Obligations when buying off-the-plan

Buying a house or unit before the building works have been completed is known as buying “off-the-plan”.

Off-the-plan purchases can occur in the drawing and planning stage, demolition of a site, and at various stages of partial or full construction, so understanding the current development progress and the purchaser’s obligations upon a contract being signed is vital for anyone thinking about purchasing off-the-plan.

The benefits of buying off-the-plan

People are often attracted to off-the-plan sales as there is a reduced amount of stamp duty to pay. The amount of stamp duty depends on how advanced the construction of the building is and its current value. If construction is close to completion, the duty is likely to be higher, whereas if construction has not yet begun, stamp duty may be much less. The value of the site at any one time throughout the development process will determine the amount of stamp duty you pay. Stamp duty is calculated at the time the contract is signed – even if it is not paid until the completion of the property and settlement.

Other benefits for buyers include the potential to have more input into the design of the property, and to purchase the property at a price reflective of today’s market value – a price that’s locked in at the time the contract is signed – taking advantage of the natural capital growth in property over the time of the construction phase.

Important things to consider

Of course, buying off the plan without being able to observe the finished product is not without risk. This is because the developer, not the buyer, enters into a major domestic building contract with the builder. Potential issues to be aware of include:

• Limited recourse to the builder if there is a dispute
• Uncertainty of the date of completion
• Unexpected changes to the plans or specifications
• Differences in the expected and actual quality of the final finishes
• Contracts of higher than usual complexity
• Property market volatility causing the value of an off-the-plan home at settlement to be less than the contract price
• Being unable to inspect the actual property

When buying off-the-plan, you will have to rely on an artist’s impression, floor plans, and advertising material for information about what you are paying for.

When people buy off-the-plan, many may not realise the extent to which the contract of sale may allow for changes or alteration to the fixtures, fittings, finishes, the lot entitlement, or even the overall design of the development. Moreover, many people may not understand that if the developer or builder makes an alteration allowed under the contract, the purchaser is still obliged to settle the contract.

Contract termination and “material change”

A purchaser may only terminate or be released from an off-the-plan contract in certain limited circumstances. These circumstances may include:

• A developer being unable to meet a special condition that is a condition precedent of the contract (such as the lodging of a plan of subdivision)
• A notice being provided by a developer under section 9AC of the Sale of Land Act, providing notice that an amendment to the plan of subdivision is required by the Registrar or requested by the vendor
• The plan of subdivision not being registered by the time specified in the contract, or within the default time of 18 months
• Where a developer enters into liquidation (subject to any liquidator’s consent) you may be able, in limited circumstances, to terminate a contract 
• Where there is a material change to the development that significantly affects you

Material change is a term developed by the courts in Victoria to deal with circumstances in which a vendor tries to avoid issuing a notice under section 9AC of the Sale of Land Act, which has been specifically put in place to protect purchasers of off-the-plan properties. Understanding what constitutes a material change is a matter on which an individual would be wise to seek independent legal advice, as its operation varies from situation to situation.

Some recent decisions in the Victorian Supreme Court have indicated that a material change may possibly occur in limited circumstances, such as:

• Lot entitlements increasing or decreasing
• Changes being made to car parking provisions sold under the contract
• Changes being made to the size and/or configuration of a unit
• Changes that are either beneficial or detrimental to the purchaser

Other than in a situation such as those described above, a purchaser should not expect to be able to terminate or be released from a contract for reasons such as:

• Changes in their own finances or family circumstances (such as divorce, separation, or additional dependents)
• Changes being made to the fitting, fixtures, or furnishings included in the contract
• Changing one’s mind: deciding they no longer want the property due to other opportunities
• Later developments being approved/built in the area which may impact on the purchased property
• Valuations performed on the property which are less than the price agreed in the contract

Of course, it is important to remember that every purchaser has the right to obtain their own independent legal advice and, in most cases, a cooling-off period on the contract does apply.