Apartment developments are set to rise. But unfair purchase agreements and lengthy delays could leave buyers high and dry.
Consents for new apartments have more than doubled in the past two years. Most of the action is in Auckland where the quarter-acre dream is a distant memory. It’s estimated about 6000 new apartments will be built in the city by 2018.
Companies behind these yet-to-be built pads are already luring buyers with pristine display suites and glossy brochures. Add the real estate agent’s sales pitch and buying an apartment off the plans may seem an attractive option, and one of the few for would-be-homeowners locked out of the market by skyrocketing prices.
But the dream of living the high life can be marred by lengthy delays and sales agreements heavily weighted in the developer’s favour.
Not in the plan
Bruce and Meryle Kenny signed up for an apartment in the ill-fated Orakei Bay Village development on Auckland’s waterfront. The couple, along with many other purchasers, pulled out after learning rising construction costs meant they’d have to pay more than they’d agreed if they wanted to proceed with the purchase.
The developer, Equinox Capital, eventually pulled the plug on the project and refunded deposits. It’s now planning an alternative development on the site.
Lawyer Tim Lewis from Auckland firm MacDonald Lewis Law, says he’s seen a jump in complaints relating to apartment contracts as new developments have taken off in the city. In some cases, would-be purchasers have experienced huge delays, their deposits have been tied up and they have had no way out of the contract, he says.
Clause by clause
For their own protection, purchasers should make sure any contracts they sign have a “sunset clause”. This allows them to cancel and get their deposit back if the developer hasn’t made sufficient progress within a certain time frame. But Mr Lewis says some developers deliberately avoid putting a sunset clause in their agreements because they don’t want to lose the sale if there are delays. While the Resource Management Act gives purchasers the right to cancel an agreement in certain circumstances, Mr Lewis says a well-drafted sunset clause is always preferable (see “Buying advice”).
Getting out of an agreement in the event of delays isn’t the only hitch purchasers may face.
Agreements can also give the seller unilateral rights to make changes to the planned development without seeking the purchaser’s consent. These changes can include substituting materials or products and even extend to reducing the size of the apartment you signed up to buy. While the contract may require the developer to deliver a dwelling of the same standard as specified on the plans, the end result could be markedly different to the original design.
Tina Hwang, a lawyer with Queen City Law, says purchasers also need to be wary of “entire agreement” clauses. These clauses typically state the contract contains everything agreed between the parties. Their intent is usually to prevent purchasers relying on anything they may have been told by a sales rep or any information contained in promotional material for the development.
Ms Hwang says it would be preferable if the clauses were removed, something she tries to negotiate on the purchaser’s behalf.
However, negotiating changes isn’t always straightforward. Mr Lewis says developers can be unwilling to amend their agreements because it may affect their funding.
John Gray, president of the Home Owners and Buyers Association of New Zealand, has also fielded inquiries from prospective purchasers of yet-to-be built apartments about “draconian terms and conditions”. Even when the purchaser’s lawyer gives advice to remove clauses, developers can assume a “take it or leave it” approach,” he says.
Mr Gray has also raised concerns about contract terms that tie the purchaser to use services selected by the vendor.
Agreements can require apartment owners to get their power, gas or other utilities through companies chosen by the vendor. Owners may also be required to use the vendor’s letting agent if they want to rent out their apartment but don’t want to manage the process themselves.
Developers defend these arrangements on the basis they can use their buying power to get good deals. But Mr Gray says the clauses deny the owner the opportunity to negotiate better terms or choose providers for reasons other than price. “It also denies them the opportunity to bring the providers to account by using the leverage of being able to shift to an alternative provider”, he says.
Developers often use their own agreements for sale and purchase, rather than adapting standard agreements such as the Auckland District Law Society (ADLS) agreement for sale and purchase. The ADLS agreement is generally accepted as striking a fair balance between the buyer and seller.
But agreements for the sale and purchase of “off-plan” developments may not strike the same balance.
If you’re thinking about buying an apartment off-the-plans, it’s vital to get legal advice before signing a sale and purchase agreement.
Make sure your lawyer checks the contract for a sunset clause that will allow you to cancel in the event of delays. Without a sunset clause, buyers risk being left hanging for years, with no home and no “out”.
If you change your mind, the Resource Management Act gives purchasers buying off the plan a 14-day cooling-off period to cancel after entering into an agreement. If the vendor fails to make “reasonable progress” towards lodging a survey plan with the council, purchasers may also have the right to cancel under the Act.
You should also check the maintenance period in the contract. This is the period of time after settlement during which the buyer can notify the developer of any defects and require them to be remedied at the developer’s cost. You also have additional rights to have defects repaired under the Building Act and Consumer Guarantees Act.
Make sure final payments are tied to the issue of the code compliance certificate and the maintenance period to ensure the developer remains motivated to see the job through.
Check out the body corporate rules and estimated levies. Apartment buyers will be bound by the rules and may be signing up for potentially considerable levies.
Insist deposits are held in a third party’s trust account until settlement to minimise the risk of losing your deposit if the developer goes into liquidation. Also check you’ll earn interest on your deposit.
Report by Aneleise Gawn
|Year ended January||Houses||Apartments||Townhouses, flats and units|
Contract terms allowing a vendor to make significant changes to a development without consulting the purchaser or giving them the opportunity to cancel, risk breaching the unfair terms provisions of the Fair Trading Act.
Since March 2015, the Act has prohibited the use of unfair terms in standard form consumer contracts – the non-negotiable terms and conditions you’re usually presented with when you’re buying goods and services from companies. The Act defines a term as unfair if it:
- would cause a significant imbalance between the rights of the company and the consumer
- is not reasonably necessary to protect the legitimate interests of the company
- would cause detriment, whether financial or otherwise, to the consumer if it were to be applied or relied on.
Our Play Fair campaign is aimed at getting rid of unfair terms. If you’ve been given a contract you think is unfair, let us know.