Recently, the NSW State Government announced its intention to provide purchasers of residential properties off the plan greater consumer protections aimed at ensuring that the property they receive is what they contracted for.
Legislation giving effect to these protections has now passed through parliament and will likely come into effect in the near future, once enabling Regulations have been finalised.
The Conveyancing Legislation Amendment Act 2018 (NSW) gives purchasers buying properties off the plan further consumer protections by:
- requiring vendors to attach to the sale contracts a disclosure statement that contains certain prescribed details about the property;
- requiring vendors to notify purchasers of any inaccuracies in the disclosure statement at least 21 days before settlement; and
- giving purchasers a right to rescind the sale contract, if certain conditions are not met.
A failure to attach the required disclosure statement could result in the developer being fined $1,100.00 for each non-compliant contract.
The disclosure statement
Although the full contents of the disclosure statement are yet to be revealed one of the required documents will be a copy of a draft plan of the property, prepared by a registered surveyor.
A schedule of finishes which lists the inclusions to be supplied by the developer along with the finished property and draft by-laws (if the property is to be strata-titled) are likely to be a required documents as well.
Notice of changes
Developers will be required to notify purchasers at least 21 days before settlement, if the developer becomes aware that the contents of the disclosure statement are:
- inaccurate in relation to a material particular; or
- have become inaccurate in relation to a material particular after the contract date.
A “material particular” will include changes to:
- the draft plan of subdivision;
- the draft by-laws (if the property is to be strata titled);
- easements or covenants to be registered with the plan of subdivision; or
- the schedule of finishes,
that will, or are likely to, adversely affect the purchaser’s use or enjoyment of the property.
Can a purchaser rescind the contract and recover their deposit?
The key to a purchaser’s ability to rescind a contract will be the adverse affectation to the purchaser’s intended ‘use or enjoyment’ of the property being purchased because of a change to a material particular disclosed in the disclosure statement.
Determining whether this requirement is met will likely require the subjective consideration of:
- how the particular purchaser intended to use and enjoy the property after settlement; and
- whether the particular purchaser’s intended use and enjoyment of the property would be adversely affected by a material change to what is being delivered.
Once a change to a material particular is established, a purchaser would need to prove:
- that they would not have entered into the contract had they been aware of the change; and
- that they would be materially prejudiced by the change made to the property.
Potential pitfalls for developers
The requirement to consider the subjective intentions of particular purchasers may open up various issues for developers.
Different purchasers will inevitably have different intentions on how the same property could be used. These intentions may not be known to the developer at the time that contracts are exchanged and issues could only arise after a purchaser seeks to rescind a contract on the basis of a material change which may adversely affect that particular purchaser’s use or enjoyment of the property, even though the same change may have no effect on the use or enjoyment of most or all other purchasers within the development.
Further, should a decrease in property values or other factors lead purchasers to change their mind about the purchase after exchange and seek to escape the contract then purchasers may take advantage of the subjective test by communicating very particular proposed uses of the property which cannot be accommodated as a result of any material change to what was disclosed in the disclosure statement.
Considerations for property developers
Developers should be conscious of the fact that the new legislation could enable even minor changes to design or construction aspects to give rise to purchasers claiming that their intended use or enjoyment of the property has been adversely affected, thereby giving rise to an ability to rescind the contract and recover their deposit.
Further, it is likely that project financiers will pay closer attention to design and construction plans as well as the disclosures made to purchasers such that they are made comfortable that there will be the smallest scope as possible for rescissions that could affect the ability of the borrower to meet qualifying pre-sale requirements and to maintain and repay finance facilities.
With these issues in mind it may be prudent for property developers to manage their exposure to potential claims (once the final regulations comes into effect) by considering requiring builders to indemnify them against losses suffered as a result of material changes to construction and design aspects of buildings.
This article was written by lawyer Kyle Bridge.