What does buying off the plans mean?

Buying off the plans refers to purchasing a turn-key home before construction is completed. You buy based on plans and specifications rather than viewing a finished property. These are usually fixed-price contracts for brand new properties built to the latest building code.

What is a sunset clause and why is it risky?

A sunset clause allows either or both parties to cancel the contract if a specified event has not occurred by a specific date. When buying off the plans, sunset clauses are often inserted for the vendor's benefit only, meaning developers can cancel if titles are delayed, potentially allowing them to resell at higher prices.

What is a price escalation clause?

A price escalation clause allows the developer to impose price increases for materials after a contract has been signed, shifting the risk of absorbing rising construction costs from the vendor to the purchaser. This means you could end up paying more than the original agreed price.

How can I protect myself when buying off the plans?

Research the developer's reputation and track record, avoid contracts for developments at very early stages, get good legal advice to review and negotiate contract clauses, and ensure you understand force majeure, sunset, and price escalation provisions before signing.

The Main Risks of Buying Off The Plans

When we refer to "buying off the plans" that is basically a turn-key home which is simply a finished home that is ready to move into and these are usually fixed price and not up for negotiation.

Why First Home Buyers Consider Buying Off The Plans

Many first home buyers find it easier to obtain lending when buying off the plans rather than purchasing land and entering into a build contract. By buying off the plan, before construction has been completed, it gives you that opportunity to get a brand new property, built with the latest building code and with a fixed price but that does not come without risks and potential complications.

New apartments and houses are generally built to a much higher standard due to the improvements to the Building code in relation to moisture, thermal and acoustic ratings and it may be more energy-efficient and include modern appliances. You are generally covered by warranties (10 years depending on the issue) by the developer under the Building Act.

The Cons of Buying Off The Plans

There is a risk that the property market could decline during the build period so that when you take possession of your property, you are paying above current market value.
Losing your deposit is a risk if you try to exit a contract when you are legally bound to settle, without using a valid option to exit the contract.
Soaring construction prices and the issues that can come with entering into contracts means there is a need for greater scrutiny for added protection.

What To Look Out For

Undertake Due Diligence on the Developer

What is their reputation like? Have there been articles in the media about this developer backing out of contracts or using delay tactics? What is the quality of their contractors' work like in past projects? Do your research online, ask friends and family, and check forums where first home buyers discuss their experiences.

What Stage is the Development At?

We always suggest that you avoid entering into contracts where the development is at the very early stages. If you decide to "take the risk" then you need to consider the consequences and the fact that there can be no guarantee that the plan you see will be the final product.

Key Contract Clauses To Understand

Force Majeure Clause

A force majeure clause allows relief to certain parties if events outside that party's control prevent them from fulfilling their obligations. Post Covid, these clauses are more important than ever. Common events include earthquakes, volcanic eruptions, severe flooding, or pandemics. Developers often include a catch phrase such as "and any other events beyond the developer's control."

Price Escalation Clause

This allows the developer to impose price increases in materials after a contract has been signed, thereby shifting the risk of absorbing the price increases from vendor to the purchaser. Before cancelling a contract under an exit clause, sometimes vendors offer purchasers an option for the contract to continue if the price is increased.

Sunset Clause

A sunset clause is a condition that provides that if a specified event has not occurred by a specific date, then either one or both parties can cancel the contract. When buying off the plans, it is very common for the sunset clause to be inserted for the vendor's benefit only. In the media, you will see that other first home buyers have issues where they felt developers purposely delayed obtaining titles so they could use this exit clause.

Our Recommendation

Good legal advice will help avoid the risk of undesirable clauses often seen in these types of contracts. Developers have been known to add exit clauses that allow them to sell the property to another party if the additional costs are not agreed to down the track. It's your lawyer's job to help protect your interests.