Purchasing off the Plans - Sunset Clauses and some other issues if you buy new builds or off plans
Sunset clauses are intended to provide that either or both parties to a contract may cancel the contract if a specified event does not happen before a specified date. They have uses in a number of different contexts.
One important context is such clauses are often found in contracts for the sale and purchase of a new build or purchasing off plans. They are intended to protect the purchaser from undue delays in building that may mean that a purchaser is committed to provide for having to settle a purchase of a home that is long delayed or may never arrive. Consequentially, when such clauses are drafted by solicitors acting for the purchaser, such sunset clauses usually allow only the purchaser to trigger the clause and cancel the contract. The reality, however, is most contracts for a new build or purchasing off plans are prepared by the developer’s solicitors. They often draft a provision that both the purchaser and the vendor may elect to cancel the contract for any reason if completion hasn’t occurred by a particular date. Purchasers need to be wary of such provisions.
Recently, there have been reports of vendors invoking the sunset clause and cancelling contracts only to increase the sale price of the property. This may be due to the increasing cost of building supplies and supply chain disruptions delaying the development past the sunset date. It may be motivated by less creditable motives that the developer believes the market value of what they have built has significantly increased since the date they signed the agreement with their purchaser.
Sunset clauses are only one of the clause types that can create problems when buying off the plans or a new build. Purchasers need to obtain legal advice before they sign up to any of these contracts.
Some of the problems include:
a) You need to make sure that the deposit you pay (usually 10%) remains in a stakeholder’s account in your name and the developer’s name until settlement of the purchase. If not, any land agent is paid and the developer immediately gets the rest of the money. If the developer fails, your money is lost. The developer’s mortgagee may sell off the property without needing to sell to you or to account to you in any manner. It is vital, therefore, there be the stakeholder provision in regard to deposits. Most developers recognize that people will not deal with them unless this protection is given and so developers tend to move at least part of the way towards stakeholder provisions.
b) You need to make sure the developer does not have the ability to change the nature of what you buy. It is usual for the developer to retain the ability to make changes to the land area if required by the terms of council consents or the LINZ title procedure. In that circumstance, you need to include a provision that any reduction in area beyond say 5% gives you the ability to be compensated or perhaps even gives you the ability to terminate the contract. Contracts normally involve some provision which enables the developer to change some materials and chattels. A purchaser needs to acknowledge that a degree of this is inevitable and acceptable so long as the resulting outcome does not reduce the value of the property. You need to make sure that the clauses do not go beyond that.
c) You do need an effective and realistically timed sunset clause.
d) You need so far as possible to have the construction costs fixed. How this works does depend upon the market. For example, most builders will make an allowance towards the cost of foundations but you may have to pay for any excess. This is understandable because the builder doesn’t know what is under the earth and the risks have to be weighed somehow. Also, you can have what are called PC sums (provisional/prime cost sums) where a figure is given for particular types of chattels or specified types of work and you pay any excess of costs incurred by the builder above that figure. Yet again, some of that is understandable depending on market conditions but the purchaser needs to recognize they are assuming risk. You should try and reduce the number of PC sum elements to the contract as much as you can.
e) The current and continuing escalation of building costs create even more challenges. It is all very well telling a builder that the fixed price is the fixed price and they bear the risk but the argument is harder to make when the proportionate increases of building materials and costs are at the levels we have seen during the 12 months to 30th June 2022. You do need to engage with market realities. For hopefully a brief period, while these sharp escalations of price are occurring, there may need to be some degree of compromise. For example, by requiring fixed price as at a certain date and only escalations later than that date can be compensated for in some manner. Or, calculating the construction price at a current date but building in a fixed escalation at ?% which gives rise to the contract sum which cannot be moved from. Otherwise, you should always have a fixed price contract or at least a contract which is fixed with a minimum degree of potential change.
f) It is important that you define the building work. You need to have a detailed set of plans and specifications to minimize the ability of the builder to increase prices because they claim items or work to be an extra.
g) Avoid variations. They are paid on a charge out basis and regrettably, often form a major part of a builder’s profit.
h) For a new build you should look for a Master Build guarantee. If you are not buying directly from the builder, make sure your contract provides that the developer transfers to you the benefit of the Master Build guarantee and all product and work guarantees and warranties the developer receives.
i) Ensure the insurance risk on the property is born by the developer at all stages prior to your settlement and personal occupation.
j) You need realistic provisions which allow a maintenance period for minor remedial work for say a 3-month period after settlement.
k) You need realistic settlement provisions. That a separate title is issued relates to the land. That a code compliance certificate is issued shows that what is being build meets the terms of the building consent and local authority minimum requirements. You need specific provisions that the contracted for works will be complete and performed to a good and tradesman-like standard.
l) There are other potential fishhooks that may appear in what is contained in or what is omitted from the contract the developer presents you with.
We therefore repeat our recommendation that before you sign up to any such agreement, you obtain legal advice from ourselves or some other experienced property lawyer.