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Purchasing off-the-plan (OTP) means buying or placing a deposit for a house or apartment before its completion.

This option has become popular among homeowners and investors because of its benefits. It ensures you are buying a brand-new home at a more competitive price with potential stamp duty savings.

However, off-the-plan property purchases in Victoria may also put you at risk of legal issues, potential problems, and unexpected challenges.

Proceeding with this property purchase with caution and proper legal guidance is best, whether you’re a first-time buyer or a seasoned investor. Here are some crucial considerations you need to understand when purchasing off-the-plan.

1. Contract and Documentation Issues

The details of off-the-plan contracts require a thorough review, particularly their sunset and variation clauses.

Sunset Clauses

Sunset clauses indicate the deadline for the project completion. Failure to complete the project within the timeframe means the vendor or purchaser can end the contract. The buyer can then refund their deposit.

It may seem like a safeguard, but some developers can exploit sunset clauses. Specifically, they can cancel the contract and resell at a higher price when market conditions shift. This definitely was the case several years ago.

New laws now require developers to seek purchasers’ consent before terminating the contract. Still, as a buyer, you should ask a property lawyer to review the details thoroughly to protect your interests.

Variation Clauses

Variation clauses in off-the-plan contracts allow developers to change the design, layout, or construction materials used in building the property. Such changes affect the final home’s finishes, size, or floor plan.

Minor alterations are typical in off-the-plan properties. However, significant changes can give you a home that does not meet your needs and expectations.

2. Financial Risks

Buying off-the-plan properties in Victoria follows a strict deposit structure. Specifically, buyers are to pay no more than 10% of the total purchase price when they sign the contract. The buyer settles the remaining balance upon house completion.

Generally, the developer will then tell the bank how many contracts they have sold off the plan to obtain finance.

Locking yourself in a property purchase that takes months or years to complete may expose you to financial risks. For example:

  • Buyers may be stung by market fluctuations. Selling assets is one way to finance a property purchase. However, market fluctuations can devalue these assets, making it harder for the buyer to prepare the necessary funds.
  • Buyers may experience difficulty in obtaining finance. A buyer may only obtain finance for the purchase when the property is close to completion. Financial circumstances can change within that period, potentially diminishing the buyer’s borrowing power. Further, generally once an occupancy permit and plan of subdivision is registered, the developer will often call settlement in 14 days. It can often be a tight timeline to obtain finance.
  • Buyers may be at risk of developer insolvency. Developers become insolvent when they are unable to complete the project. Because of this, a buyer can lose any deposit or progress payment made during its construction. Recovering funds also means lengthy legal battles with little chance of success.

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3. Construction and Quality Issues

As mentioned, one of the best advantages of buying an off-the-plan property is a brand-new home. When a property is new, you don’t have to worry about repairs or renovations for a few years (at least, that’s the hope).

However, this is not always the case because during pre-settlement inspection, you may still find doors that do not close properly, poor paint jobs, or cracked tiles. These defects are easy to spot and correct.

But remember, in off-the-plan purchases, you often have a short time (at times, only 14 days) to report and fix them.

Also, some quality and construction issues may not be visible until you move into the property. Some examples of major defects are internal water leaks, defective plumbing, roof problems, water penetration, and cracking in walls.

You may be bound to purchase a property with a price worth less than its quality. Avoid this by doing your due diligence on the developer before signing an off-the-plan contract. Research their history and previous projects and get a building and pest inspection report done.

4. Statutory Protections

Statutory warranties in off-the-plan contracts are legal protection for buyers that builders or developers must adhere to.

These guarantee that the completed property will meet quality and construction standards. The warranty also states the specific timeframes for claiming defects.

In Victoria, statutory warranties cover the following from the date of completion:

  • Major structural defects – 6 years
  • Non-structural or minor defects – 2 years

The Victoria Building Authority (VBA) can order the developer or builder to remedy the defect or pay compensation in case of a breach of the statutory warranty. Paying of fines or revoking of building licenses may also be imposed in serious cases.

Buyers must thoroughly review the contract, particularly the details of the statutory warranty, its scope of coverage, and the claim process.

5. Owners’ Corporation Matters

An owners’ corporation or body corporate is a group that manages and maintains common properties within an apartment building, condominium, or townhouse.

Lobbies, hallways, parking areas, gardens, and recreational facilities are some examples of common properties.

When buying off-the-plan, the buyer becomes a “part” of the owners’ corporation. This group influences your property’s ongoing costs, maintenance needs, and resale value.

Failure to understand the owners’ corporation rules before signing the contract can lead to several issues, such as:

  • proposed owners’ corporation fees may be different from those disclosed in the contract
  • restricted voting rights while the developer owns lots in the development
  • new rules may be introduced after contract signing

Buyers of off-the-plan properties should future-proof their investment, ensuring they join a well-managed and transparent owners’ corporation. They should review the documents and seek legal assistance to understand their rights and obligations.

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6. Settlement Complications

Most of the time, off-the-plan buyers depend on marketing materials when assessing the quality of the property.

Doing this puts you at risk of several issues, like:

  • having a limited timeframe to report defects
  • spotting discrepancies between the promotional and final product
  • noticing significant changes in measurements and specifications
  • feeling dissatisfied with the purchased property

Instead of relying solely on marketing materials, you should review and understand the contract details. Research the builder or developer’s track record. If possible, inspect their completed projects as well.

7. Legal Safeguards

Buyers have legal protections when buying off-the-plan properties in Victoria, helping balance the potential risks involved with such transactions.

Some of these legal safeguards include:

  • 3-day cooling off period: After signing an off-the-plan contract, a buyer can still cancel it for any reason within 3 business days. They also get a full deposit refund with a small penalty fee, usually 0.2% of the purchase price.
  • Deposit protection: Deposits for off-the-plan property purchases should be secured in a trust account or with a legal representative until completion. This safeguard is a requirement under the Sale of Land Act 1962 (Vic).
  • Obligated structural warranties: Developers should provide guarantees to shield buyers from any unexpected expenses due to structural defects or problems. Additionally, off-the-plan properties often feature modern designs, materials, appliances, and systems, lowering a buyer’s ongoing maintenance costs.

Be sure to look for these conditions in the contract before signing to ensure your rights.

Seek Legal Advice Before Signing an Off-the-Plan Contract

Buying an off-the-plan property in Victoria is a good investment. However, it also comes with risks and complex issues.

As a potential buyer, due diligence is a must before entering into such a transaction. Before signing the contract, ask a property lawyer to review it and identify concerning clauses. Legal professionals can also help you understand the inclusions outlined in the contract and provide financial advice.

If you plan to buy off-the-plan, TNS Lawyers will ensure you invest safely and wisely. We’ll keep you well-informed throughout, so you can navigate potential pitfalls.

You can contact us on 03 9052 3214 or email us at info@tnslawyers.com.au.