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SEPTEMBER 2017

A Warning for Residential Landlords

Is it a good idea?

It is increasingly popular for buyers to enter into an “off-the-plan” agreement to buy a house or an apartment that is yet to be built. When signing an off-the-plan agreement, buyers are more interested in the end product being what they saw in a showroom, video or in the photos. Therefore, the most interesting part of an off-the-plan agreement for a buyer is the part that contains the plans and specifications. However, many buyers are unaware that off-the-plan agreements are often drafted heavily in favour of the builder. For that reason, it is important buyers do their due diligence and understand the risks before entering into an off-the-plan agreement.

Identify what you are buying

It is important that the plans and specifications recorded in the agreement correspond with your understanding of what you are buying. It may sound simple, but clients are often surprised that the end product is different from what they had in mind. Therefore, if you are unsure what is being drawn on the plan, it is recommended that you have the plan reviewed by an architect, builder, or any other person who can deal with plans.

Furthermore, builders often reserve the right to vary the plans and specifications as well as the land area. You may end up getting an apartment or house that is smaller than expected.

Who are you buying from?

Builders often advertise or include in the build agreement a 10-year builder’s guarantee which guarantees the new build against any defects arising from faulty workmanship or materials for a given period. In addition to any guarantees provided by a builder, the Building Act 2004 also automatically prescribes a set of warranties provided by builders that is enforceable for a given period.

This all sounds very well, but you may face two potential issues:

  • Enforcing the prescribed warranties under the Building Act can be difficult. The cheapest option is to go to the Disputes Tribunal, but claims made to the Dispute Tribunal are only for a maximum amount of $20,000. Over this amount, you are required to engage a lawyer to go to Court. This can be expensive and you may not be happy with the outcome.
  • Developers or builders commonly create a limited liability company (also known as a “shell company”) solely for the purpose of completing one project. This means that you may not be able to enforce the warranties under the Act or the personal guarantee provided by the builder if the builder or building company cease to exist before the guarantee or warranty expires.

Consequently, the track record of the builder becomes important. You should do your homework such as finding out what other projects the builder has been involved in, and how well (or badly) they turn out.

Delays

Off-the-plan agreements are drafted based on an expected start and completion date. As it is an estimation, delays could occur. Therefore, we recommended off-the-plan agreements include a “sunset clause” which allows the buyer to cancel the agreement and have the deposit paid refunded if the building has not been completed by a certain date. Otherwise, you may be left to wait for an indefinite period of time for the house or apartment to be built.

Fixed Price Agreements – a misnomer

A fixed price agreement is where the builder has agreed not to increase the agreed purchase price in the event that building costs were to increase during construction.

Unfortunately, in our experience, most, if not all, “fixed price agreements” that are off-the-plan include clauses which give the builder the right to increase the purchase price in the event that “additional work” is required. For example, the builder may increase the purchase price if additional work is required other than that specified in the agreement in order to ensure compliance with a building or resource consent.

Conclusion

There are of course advantages in buying off-the-plan than a ready-made property. You often have the opportunity to personalise the design and finishes of the property. When the building is completed, you have a brand new home complete with appliances and fixtures that you have chosen at the time of signing the agreement rather than having to shop for them afterwards.

However, when a builder offers to sell you property off-the-plans, the builder is selling you a dream, a concept, which has yet to be constructed. Essentially, the builder is selling you something that he himself could not confirm what it will look like until it is built. Off-the-plan agreements are drafted heavily in favour of the builder. Therefore, you should never sign an agreement without first having it reviewed by us.