Recent media concerning a Council's Deputy Mayor's Development Company demonstrates the dangers of buying "Off the Plan" apartments.

Almost every Off the Plan contract provides the Vendor with flexibility to vary the plans for the units, including the areas of units. Almost invariably, the contract then gives the Purchaser the right to rescind if such variation is more than, say, 5% of the agreed area.

Here is what can happen:

  1. Investors search tirelessly for a good Off the Plan investment unit and invest time and money on legal costs etc to secure a particular unit in a proposed development.
  2. The buyer raises the 10% deposit, often incurring significant fees, using bank guarantees or deposit bonds or worse still, their own cash.
  3. The Buyer then exchanges contracts, sits back and relaxes, believing they have made a good investment.
  4. Over the next 12 or 18 months, God willing, the market value of the apartment under construction significantly increases, delivering an immediate windfall to the canny Purchaser who is often eager for completion of the unit, as either their investment or indeed their home to be.
  5. The Developer either notices a sharp increase in market value or works out they can cram more units into the proposed development and proceeds to lodge amended plans with Council (or the State Authority if the development is worth more than $20 million). The Developer works out that they could actually sell the units at a higher price per square metre than what they originally contracted for with the Purchaser.
  6. The Developer obtains approval to the amended plans yielding a much greater number of units but reducing the area of each unit significantly. In the current case, according to media, the areas of units decreased by as much as 36%.
  7. The Developer notified the Purchaser that the area of the unit has significantly reduced but offers no proportionate reduction in the purchase price, thus rendering the Purchaser's investment worthless and untenable, leaving the Purchaser with no option than to rescind the contract (because the area varied by more than 5%) and have their deposit returned.
  8. The Developer goes on to construct smaller units and sells them at the increased market value, leaving the existing Purchasers high and dry, with no compensation whatsoever, nor reimbursement of any banking fees or legal costs.
  9. The Purchaser has wasted 12 or 18 months and is thrown back into the market to start all over again with no redress against the Developer.

A good example of how Purchasers are at the mercy of the Developers' focused financial gain.

Possible solution?

Insist on a special condition which provides that if the area decreases by more than 5% the purchaser can elect to either rescind or demand a pro-rata reduction in the purchase price.
Or, simply ensure you buy from a long standing reputable developer.

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