There is an old adage that ‘time kills deals’ and that couldn’t be more true than selling stock off the plan in new property developments. We all know the feeling of having a buyer that cannot wait to purchase, only to have them pull out before they sign the dotted line.
Buyer’s remorse can arise due to various reasons, however the best way for a developer to mitigate this issue is to ensure buyers are able to sign the sale contract as soon as possible. This means having an off the plan contract that is balanced enough to protect your interests but to also ensuring it doesn’t take weeks negotiating amendments with the buyer’s lawyer. Resist the temptation to have a contract that is entirely in your favour and you will likely see a higher rate of buyer retention.
Ensuring your off the plan contract is ‘market friendly’
Date of adjustment
It can be tempting to have an off the plan contract that provides for an adjustment of outgoings from the date the lot registers, instead of the date of settlement. The benefit of this from a developer’s perspective is that you generally do not need to do an adjustment for rates, water or body corporate fees as the buyer will be responsible once they issue.
Land tax adjustment
The most common amendment to any off the plan contract in our experience is buyers requesting there be no adjustment for land tax. This is especially the case where most buyers in the development are owner occupiers that would not usually be responsible for paying land tax once they own the property.
If your project is targeted towards owner occupiers, there are a few different strategies to deal with this issue:
- Have a standard special condition that can easily be inserted into the contract to delete the land tax adjustment on a case by case basis
- Include a cap on the land tax amount in the contract. This means buyers know the maximum amount they will be paying for land tax and they can budget accordingly. The uncertainty of not knowing whether the land tax adjustment will be $500 or $5,000 can often result in the buyer not signing until the issue has been addressed.
- Not include an adjustment for land tax in the contract. This is not a common approach, but something you can always consider.
One sided right for the developer to terminate without controls
It is common for an off the plan contract to have a list of conditions precedent that need to be satisfied by the developer. If the developer is unable to satisfy the conditions, then the developer usually has a right to terminate the contract. This usually includes right to terminate if there is a change in market conditions or the developer cannot obtain a sufficient number of pre-sales.
While it is common and necessary for a developer to have various rights of termination, you need to consider the commerciality of expecting a buyer to sign a contract that you can essentially terminate at will. Would you want to sign a contract on those terms?
The best way to deal with this issue is to ensure the clause is appropriately drafted and that there are some controls on the developer terminating. The most common controls include:
- A limitation on the date the developer can terminate. This means the buyer gets certainty that the contract cannot be terminated by the developer after a certain time due to issues such as insufficient pre-sales.
- An obligation for the developer to act reasonably when terminating. This means you must have some reasonable basis for terminating and not just do it at will.
- Restricting the developer from terminating individual contracts by requiring the clause to only be triggered if the developer terminates all contracts in that stage or the entire development.
Unreasonably long sunset date
Having a sunset date that allows either party to terminate the contract if the lot hasn’t registered or settlement hasn’t been effected by a certain date is necessary to give the parties certainty and to allow the parties to walk away if there have been substantial delays.
With the requirements of construction funders becoming increasingly onerous, developers are taking a cautious approach and ensuring the sunset date is often the latest date permitted by legislation (18 months for land and 5 ½ years for lots in a community titles scheme). While this is obviously great for the developer, buyers often dislike the uncertainty of being tied into a contract that could potentially go for 5 ½ years.
Developers should be commercial when choosing a sunset date and also consider updating their template contract as the development progresses. If the development is nearly completed, do you really need buyers to sign a contract with a 5 ½ year sunset date?
You should consider your project timeline, buffer requirements of your financier and some contingency when choosing a sunset date to be included in your template contract. By being more commercial and not just always choosing the longest date possible, you increase the likelihood of a buyer signing quickly and decrease the risk of buyers not signing due to buyer’s remorse.
Looking for advice on your off the plan contract?
At McAndrew Law, we are experienced in drafting off the plan contracts that don’t kill deals. Call us on (07) 3266 8555 or get in touch with us online to get started.
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