Safeguarding your investment when buying ‘off the plans’

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Buying property ‘off the plans’ offers an enticing opportunity to get on the property ladder or acquire a brand-new home in a developing area. This involves buying a property that is either under construction or yet to be built. Such purchases can encompass land-only options or complete house and land packages, and are commonly used in apartment complexes and large-scale developments.

‘Off the plans’ transactions offer potential benefits, such as more time to save while your home is being built, and a brand-new home at the end, but they also come with inherent risks, including uncertain timeframes and these days, a significant risk of delays. As settlement approaches, buyers often face a tight window to finalise everything, including your finances. Bank finance offers typically remain valid for less than 12 months, while ‘off the plans’ agreements typically span about two years, which means your finance offer may expire before settlement and you’ll need to reapply. With stricter lending laws, rising interest rates and market fluctuations, banks are increasingly likely to decline previously approved applications.

Steps you can take to protect yourself when buying ‘off the plans’

Seek legal advice early

Developers can be eager to get purchasers to sign on the dotted line, but it’s crucial to seek legal advice promptly. Engage an independent solicitor, not one affiliated with the developer, to review the agreement and any associated plans. Developers often use their own agreements, favouring their interests, and your independent solicitor will be well-placed to identify clauses of concern and propose additional conditions. A due diligence condition is vital to ensure your lawyer can do a thorough investigation of resource consents and land covenants that could affect your plans or property enjoyment. It’s also wise to research the developer’s reputation and track record to ensure they are reputable and complete projects as promised.

Protect your deposit

Ensure that the deposit is held by an independent stakeholder, like an agent or a solicitor’s trust account. This safeguard prevents the developer from accessing the deposit prematurely, especially if they lack necessary consents or financing. Ideally, any interest earned on the deposit should be credited toward the purchase price (you will often need to negotiate this into your agreement).

Include a protective Sunset Clause

A sunset clause sets a date by which the obligations of the developer must be fulfilled. If this date is not met, either one or both parties can cancel the contract. Surprisingly, not all ‘off the plans’ agreements include a sunset clause, and if they do, they might only provide a right of cancellation for the vendor. Ensure the agreement includes a sunset clause that allows you to cancel if significant delays persist.

Understand your finance approval

Before ‘going unconditional’, have your lawyer review the written finance offer from your bank. Many finance approvals contain expiry dates and conditions that must be met before becoming unconditional or before funds can be drawn down.

In a worst case scenario, where your finance falls through after you’ve gone unconditional, you stand to lose more than just your deposit. The vendor could sue for specific performance (meaning you have to perform the contract) or cancel the agreement, forfeit the deposit and sue for damages for any loss on resale that exceeds the value of the deposit. If you find yourself in this situation, it is worth consulting with your lawyer as there may be further options available to you, including discussions with your bank, finding another lender, assigning or on-selling your interest under the agreement, or negotiating with the vendor for contract release.

How we can help

Buying ‘off the plans’ can be rewarding, but it demands careful consideration and proactive measures to protect your interests. If you are considering buying off the plans, or need assistance with an existing off the plans purchase, WRMK’s experienced property team may be able to help. Please give our friendly team of experienced local property lawyers a call.

Our thanks to Courtney Clarke for writing this article, which was first published in the Mahurangi Matters in September 2023.