Buying off-the-plan - what to look out for

Some people (including my grandfather) will not go anywhere near an off-the-plan purchase, not even with a sixty-foot barge pole! Others are seduced by the glossy developer magazines selling innovative designs in premier locations at a price that will never be repeated. Whether buying off-the-plan is or isn't your cup of tea, you should be aware of the legal issues involved.

Often with the large urban developments, the developer uses a large firm to draft the Contract and manage the property transactions on their behalf. What this can mean is that you have top-tier corporate/property lawyers drafting a watertight, one-sided Contract (complete with a number of volumes) with very little room for negotiation. (As a quick aside, if you come up against one of these Contracts, there may be scope to challenge them on the basis of unfair terms in the Australian Consumer Law. But rest assured, that would be an expensive and time consuming process.)

Here are some of the key things to look out for in Contract for an off-the-plan purchase:

• Rights to alter design/plan: The Contract will most likely give the Vendor a right to alter the design/plan if required (by Council etc). This is necessary as it is difficult to foresee what issues might arise in the development. However, there should also be a right for you to terminate the Contract (or be compensated etc) if the change in the design/plan disadvantages you.
• Rights to alter materials/fittings/finishes: As above. Different materials etc may need to be used by the Vendor (eg. if they are unavailable etc) but should you have some recourse if they are significantly different from what was planned originally.
• Sunset Date: How long does the Contract give the Vendor to finish the development (the sunset date)? Are they given the right to extend the sunset date? These are important issues to consider as you don't want to sign up for a development that keeps dragging on. 
• Land tax and other costs: Is the Vendor passing on significant costs to you as the purchaser? Such as land tax? 
• Strata and Community Schemes: Large developments are often structured by having individual buildings as their own strata schemes and then all the buildings are part of a larger strata scheme or community scheme. This can mean that each of the strata schemes (and thus you as part of the owners corporation) can have significant liabilities for the maintenance and upkeep of the community scheme property - private roads, pools, gyms, saunas, recreational facilities. 
• Other construction work: Has the Vendor disclosed that they intend on constructing other buildings right next to yours? This may mean that your idyllic harbour-side pad will take on a kind of jackhammer ambience!

There will be other issues that need to be considered as well. You should always obtain advice from a property lawyer for a Contract for Sale but this doubly applies for off-the-plan purchases. You need to know what you're getting into.

Jonathan Marquet
Emil Ford & Co. - Lawyers

Demystifying the money you pay at settlement

Many purchasing clients, particularly first home buyers, don't understand why they had to pay more than the balance of the purchase price at settlement. This is perfectly understandable. You fastidiously crunch the numbers before and after exchanging contracts: calculating duty payable and then what the rest of the purchase price is after the deposit is paid. But you then find out that instead of paying $450,000.00 at settlement, you are actually obliged to pay $451,489.78.  What you didn't know is that there are always "adjustments" to be made in the settlement figures, which tend to increase the amount of money a purchaser has to pay to the vendor at settlement.

What are these "adjustments"? Are they just a flow on from a Matt Damon movie? No, not really. Adjustments are done at settlement because a vendor is liable for council rates, water, strata levies etc up until and including the day of settlement and the purchaser is liable from after settlement for those charges. Adjustments ensure that both parties have paid their share of the charges for the property. For example, if the vendor has paid all the council rates for the year (which run from 1 July to 30 June) and settlement is to take place on 15 June, then the purchaser is to "reimburse" the vendor for the 15 extra days that the vendor has paid but for which the purchaser is actually liable.

Water usage charges are generally estimated for settlement and this will mean that the vendor, in effect, provides the purchaser with a "discount" for the costs of the vendor's estimated water usage (water usage is only recorded periodically and it is only fair that the vendor pays to the purchaser for their water usage, which will be payable down the track).

Sometimes I have purchasers asking me why they are paying council rates at settlement. The adjustments are done on the basis that the charges have in fact been paid. If the charges have not been paid, then a cheque is drawn from the money to be paid to the vendor to pay the council rates. For example, let's say that the council rates are $1500 for the year, but they have not been paid by the vendor. Settlement is on 15 June. This is how the adjustment would look:

   Council Rates $1500
   Purchaser allows 15 days (being 15 days from after settlement to the end of the year)
   $61.64 is payable by the purchaser to the Vendor

   Cheque at settlement: $1500 to Council

You can see from the above that the purchaser pays the vendor for their share of the rates and then from the overall settlement moneys a cheque is made to council to pay for the full rates (so the vendor pays for their share as well).

In certain situations, there may be more complicated adjustment calculations for things such as rent or strata insurances etc. The key thing to remember is to budget for some extra moneys at settlement so that you are not surprised when there is a bit extra to pay.

Jonathan Marquet
Emil Ford & Co - Lawyers