Purchasing off the plan – Vacant Land

Purchasing off the plan – Vacant Land (Updated December 2017)

Practically every vacant housing block purchased these days is sourced from larger blocks of land bought and subdivided by Commercial Property Developers.  Whilst big profits can be made, the costs of the initial land acquisition, service roads, sewerage, power, phone and drainage are enormous.  As a consequence, the financial backers for these projects understandably seek to secure ready Buyers to whom the properties can be sold as soon as the final subdivision and individual Title Deeds can issue.  In the early days, unscrupulous Property Developers took deposits from Buyers and committed them to contacts which then took years to settle, or never settled at all.

To remedy the problem, laws were introduced prohibiting the sale of land prior to the subdivision development having attained a certain stage of completion.  The threshold stage has changed over the years as the competing Developers and Consumer Groups have vied to pull the regulations to their favour.

The present day legislation is found in the Queensland Land Sales Act and listed below are some important points to note:

  • A sales contract for any land can now be entered into even though the development has not yet reached the point of Local Council approval to both the proposed plan of subdivision and the required subdivision works.
  • Any contract has a mandatory sunset clause which entitles the Buyer to terminate the contract if the Developer has not created a title which is capable of being conveyed to the Buyer within 18 months from the date of the contract.
  • The contract must contain a “disclosure statement” (or a copy of the actual registered survey plan) which contains a detailed plan showing the location, dimensions, orientation and contours of the subject lot.
  • The Developer must notify the Buyer if there is to be any change to the block as described in the disclosure statement and if the changes cause “material prejudice” to the Buyer the Buyer can be released from the contract on 21 days’ notice.
  • Any non complying contract is capable of termination without penalty at any time before settlement so long as the appropriate notices are given.
  • It is critical to note however that rights of termination extinguish once the money is paid over and the property is transferred. If termination is to be actioned therefore, it must happen before settlement occurs.

Because buying a block of land “off the plan” is effectively a contract to buy a product which is yet to be built, there are a number of important things to consider both in terms of what has been said in the contract and/or possible investigations and enquiries that need to be made before the contract is signed:

  • As said above, the Contract must contain a plan which shows the dimensions, contours and locations of the intended block. Whilst not obligatory, it is prudent that the Buyer should also receive a copy of the plan which shows all of the positioning of the services to be provided to the property such as sewerage, drainage etc.  Similarly, the subdivision plan may indicate the property is to be encumbered by easements which give rights of use over part of the land to some other person or entity like the local authority for the subterranean carriage of stormwater or sewerage.  Commonly, these easement agreement documents have not been drafted and so provision for their perusal with rights of termination/compensation if unsatisfactory should be considered for incorporation into the pre-settlement searches.
  • As said above, if the Developer notifies the Buyer that there has been a change to the block as described in the original disclosure statement, the Buyer only gains the right to terminate the contract if the Buyer can show the change will cause a “material prejudice” to the Buyer. The previous law only gave rights of termination for shortfall of linear dimension/overall area of the lot, so this provision is arguably wider.  “Material prejudice” has been defined as “disadvantage in a way which is substantial or much consequence – it is an objective test applied subjectively ie. what is reasonable or unreasonable having regard to the Buyer’s personal circumstances” see Mirvac Qld Pty Ltd v Wilson [2010] QCA322 – The elderly lady and the security camera case.
  • Commonly, the plans will contain conditions which dictate the size of home and materials that must be used in its construction. There are usually also conditions which identify the “building envelope” which is the location within the block within which the home structure must be contained and/or mandatory setbacks which identify the minimum distance that must be maintained between the structure and any of the external boundaries.
  • Often the contract will also contain a statement or letter from the Local Authority addressed to the Developer which sets out the Local Council’s conditions for approval of the development. Mostly, the conditions will attach solely to the Developer but are well to note because these are things the Developer is obligated to ensure are done to the benefit of the block and are therefore things which the Buyer can rightfully insist on happening.  Occasionally, these documents will identify obligations which will actually fall to the property owner and these are obviously items which the Buyer must fully understand.  An example of this would be noise abatement measures which are commonly required where the subject lot is close to a very busy road or train line.  Typically, the abatement measures will require certain additional materials to be used in the construction of the home, thicker windows, noise insulation etc all of which will definitely add to the cost of construction of a home and therefore should be thoroughly considered before the land purchase contract is signed.
  • The building covenants which are referred to in the two preceding dot points commonly will also obligate the land Buyer to extract a similar promise or covenant from any subsequent Purchaser of the property to similarly adhere to these building covenants. In the case of Council imposed noise abatement works, the obligations are even sometimes recorded as a covenant on the Title Deed to ensure that incoming Purchasers are bound by the same obligations without choice.
  • The contract will commonly state that the Developer gives no promise that the survey pegs located on the property correctly mark out the external boundaries of the block in compliance with the subdivision plan and instead gives to the Buyer the right to conduct their own survey to verify accuracy or identify discrepancy. If a discrepancy is identified then there are only rights to terminate if the blocks dimensions are materially different from that which was represented in the plan attached to the contract.  Anything less than this only gives a right to demand compensation.  It is however, critical to note that any survey performed will usually have to be done before settlement of the land purchase has been completed.  Typically, if a boundary error is discovered after settlement, then the Buyer is stuck with the problem and has no recourse back against the Seller because the Buyer’s rights of termination or compensation are said to have “merged” in the settlement.  Some land sales contracts however, do preserve rights to claim compensation at a later stage, so careful reading of the contract would be required.
  • Provision for soil test should also be made with care to ensure the test is actually performed on the soil after all of the Developer’s earth works have been completed. If the soil which is to support the building pad is determined by the test to be unstable then the Buyer would need to pay substantial additional monies for foundation which would significantly add to the cost of the home’s construction.  To guard against this, the contract should be drafted to give to the Buyer rights of termination if the soil tests prove unsatisfactory with a right of termination in hand, the Buyer is then usually able to negotiate a discount in the purchase price in return for their agreement not to terminate the contract so as to cover the additional costs of the foundation.
  • Stamp duty aggregation. If the contract contains a condition which makes entry into the land sales purchase conditional upon signing up a simultaneous building contract, then the money to be paid to the builder under the building contract could well be assessable for stamp duty.   This could add thousands of dollars to the stamp duty bill.  Other circumstances where people can be caught is if the land sales contract for instance offers a discount to the buyer for the land purchase if a building contract is entered into.
  • The susceptibility of the property to flooding is also something to consider. As a condition to the approval for the subdivision, the Developer will always be required by Council to install drains and configure land fall so as to minimise the impact of flooding (commonly referred to as flood mitigation works) but the previous susceptibility of the property before the subdivision to floods is something that can be searched with Council (on the parent block) and would at least give greater insight into the susceptibility of the property to future floods.
  • The position of future main roads. The Developer is only obligated under the law to create a plan which identifies the piece of land being purchased.  The Developer is not under any obligation to make any statements about things that might potentially affect the surrounding land.  The Department of Main Roads and Queensland Rail however, do maintain future transport corridor plans that show the location and projected traffic carriage.  The Civil Aviation Authority, also maintains future flight plans, for example, the second runway for Brisbane Airport.
  • Typically, the contract will also obligate the completion of home construction on the property within 2 years with a right for the Developer to buy the property back at market value if not completed.
  • Because steep or dramatically undulating contours on the property, soil test issues and/or other factors such as building envelope restrictions can significantly affect the cost and/or design of the buildings which are to go on to the property, it is always recommended that:
  • Quotes/Design drawings be obtained from your intended builder before you sign the contract; or
  • The Contract contains a Special Condition permitting termination if quotes and design drawings cannot be obtained until after the Contract is signed; and

Either way, in any discussions with the builder, all of the disclosure documents and plans given to you by the Seller should be shown to the builder so that the builder knows as much about the property as you do.

  • Finally, careful note should be made of the timing for the date of settlement for the purchase. Typically, the contracts will state that settlement is to occur within 14 days from the date when the Developer notifies the Buyer or the Buyer’s Solicitor/Agent that the Plan of Subdivision has registered with the Department of Natural Resources.  In many cases, finance approvals obtained by Buyers for land purchases can actually lapse if the loans are not drawn down within 3 months.  Once the approval does lapse, a new application for finance will typically take much longer than 14 days to process and of course if there has been a change in circumstances, may not actually be approved at all.  Because contracts can potentially be stretched out to 18 months, it is therefore essential that Buyers maintain an up to date approval from their financiers capable of being drawn down on 14 days notice.

Most law firms are willing to look over “off the plan contracts” before they are signed and discuss these and many other potential issues and if necessary assist in the drafting of special conditions to solve those issues before contracts are signed.

Michael Zande is the Principal of Zande Law Solicitors, with 25 years experience in practice.  Michael and his team have had extensive experience in conveyancing matters.  Please feel free to review our firm and staff profiles at www.zandelaw.com.au

The information in this article is merely a guide and is not a full explanation of the law.  This firm cannot take responsibility for any action readers take based on this information.  When making decisions that could affect your legal rights, please contact us for professional advice.