Buying Off the Plan
What is an “Off the Plan Purchase”?
It is the purchase of an apartment which has not been constructed or has only been partly constructed and in either case is defined by reference to a Plan (which is an unregistered Plan of Subdivision). The Plan shows the dimensions and the layout and the situation of the Apartment. It may also show the development in cross section.
There may also be:
– Architectural Plans and/or
– Specifications.
There may even be a mock up display unit.
What is the significance of the Plan (the unregistered Plan of Subdivision)?
The Plan is a necessary prerequisite to the ultimate completion of the purchase. When the development is completed, the Council will certify the plan. Then the Land Titles Office will register the plan. Registration of the plan results in the creation of the Titles for the apartments. Completion of the purchase involves the transfer of the apartment title in exchange for the purchase price.
So, the purchase cannot be completed until the plan is registered – it cannot be completed earlier because there is no title for the apartment until the plan is registered.
Is a deposit payable?
Normally a 10% deposit is payable. The Sale of Land Act (“Act”) limits the maximum deposit to 10% of the price and requires the deposit to be held on trust for the purchaser until the plan is registered. If there is likely to be long lead time until the plan is registered, it is normal for the Vendor to accept a bank guarantee instead of cash.
When will construction be completed (and when will payment of the balance of purchase moneys be due)?
It should be appreciated that large developments require financial backing and that financial backing frequently depends on a particular level of presales having being made. If presales are insufficient the financial backing will not be forthcoming and the development will not proceed. The Contract is also likely to provide that if the Vendor runs into difficulties with the development and considers those difficulties to insurmountable he may cancel the contract.
If the development commences the Vendor should be able to give an estimate of a completion date. Payment of the balance of the purchase money will be due shortly after completion.
The completion date will be capable of extension if the development is delayed due to bad weather, or strikes etc.
The Contract will also have a “cut off date” i.e. a date after which the Vendor and the Purchaser can cancel the Contract because the Plan has not been registered. In the absence of a Contract “cut off date”, the Act imposes an 18 month period from the date of the contract as the cut off date.
So, when you enter into a Contract you do not know when the balance of purchase moneys will be due because it depends on the registration of the plan and that in turn depends on completion of construction. If you are concerned that the price may be payable before it is convenient, then you need the contract to provide for settlement on whichever is the later of the specified date, and 14 days after notification of registration of the plan, and 14 days after notification of the issue of an occupancy permit. Sometimes a completion certificate from the Vendors Architect is also a prerequisite to completion.
What if the Vendor deliberately slowed down to ensure that the Plan of Subdivision is not registered by the cut off date?
The 1999 Victorian case of Etna v Arif & Ors (1999) VSCA 99 (1 July 1999) decided that in a typical “Off the Plan Contract” there was an implied obligation on the Vendor to use its best endeavors to have the plan registered by the specified cut off date. The result is that the Vendor cannot deliberately delay so as to ensure that the plan is not registered by the cut off date
Variations between the Apartment as initially represented and as presented when the Plan is registered.
The Vendor usually reserves the right to vary the dimensions of the apartment. The Act gives protection to a Purchaser by saying that the Vendor must notify the Purchaser of any proposed amendment and that the Purchaser may cancel the Contract if the alteration will “materially affect” the Apartment being purchased. There is no statutory definition of “materially affect”.
Contracts sometimes seek to limit the effect of the Act by saying that any reduction in area of less than say 5% is not material. Of course 5% may well be material, depending where the discrepancy is and the amount of the price.
The Contract also normally allows the Vendor to change the specifications as to construction details, appliances, fixtures, fittings and finishes and by substituting similar standard equivalents.
So, when you sign the Contract there is no guarantee that you will get exactly what you thought you would get and there is fact a possibility that the development will not proceed at all, or will commence but be cancelled before it is completed.
What about stamp duty concessions?
The amount on which duty is payable is determined by deducting from the purchase price the cost of construction occurring after the contract date. In a high rise development the cost of construction could be 75% of the price, so, if a high rise contract is signed before construction is commenced, duty could be payable only 25% of the purchase price. State Revenue Office Ruling DA.048 sets out the duty concession and how it is calculated. As with other contracts for the purchase of land the duty is payable on the transfer of title and that does not occur until the purchase is completed after the Plan is registered.
Reservation by the Vendor of other rights
Vendors often reserve to themselves:
– the right to conduct marketing activities for unsold units and to maintain signage after settlement
– the right to complete construction after settlement and require the purchaser not to object to any noise, dust or inconvenience.
– the right to enter into agreements about parts of the common property.
– the right to restrict Owners Corporation voting after settlement so long as the Vendor retains any apartment.
Builders warranty insurance
Regulation 1809 of the Building Regulations exempts a builder from the requirements for builders warranty insurance in the case of a multi storey residential building, i.e. a building of more than 3 storeys which contains two or more separate dwellings.
GST
Off the Plan developments will not normally be exempt from GST. It is important that the Contract should provide that the Vendor is to pay the GST i.e. that the price is GST inclusive.
Why does Henderson & Ball send newsletters?
There are several reasons. First, we come across problems during our day to day work. It is sensible from our point of view to record the problem and the answer for our own educational purposes. Second, the problems we encounter are likely to be common to other professionals – it makes sense to put the problem and answer in writing so others can benefit. Third, we think our Newsletters may indicate our expertise and may assist us to advertise that expertise. On that point, if you the reader have a problem which you think may merit being the subject of a Newsletter please let us know.
The information in this newsletter is general. It must not be relied on without first obtaining specific advice from Henderson & Ball.
