Subject to finance in off the plan contracts

In a strong property market often we hear stories from clients where they have bought “off the plan” having been told that – given the rising market – they should expect substantial increases in value before the contract is due to settle.

Perhaps the strong gains over the past year have been pointed out, and the clients have been told that if they sign a contract today at (say) $1M, then by the time the building is complete in two years the unit should be worth at least 10% more, so in effect they are getting a $1.1M unit for $1M.

We have had matters where that sort of thought process has led to clients buying units off the plan, thinking that they will be able to almost 100% finance the purchase price, by the time that settlement comes around.

Unfortunately – while there have been strong increases in value for many Gold Coast properties – this sort of rising market does not tend to last forever and high rise units in particular are prone to substantial fluctuations in value. This can translate to banks being more conservative with lending on the product.

Further, a challenge arises in “off the plan” contracts because the “subject to finance” condition will usually have to be satisfied within three to four weeks of the contract date when settlement might not occur for over two years. The approvals lapse, and when the time to settle comes around the lending policies might have changed, the market might have fallen (ahem….”corrected”) leading to lower valuation, the buyer might have lost his job or had some other misfortune, any of which could lead to finance being declined.

What next? Well generally trouble, as the contract is no longer subject to finance. If settlement does not occur and unless there is a basis to terminate the contract, then the buyer is in breach. It could lose the deposit, have to pay interest on the purchase price, and be responsible for losses.

As an example, in 2007 some buyers agreed to buy a unit in Oracle Tower 1 for $1.01M. They paid a $101K deposit. They did not settle when the building was finished in 2010. Damages in favour of the seller were assessed at $428,483.50 on top of the deposit of $101,000 which was lost. So all up, and excluding the seller’s legal costs, the buyers were obliged to pay almost $530,000 – over half of the price of the unit that they did not buy. South Sky Investments Pty Ltd v. Luppi [2012] QSC 27

Caution should be exercised in entering contracts and making long term commitments, unless there is certainty that external events will not turn it into a disaster.