It is not difficult to see why it has become common for developers to sell new houses and apartments in this way; an immaculate new home fitted out with every modern convenience is clearly a very appealing proposition for any purchaser.
There are, of course, other benefits for both parties. The developer secures a legally binding commitment from the purchaser at an early stage, reducing development risk and facilitating funding. The purchaser has the benefit of securing the acquisition of their chosen unit of accommodation, at a pre-agreed price and with a fixed specification which may prove to be particularly attractive in the market at the time of completion.
Each development is, of course, physically unique and indeed the way in which it is legally structured (freehold, flying freehold, share transfer or a combination of these) will differ from one development to another. There are, however, a number of important matters which a prospective purchaser will almost invariably need to consider and these are highlighted below.
Binding legal obligations
It is absolutely crucial to appreciate that entering into an agreement to purchase a property with a developer creates a legally binding obligation on both parties to complete the sale and purchase in accordance with the terms of the agreement. Both parties need to be sure that they will be able to comply with this obligation -there is no option for either party to change their mind – and failing to do so will customarily oblige the applebyglobal.com 2 ‘defaulting’ party to pay substantial damages to the other, normally set at one third of the price. The purchaser therefore needs to be satisfied that the wherewithal to fund the purchase will be available at the time of completion.
A purchaser will be required on signing the purchase agreement to pay a portion of the purchase price, typically 10%, to the developer. In some cases this will be held ‘in escrow’ by a third party (usually the developer’s lawyers) pending completion. The disadvantage of such an arrangement for the developer is, of course, the inability to apply the funds to the development.
Some developers therefore insist upon being able to use the deposit immediately upon receipt. In this case, a well-advised purchaser should insist on proper protection against the developer failing to complete the development. There are specific forms of insurance available in the market under which the insurers will refund the deposit to the purchaser in such circumstances once the purchaser has attempted, without success, to recover it from the developer. It would be unwise for any purchaser to proceed to pay over a meaningful deposit which the developer can use to fund the development without this protection.
Trigger for completion
Practical completion of the house or apartment under construction is typically the trigger for completion of the sale and purchase (the timing of which will be set out in the agreement). A reasonable agreement will be clear as to the required procedural steps for the developer, or someone on its behalf, to declare practical completion.
Furthermore, it will allow the purchaser sufficient time to inspect the unit and the opportunity to challenge the declaration if appropriate, with a clearly specified process (e.g. arbitration) for resolving any dispute between the parties.
It is inherent in buying ‘off plan’ that the subject matter of the agreement, at the time of its signature, has no physical existence. It is thus imperative that the agreement be clear as to what the contractual reference documents (i.e. plans/specifications) are and in what circumstances those documents may be changed prior to completion. A sound agreement will acknowledge and cater for any legitimate concerns of the developer such as, for example, allowing the developer to make alterations which are imposed by statutory authorities or are immaterial to the particular unit of accommodation, whilst at the same time preventing the developer from making unilateral changes which would result in the purchaser ending up with something materially different from that which was originally promised.
At the point when any new building is declared practically complete there will be a number of defective or incomplete items of a minor nature, often referred to as ‘snagging’, and a purchaser should ensure that the agreement sets out a proper procedure for remedying these items. At the same time, it must be recognised that more serious defects of design or construction do, occasionally, occur and it is vital that the agreement includes proper provision to cover this also. It is relatively common for the developer’s obligations to be supplemented by latent defects insurance (also known as ‘decennial’ insurance) whereby new developments are insured (typically for ten years from practical completion) against major defects affecting their structural integrity and weatherproofing arising from defective design and/or workmanship.applebyglobal.com 3
Management and service charges
Most new multi-home developments involve some communal arrangements, as with blocks of apartments and with many modern developments of new houses, and the purchaser should be clear when signing up how the development will be managed and how service charges will be calculated and allocated. Seeking budget estimates of service charges is an important part of the ‘due diligence’ exercise but the purchaser should never lose sight of the actual contractual arrangements which will apply. Ultimately, the specified percentage of relevant expenditure that applies to a particular unit is what will have to be paid and an estimate of monetary outlay is just that.
The article above identifies a number of specific issues to which a prospective ‘off plan’ purchaser should give careful thought when considering purchase documentation with their legal adviser. But there is, perhaps, something else of a manifestly different nature to bear in mind, namely the reputation of the developer. Does the developer have a proven track record in local residential development, with a well-established commitment to delivering a quality product and treating its purchasers fairly both prior to and after completion? The contractual ‘nuts and bolts’ should not be neglected but there is considerable comfort to be derived from dealing with a developer with an excellent and jealously-guarded reputation.