We advise a number of purchaser and developer clients on off-plan contracts. These contracts are designed to deal with the sale and purchase of newly built houses where parties enter into a contract before commencement or completion of the construction project.
There is significant developer activity on new residential builds at this time and there are a number of benefits but also risks for purchaser clients buying off the plans so contractual issues are important and relevant for both developers and purchasers.
When talking about Development Purchase Contracts (DPC) overall, we generally refer to two main types:
- “Off-Plan” or “Turn-Key” contracts describe a range of possible types of property purchases including unit title developments, terraced/town housing developments, standalone developments or a mix of these where the purchaser enters into a contract for the builder or developer to undertake all development work including subdivision and construction and delivers a new title (unit title/freehold) and completed home unit to the purchaser on settlement after title or CCC has issued.
- “Land and build” contracts are terms used to describe contracts where the purchaser contracts to purchase the land and contemporaneously enters into a construction contract with the builder/developer to undertake construction of the home on the land. If the land is being subdivided at the time of purchase, the purchase contract will contain provisions dealing with the development of the land by the developer to complete all subdivision work before construction of the house commences pursuant to the construction contract which can be incorporated in the one document.
While most DPC’s need to address a number of common issues, there is no standard form for DPC’s and the terms and conditions (sometimes) vary considerably from contract to contract. This can lead to some very real issues for both purchasers and developers.
Purchasers are typically entering into a contract for a non-existent or incomplete property that they have purchased based on the limited information available from sales and marketing materials and often do not get an opportunity to have a tangible experience of the property until settlement. Such notions are generally not expressed in the contract and in fact are often quite the opposite allowing for a range of variations and changes to the end product. Purchaser’s need to be fully advised on the implication of these terms and the restrictions on their rights under the contract so they are given the chance to consider the overall risks associated with so many uncertainties that can result from the developmental nature of construction projects.
From the developer’s point of view, now more than ever there are uncertainties for developers completing projects due to significant supply constraints and increased costs for importing and procuring materials especially during a global pandemic. In addition, local authority consent and compliance requirements, shortages of skilled labour and delays by contractors and market competition all culminate in pressure to deliver projects on time and on budget.
Off the plan sales are a crucial part of the development process for securing funding and proceeding with the development. So, developers need to have a marketable contract that strikes a fair and reasonable balance between the competing rights and interests of the parties under the contract. Overall, the contract must enable the developer to do all the things necessary to complete development with minimal interference by purchasers. Developers must have the ability to make real time decisions in respect to complications arising before and during construction without needing to obtain the individual consent of the purchasers at each turn.
Generally, parties have a limited ability to negotiate terms of the contract as the terms are pre-approved by the developers lenders prior to going to market and developers are not able to substantially alter the terms without consent. It can therefore lead to difficult situations for both parties where the contract fails to strike a fair and reasonable balance as such contracts increase the risk profile for the parties to such an extent that it would be disadvantageous for a purchaser to enter into a contract resulting in the developer being unable to secure sufficient presales.
So for a purchaser it is vital that they enter into the transaction with their eyes wide open after being made fully aware of what to expect during the process and on settlement while being afforded the appropriate protections.
For developers it is extremely important that they have a contract that has been prepared to suit the development and that careful consideration has been given to the overall form of the contract so that the developer can successfully market the development and secure presales.
Over the next few weeks we will be publishing a series of articles on “off-plan”/“turn-key” contracts and “land & build” contracts discussing issues for both purchasers and developers in this area.
If you require any advice or further information on the matters dealt with in this publication please contact the lawyer at Farry Law who normally advises you, or alternatively contact:
Cornelius Botha
cbotha@farry.co.nz
09 353 6677
or
Paul Farry
pfarry@farry.co.nz
09 353 6671
The information contained in this publication is intended as a guide only. It does not constitute legal advice and should not be relied upon as such. Professional advice should be sought before applying any of the information to particular circumstances. While every reasonable care has been taken in the preparation of this publication, Farry Law does not accept liability for any errors it may contain.