GUIDE: Buying off-the-plan: Managing the risks for purchasers

When a purchaser buys property off-the-plan, they are contracting to buy something that does not yet exist in its final form. The gap between signing the contract of sale of land and settlement, can be years, and creates risks not present in standard conveyancing transactions.

The claims risks in this area concentrate around three types of failure:

• Failure to read and advise on the off-the-plan contract of sale of land. Off-the-plan contracts contain conditions that differ significantly from standard contracts of sale of land. Practitioners who treat off the plan contracts as routine conveyancing files, without reviewing and advising on the specific conditions governing plan of subdivision amendments; building plan variations; and sunset dates, leave their clients without the critical advice they need to protect their position.

• Failure to identify and act on plan of subdivision amendments. The developer may amend the plan of subdivision between the day of sale and settlement. Some amendments entitle the purchaser to rescind the contract of sale of land; others do not. Failing to identify an amendment, or failing to advise the purchaser of their rights within 14 days after the vendor has provided the amended plan of subdivision (“14-day time limit”), are the most common sources of claims in this area.

• Failure to advise on the purchaser’s specific expectations. Purchasers have expectations about dimensions, fittings, car parking, and finishes that are not reflected in or protected by the contract of sale of land. A practitioner needs to properly advise the purchaser of the parties’ rights under the contract of sale of land.

This guide is structured around four workflow triggers

The steps in this guide are organised around the moments in the transaction when action is required. Each trigger corresponds to a known concentration of claims risk.

Many off-the-plan risks are fixed at the pre-contract negotiation stage and cannot be corrected after signing.

Review the off-the-plan contract of sale of land and plan of subdivision

Before the purchaser signs, if you have the opportunity, review the contract of sale of land and any plan of subdivision attached to it to confirm:

• The plan of subdivision is legible and the lot dimensions, orientation, and features are clearly identified.
• The contract of sale of land correctly records what the purchaser understands they are buying, including lot size, car parking spaces, storage, and any building finishes or fittings.
• The sunset date, being the latest date by which the plan of subdivision must be registered or the occupancy permit issued, is clearly stated and acceptable to the purchaser.
• The deposit does not exceed 10% of the purchase price, and is to be paid to a trust account held by the vendor’s solicitor, licensed conveyancer, or real estate agent, as required by section 9AA of the Act.

Advise the purchaser on key off-the-plan contract of sale of land risks before signing

Give the purchaser written advice before they sign the off-the-plan contract of sale of land, on the following matters:

• Plan of subdivision amendments. The vendor may amend the plan of subdivision between the day of sale and settlement. Whether that amendment entitles the purchaser to rescind depends on whether it “materially affects the lot” under section 9AC of the Act.
• Building specifications. Changes to fixtures, fittings, colour schemes, and finishes are not governed by section 9AC of the Act. The purchaser’s rights in respect of building plan and specifications variations, depend on the specific conditions of the contract of sale of land and rarely give rise to a right of termination.
• Finance risk. Finance approval obtained before the day of sale or shortly after, may lapse before settlement. If the purchaser cannot finance at settlement, the vendor may rescind the contract of sale of land, retain the deposit, and resell the lot. The purchaser should maintain contact with their lender throughout the period between contract and settlement.
• Sunset date. If the plan of subdivision has not been registered by the sunset date, the purchaser has a right to terminate the contract any time after the sunset date but before registration, and to receive a refund of deposit monies (see section 9AE and section 9AF(1)(b) of the Act). Advise the purchaser of this right.
• Vendor’s sunset date termination rights. Where the contract of sale of land is a “residential off-the-plan contract” as defined by the Act, and the plan of subdivision has not registered by the sunset date or the occupancy permit has not issued by the sunset date, then the vendor may only terminate the contract of sale of land after the sunset date, in accordance with sections 10B or 10E of the Act. Accordingly, advise the purchaser of these statutory protections.
• Deposit trust requirements. If the deposit is not held in a trust account in accordance with section 9AA(2) of the Act, the purchaser may rescind the contract under section 9AE(1) of the Act at any time before registration of the plan of subdivision.
• Mezzanine loans and rebates. Advise the purchaser not to pay money to the vendor on the promise of a rebate or as a mezzanine loan to help finance the development. Any such arrangement potentially breaches section 9AA of the Act, and the purchaser would be advancing money to the vendor without adequate security.
• Restrictive covenants and building guidelines. For vacant land sales, advise the purchaser on the substance and effect of any restrictive covenants or building and design guidelines that will apply to the property.
• Fill and contour maps. For vacant land sales, advise the purchaser about any fill maps or contour maps relating to the surface level of the property, and recommend that the purchaser provide this material to their builder.

When the file is opened, do three things: take detailed instructions from the purchaser, give comprehensive written advice about the off-the-plan contract of sale of land and section 32 statement, and diarise every critical date. These steps are the foundation of a defensible file.

Take detailed instructions at file opening

At the point the file is opened, ask the purchaser to tell you what they understand they are buying. Record their answer. Specifically ask the purchaser about:

• the dimensions of the property, including floor area
• number of car parking spaces and storage
• building fittings, finishes, and appliances
• any other features that were material to the purchaser’s decision to buy the lot.

Then check whether the contract of sale of land and plan of subdivision accord with the purchaser’s instructions. Where there is a discrepancy, raise it with the purchaser before proceeding any further.

For apartment purchases, note that measurement methodology for floor space can vary and that measurements shown on a plan of subdivision may not accurately reflect usable floor area. If there is any doubt about dimensions, recommend that the purchaser engage a surveyor.

Give written advice

Send a letter of advice to the purchaser at or immediately after file opening. As a minimum, the letter should address:

• Plan of subdivision amendments. The plan of subdivision may be amended between the day of sale and settlement, and that the purchaser’s right to rescind the contract under section 9AC of the Act arises only where an amendment “materially affects the lot.” Examples of amendments that may materially affect the lot include:
  • a reduction in lot size
  • a change in the position of a structural wall in an apartment
  • removal of a car parking space
  • addition of an easement (subject to section 10 of the Act).

• The 14-day time limit. Where an amendment to the plan of subdivision materially affects the lot, the purchaser must rescind the contract within 14 days of being notified by the vendor of that amendment. Missing this time limit extinguishes the right to rescind under section 9AC of the Act.

• Building plan variations. The vendor may vary fixtures, fittings, and finishes. The purchaser’s rights in this event are contractual, not statutory. Explain the relevant contract conditions.

• The sunset date. Identify the sunset date and explain its effect. If the plan of subdivision is not registered by the sunset date, the purchaser may terminate and receive a refund of their deposit.

• Finance. Finance approval may lapse or be withdrawn between the day of sale and settlement. If finance cannot be arranged at settlement, the vendor may rescind and retain the deposit. Advise the purchaser to maintain active contact with their lender and to notify you immediately if their finance position changes.

• Pre-settlement inspection. The purchaser should inspect the property before settlement to confirm that it accords with the contract of sale of land and the plan of subdivision. Ask the purchaser to contact you immediately and before settlement, if they identify any discrepancy.

Diarise critical dates at file opening

When the file is opened, diarise the following dates in your practice management system:

• the sunset date
• any finance approval due date
• any date specified in the contract for registration of the plan of subdivision or issue of the occupancy permit.

Set a reminder to check in with the purchaser as each date approaches. Do not rely on the purchaser to alert you that a deadline is near.

Step 1: Compare the amended plan against the contract plan immediately

As soon as you receive an amended plan of subdivision from the vendor, compare it against the proposed plan attached to the contract of sale of land. Look specifically for:

• any reduction in lot size or change in lot dimensions
• any change in the position of structural walls
• removal or relocation of car parking spaces or storage
• addition of an easement or change in position of an easement
• any other change to the physical characteristics of the lot.

If you identify any amendment, proceed immediately to step 2. Do not wait for the vendor’s solicitor to characterise the amendment.

Step 2: Advise the purchaser promptly and in writing

Write to the purchaser without delay, setting out:

• the specific amendment or amendments you have identified
• whether, in your assessment, the amendment is likely to materially affect the lot under section 9AC of the Act, with reference to the case law on what is considered as an amendment that materially affects a lot
• the purchaser’s right to rescind within 14 days of the vendor’s notification
• the deadline by which the purchaser must instruct you to rescind, to ensure that the purchaser has sufficient time to respond before the 14 days expire.

Record the advice given and the purchaser’s response in a detailed file note, and confirm the purchaser’s instructions in writing.

Step 3: If the position is uncertain, obtain specialist advice

If there is genuine uncertainty about whether an amendment materially affects the lot, particularly where the 14-day time limit is at risk, recommend that the client seek urgent advice from an architect or barrister experienced in this area (depending on the type of uncertainty). Do not allow the deadline to pass while the question remains unresolved.

The ‘materially affects the lot’ threshold

Whether an amendment materially affects the lot under section 9AC of the Act is a question that has been considered in several cases. Practitioners acting in this area should be familiar with the case law on where this threshold falls. Key principles from the cases include:

• a reduction in floor area is not automatically material; its materiality depends on the degree of reduction and the nature of the property
• changes to structural elements (such as walls) are more likely to be material than changes to non-structural finishes
• the effect on the use and value of the lot is relevant to whether an amendment is material
• removal of a car parking space is likely to be material for an apartment purchase.

This is not an exhaustive statement of the law. Practitioners should research the current case law at the time of advising and obtain specialist assistance where the position is not clear.

Notify the purchaser when the plan is registered or occupancy permit issues

Tell the purchaser promptly when the occupancy permit is issued or the plan of subdivision is registered. Failure to notify promptly can leave the purchaser insufficient time to arrange finance or conduct a pre-settlement inspection.

Prompt the purchaser to inspect before settlement

Before settlement, write to the purchaser and ask them to:

• inspect the property to confirm that it accords with the plan of subdivision and, where applicable, the building plans under the contract
• contact you immediately if they identify any discrepancy between what is built and what the contract provides for
• confirm that their finance arrangements are in place for settlement.

Do not wait for the purchaser to raise discrepancies. A direct prompt is more likely to produce a timely response than a general invitation to contact you if anything is wrong.

If the purchaser identifies a discrepancy before settlement

Where the purchaser identifies a discrepancy before settlement between the property as built and the plan of subdivision or building plans, consider:

• The purchaser’s rights under the Act. Does the discrepancy involve an amendment to the plan of subdivision that materially affects the lot? If so, and the 14-day rescission period under section 9AC has not expired, advise the purchaser accordingly, and confirm the purchaser’s instructions in writing.
• The purchaser’s contractual rights. What rights does the contract of sale of land confer in respect of variations to building plans? These are governed by the contract of sale of land conditions, not the Act.
• Whether specialist advice is needed. If there is uncertainty about whether the amendment to the plan of subdivision or changes to the building specifications gives rise to a right to terminate the contract of sale of land or a purchaser claim for compensation, recommend that the purchaser seek urgent specialist advice before settlement proceeds.

Monitor the sunset date throughout the matter

Check the sunset date as settlement approaches. If the plan of subdivision has not been registered by the sunset date:

• advise the purchaser in writing that the sunset date has passed without registration
• advise the purchaser of their right to terminate under section 9AE of the Act and to receive a refund of their deposit under section 9AF(1)(b) of the Act.
• where the contract is a “residential off-the-plan contract” under the Act, and the plan of subdivision has not registered or the occupancy permit has not issued by the sunset date, advise the purchaser that the vendor may only terminate in accordance with sections 10B or 10E of the Act.

Finance

If the purchaser’s finance approval has lapsed or been withdrawn before settlement:

• advise the purchaser in writing that they need to obtain alternative finance before the settlement date
• advise the purchaser of the consequences of failing to settle: i.e. the vendor may rescind the contract of sale of land, retain the deposit, resell the property and pursue the purchaser for damages
• record the advice and the purchaser’s response in a file note, and confirm the purchaser’s instructions in writing.

To reduce risk at the firm level when acting for a purchaser in an off-the-plan matter:

• Reserve off-the-plan files for suitably trained staff. Off-the-plan conveyancing is more complex than standard conveyancing. Firms should have a clear policy on which staff are authorised to handle these files and under what level of supervision.
• Ensure your first letter covers all relevant aspects of the contract and any rights of rescission. A practitioner needs to properly advise the purchaser of the parties’ rights under the contract.
• Provide specific training on plan of subdivision amendments and the section 9AC time limit. This is the highest-risk point in the transaction and the one most likely to be missed without a targeted workflow prompt.
• Build the four workflow triggers into your practice management system. The sunset date, finance approval date, and plan of subdivision registration date should be diarised at file opening as a matter of course.

• For further commentary on the Act, solicitors may wish to refer to D Lloyd and W Rimmer’s publication “Sale of Land Victoria”.
• In addition, the case of Burger & Ors v Longboat Holdings Group2 Pty Ltd [2021] VSC 469 provides useful analysis on the extent of purchaser termination rights under section 9AC of the Act.