How Proposed Off The Plan Contract Legislation Will Impact Developers
In November 2017, Victor Dominello MP Minister for Finance, Services and Property released a Discussion Paper on Off-the-plan contracts for residential projects.
At the time the Minister’s foreword noted that the growth of the New South Wales economy had in recent years led to record increases in housing supply and acknowledged that Off-the-plan (OTP) contracts have become popular for developers looking to secure early buyers and project financing.
He further noted that over the last 10 years, OTP contracts had increased tenfold and the represent around 11.5% of all NSW residential sales and further they were critical for housing construction industry.
As a result of the discussion paper there is now new legislation in train that will have a big impact on the OTP market.
“However, many in the industry have already anticipated the changes and experienced developers are embracing them as representing best practice,’ commented Dennis Vertzayias, Head of NSW Residential Project Marketing at Colliers International.
“In combination the changes should benefit OTP sales and make the process more buyer-friendly and robust as markets head for recovery. The changes should also be welcome by financiers for the same reasons” said Dennis.
Proposed changes to Contract legislation will have an immediate impact on developers, purchasers, financers and the broader industry when it comes to ‘Off the Plan’ (OTP) Purchasing.
The new laws are currently being drafted and proposed to take effect as early as September this year. Meaning any new developments currently on market or proposed to go to market later this year will be impacted!
The new laws and associated regulations will have a material impact. While the changes are focused on terms directly impacting buyers, the varied obligations for developers (vendors) need careful assessment.
The changes, while not ‘massive’ do have the potential for material impact if definitions and regulations are not followed to the letter.
The first changes focused on the electronic execution of deeds and email service were already introduced in November 2018. The next round of changes are expected to come into law later this year, possibly September and they will focus on the form of contract for OTP sales and cooling off period extensions.
The updated legislation has been welcomed as a logical way of adding extra credibility and security for OTP buyers. Designed to protect buyers who might be negatively impacted by changes to a development they also give developers the flexibility to extend the completion of a project.
In broad terms the changes which, have been under discussion for several years will impact and amend provisions concerning; disclosure statements, notice of changes, notice of rescission for notice of changes, service of the registered plan, notice of rescission for registered plan and rescission under the terms of sunset clauses.
Across an outline of each topic, Disclosure Statements are important as they are to be attached to the OTP sales contract before contracts are signed and exchanged by the buyer and as such if they are not correctly addressed contracts could be delayed or cancelled. The statement must be in an approved form (as prescribed by the draft legislation) and must include a copy of the draft plan, and include documents prescribed by the regulations.
Dennis Vertzayias of Colliers International noted “There will be far more rigidity around the accuracy of disclosure information, including the draft strata plan at the time of sales.”
“This means developers need to be certain about development approvals, and relevant components such as finishes, appliances, location of building services, by laws and building management statements, prior to sales”
“Construction documentation will need to be far more progressed than currently and complete well-before the developer takes a project into the market.
“This will ensure that there’s more certainty around what is actually being built and subsequently being purchased, which to be honest is a good thing!”
The new legislation will according to Dennis see developers more accountable at the front end of a project. However, he goes on to suggest that any well organised developer has nothing to worry about, albeit it may take slightly longer to go to market to obtain pre-sales.
“The flow-on from this is that indirectly the developer will need to be more financial stable when acquiring the land, which is also a positive in the big scheme and across the marketplace.” He said.
Notice of Changes have a format that vendors must serve on the buyer (or their authorised representative) at least 12-days prior to completion, if the vendor becomes aware that the disclosure statement needs to be amended. This could be as a result of inaccurate material at the time the contract was signed or became inaccurate in a material way after the contract was signed.
Examples of a material change would include; a change to the draft plans, provisions of the draft strata plan, an easement or covenant and changes to the schedule of finishes. And other matters prescribed in the regulations that would adversely impact the buyer’s enjoyment of the apartment but would exclude prescribed matters.
If a Notice of Change is served and it contains material changes there is recourse by the buyer to rescind the contract. However, the contract can only be rescinded if the changes meet certain conditions.
The first is a subjective change that if the buyer had known then they would not have entered into the contract. The second type of change is objective, and the change would have a material effect on the purchase.
An objective change will be framed in the legislation to the benefit of the buyer and would be assessed in light of the buyer’s individual circumstances. This would be determined by the relationship of the inaccuracy (requiring the change) and how that change, and inaccuracy would prejudice the buyer.
In reality this change requires any vendor to not make material changes without full and proper consideration for the buyer’s rights and so would appear to rule-out changes of convenience that have not real benefit or gain for the buyer.
Service of Registered Plan is another main area of focus in the new legislation. The vendors obligation is to serve a copy of the RP before completion along with any other document that was registered with the RP.
The buyer is not required to complete the contract any earlier than 21-days after receiving copies of the RP and other related documents.
After service the buyer may rescind the contract if the disclosure statement includes any inaccuracy that would have meant the buyer would not have entered into the contract and would be materially prejudiced, and this would be based upon the same test material prejudice.
For vendors there’s a need to have full regard to the varied rights of rescission. Potential risk can be mitigated via the early service of Notice of Changes, pro-active completion of documentation and careful and detailed consideration as to what’s included in schedules of finishes. The schedule of finishes has always been a focus of buyers.
In reviewing the proposed legislation Ian Bennett, Director Project Marketing Residential said, “It’s not always an easy task but that’s not a hurdle if the schedule is well considered in the first instance.”
“Developers should allow for finishes and aspects such as appliances to be described fairly but with commercial reality, understanding that designs and suppliers can change if for example dealing with a 3-year long project.”
“However, beyond the finishes it is important to note that if there are any construction amendments to the building, that substantially have a detrimental effect on any apartment in the project the purchase can rescind.” He said.
According to Ian when the industry deals with construction and development approvals there’s also room to suggest that local councils also need to act to ensure that any DA requirements are managed in a timely manner.
“Another important aspect of the proposed new laws relates to changes to the strata plan where there’s also a potential right to rescind.
“Changes that could trigger this right include the location of a property that has a substantial and detrimental effect on the apartments in that part of a building. Including most importantly changes that result in a reduction of more than 5% and also have the same effect.”
“Over recent years there have been some high-profile cases centred around OTP sunset clauses and so the provisions in the new legislation will be clarified.”
“While the removal of existing provisions for agreed variation in the area of an apartment will mean an almost zero provision for any variance and that needs to be taken on-board by developers and all their consultants”. He said.
“These will address the right to rescind if the subject apartment (lot) is to complete by the sunset date and how an extension is to be provided in the contract.” Said Ian.
“Other changes in the final legislation are expected to include not permitting the release of the deposit to the vendor.
Contracts (unwisely) entered into outside the legislation’s expected to be strict guidelines will be suspect and may well have a negative impact on how a project is financed. It may be easier for buyers to ‘escape’ their purchase however, by taking the prescribed steps expected in the new legislation the commercial interests of every party will be better protected.
We acknowledge the assistance of Corrs Chambers Westgarth Lawyers in preparing these notes.