Why You Should Never Buy Off The Plan

In a heated housing market, it can seem tempting to rush into property transactions for fear of missing out. Buying off-the-plan into a new development can be the most tempting, because it’s brand new, shiny and the developers make all kinds of promises.

Yet it’s common for such property dreams to turn into nightmares. A house and land package deal 15 minutes from Penrith, in Western Sydney, bought from Henley Group by Suraj Siddique has turned into a messy legal battle. He thought it would be an ideal family home for his wife and two young children. Along with 14 other families, he bought the pre-sale lot for $620,000 in July last year, believing that he’d be moving in by Christmas.

By February, construction had not begun and Siddique began to panic about the contract’s March 31 sunset date. The local council revealed that no subdivision plan had ever been registered for the development. Fearing he would lose the home, Siddique launched legal action against the developer, alleging false and misleading conduct. He says the effect of having to deal with the prospect of losing the home and the legal battle has been devastating. “My wife is taking sleeping medication, I’m depressed, my kids keep asking when we will be moving into our new house,” he said.

Sunset clauses in the contract allows either party to rescind a contract if certain conditions are not met. A separate legal action against a developer in Kellyville reveals that the developer informed a group of families who had bought off-the-plan lots in a subdivision that it would only extend the sunset clause in their contracts if they paid an additional 10 – 15% on top of the original contract price. The solicitor representing the families said that the problem has become so bad that he would advise people never to buy off the plan, particularly in the super-heated real estate market of Sydney. In June, the Supreme Court granted a temporary injunction to prevent the Kellyville developer on-selling the lots ahead of a hearing date which has yet to be set.

Property lawyer and real estate ‘watchdog’ Tim O’Dwyer wrote of the very same issue occurring over ten years ago, so it’s hardly a new problem.

In August 2003 XYZ Holdings Pty. Ltd. entered into 11 off-the-plan contracts for the sale of apartments in a 20-unit residential building at a coastal town.   Settlement was due 14 days after the establishment of the Community Title Scheme for the building.  A sunset clause in each contract entitled either party to terminate if the project did not complete by 31st December, 2005.

By September 2004 XYZ’s solicitors had written to the buyers’ solicitors:

“As construction costs have increased significantly and the residential market has experienced a down-turn, our client is unable to obtain satisfactory construction finance to proceed with this development.  Accordingly our client proposes that the contract be terminated by mutual agreement.”

housesFive buyers accepted this proposal.  The other six were not happy and, in July 2005, sued XYZ for breach of contract.  They later argued in court that, by not proceeding with the development,  XYZ committed an “anticipatory breach” of each contract. 

XYZ responded that, despite the contracts’ December 2005 sunset date, nothing obliged it to establish the Scheme by then. Rather XYZ would use “reasonable endeavours” in that regard (which it had)  but, without construction finance, further steps to establish the Scheme “would have been futile”.

The trial judge ruled against the buyers because they did not establish that XYZ had not used its “best endeavours” to complete.

On appeal the buyers submitted that the trial judge had not considered two contract clauses which “unconditionally and expressly” obliged XYZ to build the apartments.  One clause stated (in part):  “The seller shall construct a multi-storey building …substantially in accordance with the plans…” The other stated (in part):  “…the seller will ensure the building is constructed in a proper and workmanlike manner.”

The Appeal Court found these contractual promises by XYZ were “express and unequivocal” and not conditional upon the availability of construction finance.  “Best endeavours” or “acting reasonably” could not be implied.

While another contract clause enabled XYZ to extend the sunset date if unavoidable delays occurred, the Court disagreed with the judge’s interpretation that this impliedly meant XYZ could reasonably seek mutual termination of the contracts as it had.  Such an interpretation would make the contract “illusory” –  giving XYZ a discretion whether or not to perform the contract.

Because XYZ was contractually obliged to complete the building and establish the Scheme, the Court found there had been a “clear repudiation by anticipatory breach of the contracts”.

So the buyers’ appeals were upheld.

If you are considering making an off-the-plan purchase, Tim says to make sure you obtain legal advice first. Because of the many legal and financial risks associated with buying, selling or re-selling properties off-the-plan, you should not sign anything until you have sought legal advice. It is preferable to protect your interests initially rather than trying to renegotiate contracts down the track.

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