A recent decision of the WA Court of Appeal has made it clear that the Sale of Land Act 1970 (WA) prevents a developer from individually selling five or more lots in a subdivision or proposed subdivision, or two or more strata lots in a strata development or proposed development, unless they are the registered owner of the land or strata lots.

If a developer does sell lots of land or strata lots contrary to the requirements of the Sale of Land Act, then the sale is unenforceable by the seller and the buyer cannot be required to continue with the purchase. The buyer can, however, require the sale to proceed.

Buyers can check who the registered owner of land or strata lots is by doing a title search at Landgate.

Perhaps the main attraction of buying off-the-plan is it provides purchasers with an opportunity to obtain property at the current market price on payment of a deposit (generally no more than 10%), with the majority of the purchase price being payable at settlement at some future time.

This provides purchasers with time to organise their finances and, if required, sell their existing home, without the need for bridging finance. Developers may also sell some of the land or proposed building at a discount price if they need to meet sales targets or to get construction underway. If the real estate market is experiencing growth then the land or buildings purchased off-the-plan may also rise in value by the time the property is ready to settle.

Development does not proceed

Perhaps the biggest disadvantage of buying off-the-plan is a developer may be unable to proceed with the project within the time specified in the contract or at all. This may occur because the developer is unable to obtain final subdivision approval or is unable to secure sufficient investment funding to finance the project. If this happens the developer may choose to cancel the contract (should the contract provide for this).

Be aware of speculative developments where a developer seeks to use deposit monies to fund the development of the land or, in extreme instances, to fund the land purchase itself. In these cases the required deposit could be significantly higher than normal and could be lost altogether if the purchaser signs away their legal rights to it, lured by a purchase price that is considerably under current market value.

Although a contract would normally provide for the return of a buyer’s deposit money in the event of a development not proceeding, a contract would not usually provide for payment of any other compensation. Importantly, even though a deposit may be refunded, the buyer will have lost the opportunity to purchase elsewhere in what may have been a rising real estate market.

Security of deposit money

Deposit money can be tied up for a very long time without any guarantee of a development ever being finalised. If the developer becomes insolvent, the buyer’s deposit money may also be at risk unless steps are taken to secure the money.

If a contract is for the purchase of a strata title or survey strata property, the deposit is required, under the Strata Titles Act 1985 (WA), to be held in the trust account of a solicitor, real estate agent or settlement agent until a strata/survey strata plan has been registered with Landgate. However, as there is no requirement for money to remain in a trust account after registration of a plan, a developer could still access deposit money unless there is a term in the contract to prevent this.

To protect a deposit, a contract should always include a condition requiring the deposit to be held in the trust account of a solicitor, real estate agent or settlement agent, and for it not to be accessible to the developer until settlement. If the developer does not agree to include this as a term of the contract the buyer should consider the risk before going ahead at all.

Depreciating market

Despite the widely held belief that real estate property values always rise, they may not appreciate in value during a development period or could even depreciate in value. There is always a risk that the contract price for a property will be more than the market value at the time of settlement.

Quality of construction

A builder’s standard of work may not be as high as expected and a completed property may therefore fail to live up to a buyer’s expectations. People who buy off-the-plan are often limited to viewing marketing material or a design concept provided by the developer, and may not get exactly what they expected.

Buyer’s finance

Banks or financial institutions may be less willing to lend money for buildings that are yet to be constructed or, in the case of a strata property, are below a minimum threshold size (area). Developers may also not agree to a contract being subject to the buyer obtaining finance, as this may impact upon their own capacity to obtain investment funding.

Although a bank or other financial institution may, at the time of purchase, consider a buyer fully qualified to borrow the required amount, this may be different in the future when finance is actually needed due to changes in lending policy, changes in the borrower’s own financial circumstances or even changes in prevailing interest rates. If finance is essential to complete a purchase but this is not included as a term of the contract, a buyer risks being in default if they cannot proceed and may be liable to compensate the developer.

Corporations Act

Managed investment schemes

In broad terms, a managed investment scheme (or “pooled investment”) is a scheme where people pool their money together with other investors, to be used in a common enterprise where a “responsible entity” operates the scheme and investors have no day to day control over the operation. Managed investment schemes cover a range of investments, including property developments.

With pooled investments involving property, an investor acquires a share in a development. They are not purchasing an individual lot for which a separate title will be issued. It is very important to understand the type of investment being offered. Buyers should be particularly aware of schemes promoted at so called “investment seminars” which may involve high pressure selling techniques and offers of “once in a lifetime” opportunities.

Anyone considering investing in a pooled investment should carry out extensive research and seek advice from a source that is completely separate from the investment scheme. An independent adviser will provide an objective and unbiased view of the potential of the scheme and the risks associated with it. As a general rule, investment schemes which appear to have high returns also have high risks. Potential investors need to be clear about what will happen if things go wrong with a company. If a company is wound up due to insolvency, the law gives preference to certain creditors and there may be little or no money left to distribute to investors who are unsecured creditors.

Managed investment schemes must be registered with the Australian Securities and Investments Commission (ASIC) before they can operate. A proposed “responsible entity” must be a registered Australian public company and hold an Australian Financial Services Licence authorising the entity to operate the scheme.

On its website, ASIC provides advice about investing in real estate schemes and about choosing a financial advisor. The key messages from ASIC are that the company managing the investment scheme must be licensed and must provide a Product Disclosure Statement (PDS). A PDS must provide enough information for potential investors to make informed decisions, including: features of the scheme; fees and commissions; and the benefits and risks of the scheme. The PDS should also include information about how complaints will be handled and about the investor’s right to a cooling off period.

More information on managed investment schemes can be found on the ASIC website.

Australian Consumer Law (ACL)

The ACL came into effect on 1 January 2011, and applies to contracts between business and consumers for the supply of goods and services.

Consumer Guarantees

The statutory consumer guarantees provided for in the ACL apply to off-the-plan sales where goods or services form part the purchase.

Under the ACL, goods or services (such as landscaping or furniture) must be of “acceptable quality”. There are other consumer guarantees which may also be relevant to off-the-plan sales.

Goods are of acceptable quality if they are: fit for the purpose for which they are commonly supplied; acceptable in appearance and finish; free from defects; safe; and durable. The ACL provides consumers with a right of action against a trader where there is a failure to comply with a consumer guarantee, however the remedy will depend on whether the failure is considered major or minor and may allow a buyer to recover any reasonable costs incurred in fixing a problem.

The ACL also provides a consumer guarantee that requires goods or services to be supplied within a reasonable time, where a contract fails to stipulate a time for the supply of those goods or services. If a trader fails to comply with this consumer guarantee, the buyer may be able to terminate the contract, insofar as it applies to those goods or services, and recover damages for any loss or damage suffered because of the trader’s failure to comply. It is always better to have a date stipulated in the contract for the supply of any goods or services, as that may be useful if, at a later time, action is required to enforce an outcome.

Any term in a contract that attempts to exclude, restrict or modify a consumer guarantee is void. Terms that seek to exclude your right to seek a remedy for any failure to comply with any consumer guarantee in the ACL are also void.

Home Building Contract Act 

The Act applies to contracts for the performance of ‘home building work’ or ‘associated work’, where the value of the fixed price contract is between $7,500 and $500,000.  It excludes contracts between trades people/subcontractors and a builder, if the builder has a contract with the owner for the performance of the work.  More information is available from the Building Commission's 'home building contracts' page.