The advantages, pitfalls and the Kawarau Falls case
If you live in one of New Zealand’s cities, it’s likely that you’ve noticed a multitude of brand-new apartments, terraces, and town houses popping up in your area. You may have decided that you too, want to secure one of these brand-new properties as an investment or as a home. What do you need to know before taking the plunge?
Many people choose to buy these kinds of properties ‘off the plans.’ Developers make building plans and specifications available to prospective purchasers and sell the properties ahead of construction as a method of convincing the bank to fund their project.
To secure one or more of these properties for yourself, you would need to enter into an agreement where you agree to pay a deposit (usually 5%–10 % of the developer’s asking price for the property) and then pay the balance on completion.
Before entering into any agreement with a developer, you should be aware of the advantages, and pitfalls, of buying off the plans. We have set out some below, but they are by no means exhaustive.
The early bird gets the worm: When buying off the plans, you can often acquire the exact property of your choice, as opposed to having to pick from what is left which may not meet your exact requirements.
By buying at this early stage, you have the opportunity to choose the best property, with the best location and views. You also can choose finishes and so on.
Making a profit: If you get in early enough, you could buy at a comparatively lower price, as prices often rise as construction nears completion.
If the property market is favourable during the construction of your property, you could potentially make a profit on it between the time of paying your deposit and the final instalment.
The Agreement for Sale and Purchase: As a purchaser, you would enter into an Agreement for Sale and Purchase (ASP).
The ASP has clauses that typically favour the developer and specify important factors such as how much the developer can deviate from the initial plan to which you agreed.
As well, most ASPs contain clauses which mean the developer cannot be held liable for failing to complete your property, and don’t allow you any way out of the agreement. Some developers seek to impose cost escalation clauses in their agreements so they can pass on construction cost increases. Unless these clauses are carefully limited, a purchase price could increase substantially.
If the market drops during the construction phase and you want to sell on completion, there’s a risk you could make a loss.
Timing: Some projects can take years to complete, and delays can and do happen. It’s important to consider these potential delays when planning your future.
Your expectations: As there was no physical property to view, it may only be at the final stages, or after completion, that you realise your property is built to a lower standard or that certain aspects are not how you had envisioned.
If your expectations haven’t been met, whether it be due to the time it has taken to be built, or you find yourself dissatisfied with the finished product – the fine print in the ASP becomes critical.
The Kawarau Falls case: when things go wrong
Imagine that you had already bought off the plans, when, to your horror, you get a call – the developer’s company is in receivership, and the project cannot be completed. What are your rights? Do you get your deposit back? On 9 September 2016, the Court of Appeal answered this very question (1).
This case involved Dr Ho Kok Sun (Dr Ho), a purchaser of one of the luxury properties that were to be built in Queenstown. Dr Ho and other purchasers had paid their 10% deposits and agreed to pay the balance when the properties were completed.
When it came time for the property to be completed and it was not, Dr Ho, and others like him, cancelled their agreements.
The developers refused to refund the purchasers’ deposits. The High Court agreed with the developers. The Court of Appeal disagreed with the High Court, and required the developer to refund Dr Ho, and others, their deposits.
Although the outcome of this case appears favourable to those who have bought off the plans, it’s important to note the decision has now been appealed to the Supreme Court and will be heard in early April 2017.
Although there are undoubtedly advantages in buying off the plans, there are also pitfalls.
Until the Supreme Court has released its decision on the Kawarau Falls case, the purchaser’s rights are still uncertain.
Before deciding to buy off the plans, do talk with us so we can explain your rights and obligations under the agreement you are signing.
(1) Sun v Peninsula Road Ltd (in rec and in liq)  NZCA 427