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Buying Off-The-Plan - Buyers Get Out Of Contracts - News Article 29/06/09

You may have seen this reported in the news recently. It was reported as a ‘loophole’ that allowed off-the-plan buyers to terminate contracts at any time before they settled. It wasn’t a loophole at all.  The right to terminate was brought about due to lazy drafting by developers or their lawyers in the contracts.

The issue has come up largely due to the economy and the falling prices in real estate, and in particular, units.  A buyer who entered a contract in mid 2007 might find that what they were buying, may have had a value a few hundred thousand dollars more than what it is worth now – especially in the luxury and high end apartment blocks.  That has created problems not just for the buyer, but also with finance arrangements to fund the purchase. Financiers are undertaking valuations and either not agreeing to funding the purchase (and any ‘subject to finance’ clauses were satisfied a couple of years ago) or only agreeing to fund an amount leaving the buyers to find the balance of monies elsewhere, which could be up to several hundred thousands of dollars.  So buyers were trying to find a way out from these ‘bargains’ they thought they  were entering a couple of years ago.

So along come the lawyers and find a reason to get out of the contract and in this reported case, they did.  The Queensland Court of Appeal agreed with their position as well and the buyer in this case (Bossichix v Martinek Holdings) was able to walk away.  If a lawyer drafted the contract the developer used, no doubt, there could be further  litigation against those lawyers by the developer.

So what happened?  There were technical reasons why the buyer was able to cancel and get out of the contract involving an interpretation of the Body Corporate & Community Management Act. The Act provides: “A contract entered into by a person (the seller) with another person (the buyer) for the sale…of a lot intended to come into existence as a lot…in a community titles scheme…must provide that settlement must not take place earlier than 14 days after the seller gives advice to the buyer that the scheme has been established or changed.

In an off-the-plan contract, it is not sufficient for the developer to simply include a clause in a contract stating that the settlement date will be 14 days after the developer notifies the buyer that a plan is registered. The Court said that a reference to a plan (in this matter, a Building Format Plan) was something different from a reference to a community titles scheme being established or changed. In the court’s view, this amounted to a failure to comply with the Act.

The decision confirms the courts’ approach to consumer protection provisions in this legislation. Protection ‘may extend to giving the purchaser a right to terminate even for quite technical reasons and whether or not the purchaser has suffered any material disadvantage’.

Due to the implications of this decision on the building industry and the impact and uncertainty in the economy, and the fact that  a lot of developments could be at risk due to poor drafting, the State Government moved quickly last week to amend the legislation to remove this right for buyers. It doesn’t affect contracts that have settled or any cancelled before the Court’ s decision in the reported matter.