Property development can be an attractive investment option for many, particularly for those who have held land for a number of years and are now looking at options for maximizing the value of that land on sale.
Property developments can take a variety of different forms. This article is aimed at the developer of a “house and land package”, usually involving the construction of new dwellings by the developer in conjunction with a subdivision of an underlying parcel of land. Developments can range from simple dwelling houses to large multi-story apartment style properties.
For a variety of reasons developers will usually look to sign up purchasers of house and land packages as early as possible in the development process. This type of sale is commonly referred to as “off the plans”. When developing and selling “off the plans” property, there are a number of considerations for the developer to be aware of and factor into the sale terms. These include the following:
- Flexibility is key. The developer should reserve the right to make reasonable variations to the plans and specifications where necessary or desirable. Ordinarily this will apply to the materials used (including products and finishes) and also allow for a degree of flexibility with regard to the floor area. For subdivisions, this will also apply to land area given that title has not issued. The developer will want to restrict the purchaser from claiming compensation/damages or withholding the purchase price in the event of any variations, and the sale terms should reflect this.
- There can be a myriad of delays that may be unforeseen by the Developer at the time of signing. The terms of sale should ensure that purchasers cannot claim damages or compensation if the build is not completed within a certain time.
- Sale terms should provide for a “sunset date”. This is the date by which the developer may cancel the agreement (and refund any deposit) if the development is incomplete. Purchasers will often require the benefit of a sunset date, so the developer will need to give itself plenty of time to complete the development when setting that date. Incidentally, the developer will also want to ensure that its sales commissions do not fall due until these completion milestones have been met.
- Depending on where the development is at the time properties are sold, the developer may want the sale agreements to be subject to the developer being satisfied with the terms of relevant consents, and that the development is feasible.
- Where a subdivision is involved the developer’s sale terms should prohibit the purchaser from lodging a caveat on the underlying title to the property. This is because a caveat will prevent new titles from issuing until either it is withdrawn, or caveator consent is provided.
- Provision should be made for the deposit to be held in the developer’s solicitor’s trust account and released to the developer once separate title has issued and/or practical completion has been achieved. Timing of payments of sales commission should be consistent with this. The developer will want to ensure that it has the benefit of any interest earned on the deposit while held, at least in circumstances where the transaction goes ahead.
- The developer needs to be familiar with the obligations of a commercial on-seller under New Zealand law, particularly in relation to aspects such as mandatory defect warranty periods. These include certain obligations and warranties implied by the Building Act 2008, which will apply to the sale even if the terms of the agreement do not take them into account. Nevertheless, provision for any “defects period”, whereby the developer agrees to remedy any defects within a specified period from settlement, should be consistent with these requirements.
- Consideration should be given to whether the developer is able to transfer certain construction warranties and guarantees to the purchaser (or Body Corporate in cases of unit title developments) where possible.
- The developer should always seek comprehensive tax advice prior to undertaking the development and contracting with purchasers. Issues around aspects such as GST can be increasingly complicated.
This article is intended to be general guidance only. There are a number of other factors that are specifically relevant to different types of developments, such as (by way of example) unit title developments and subdivisions. It is strongly suggested you seek legal advice before looking to contract with purchasers for any “off the plans” development, particularly when preparing sales packages to be released to prospective buyers. Our input into the terms of the agreement can have a significant impact on your rights and obligations as a developer.
If you have questions or think we can assist, contact Chris Egden, Senior Associate (03 343 8584 / email@example.com).