Risks of Purchasing Apartments Off Plans

Risks of Purchasing Apartments Off Plans

There has been significant publicity surrounding over 30 Auckland apartment developments where, despite having been sold to purchasers prior to construction, the development is now not proceeding.

This has been as a result of the inability of some developers to obtain project funding and/or the increased costs experienced in completing the development. This situation leaves purchasers in a significantly compromised position and having very few options for redress. They will have lost their position in the market place in that the costs of an alternative property will have, over the period of 18 months, increased by between 10 and 20 per cent. When considering committing to purchase a property "off the plans" (and especially in the case of apartments) careful consideration must be given to the form of agreement for sale and purchase being entered into. While it is never possible to cover every inherent risk in a property transaction there are some fundamental issues which should be included in the relevant contract.

By way of example:

  • It is essential that any deposit paid pursuant to an agreement for sale and purchase is held in an interest bearing trust account pending settlement being completed. Should the development not proceed for any reason, the deposit should be returned together with interest to the purchaser.
  • The inclusion of a "sunset clause", whereby, in the event of the development not being completed by a specified date, the purchaser becomes free to withdraw from the contract. It may also be advisable to include in the contract a number of milestone dates whereby, if the developer has not progressed the development to a certain stage by the specified date, the purchaser can cancel the contract and receive the return of their deposit along with interest.
  • That any apartment accessory units such as storage, garage and common areas, are adequately defined in the plan.
  • A copy of the relevant body corporate rules which may impose restrictions for use of the apartment (for example, the owner's right to have pets reside there) are included.

We believe that careful consideration should also be given to the reputation and experience of the particular developer involved. In our experience, most difficulties concerning apartments occur as a result of either under-capitalisation of the developer or a lack of industry experience. We highly recommend that prior to entering into any contract to purchase a property "off the plans", legal advice be obtained.

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