  • the plan of subdivision and documents required to establish the new owners corporation(s) are lodged at the titles office, which takes a few weeks to examine them.  When finalised, new titles are issued for each lot in the development; and
  • the vendor’s solicitors notify all purchasers that the occupancy permit has been issued and the plan of subdivision has been registered.

Settlement is then typically scheduled 14 days after the notification.  If that is inconvenient for a purchaser, vendors will sometimes allow one extension of a few weeks, but no more.  Other vendors will charge penalty interest once you fail to settle.

When exactly the property settles is therefore not in the purchaser’s control, and in some ways also not in the vendor’s control either.  It is very important for the purchaser to keep in contact with their lawyer, and if they are using financing to complete the purchase, their loan manager or broker, to make sure that once the title is registered, they have already signed all the necessary paperwork and are able to settle 14 days afterwards.

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The final inspection and defects in the property

Generally, you are entitled to a final inspection before settlement.  This is where you find out whether the vendor has built to the original specifications, or taken the liberty of making the sorts of changes described earlier in this article.  If they have, then that is generally not enough reason to not settle.

If you find defects with the property in the final inspection, it is again not a reason to not settle.  Your solicitor or conveyancer can ask the vendor to fix the defects, but this will not necessarily be done before settlement.

Many off-the-plan contracts will provide that defects found after settlement can still be notified to the vendor in the 3 months following settlement, and they will contact the builder for you to fix those issues.  For issues found after these 3 months, and for contracts that do not have this 3 month period, you will have to pursue the builder or the builder’s insurer directly to get the issue rectified.

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About the author

Lucy Dong, property and tax lawyer, former State Revenue Office senior compliance officer

Growing up in a family of property developers, real estate is in Lucy’s blood. It’s that experience and her time at her previous commercial and property law practice that allows Lucy to cut to the chase, identify the real issues, give you practical advice alongside the legal, and help you with anything from the smallest purchase to your next major development project.

Lucy can also draw from her years of experience at the Australian Tax Office and Victorian State Revenue Office to help you structure your property transactions in the most tax-effective way.

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About this publication

Kai Legal publications provide general information, and are not legal advice. These are not complete summaries of the law, and only touch on select points and scenarios that may be relevant to our readers.

This fact sheet is current as of 26 September 2017.

© Kai Legal 2017