Clawbacks, shape-shifters and other off-the-plan horrors


Off-the-plan sales can be very attractive for potential owners looking to get into the property market.

Depending on where you live, there are various tax benefits and grants available for those who put their money down on the basis of a floor plan drawing and some computer-generated artists’ impressions.

But nowhere in those images do you see the dark shadows of shape-shifting and sunset clawbacks.

In the former, buyers are told their nearly completed apartment will be considerably smaller and they can either pull out of the sale or, if they’re unlucky, the reduction falls within the variation permitted in the contract.

Shape shifting can occur when a local council imposes conditions on a block that’s been sold before it was fully approved. It also happens when developers realise they can make greater profits by selling more, smaller units instead of fewer bigger ones on the same footprint.

In extreme instances, such as one reported in Sydney a couple of years ago, you can find your neat one-bedder has been transformed into a squeezy studio.

In most cases, there will be a clause in your contract that allows you to get a full refund of your deposit.  But that isn’t much use to anyone whose money has been doing nothing for two or three years while the market has been going gangbusters.

Which brings us to the shady question of “sunset clawbacks”.  Most off-the- plan contracts contain a sunset clause that says if the project isn’t finished by a certain date, either party can rescind it without penalty.

In an overheated Sydney apartment market, some unscrupulous developers realised that if they pulled their work crews off site for a while, the building wouldn’t be finished by the deadline so they could legally tear up the contract and re-sell the near-complete apartments for much higher prices than they’d achieved originally.

In 2015, then NSW Better Regulation Minister Victor Dominello, stepped in and changed the law so that, if the off-the-plan buyers objected to the contract rescission, the developers had to apply to the Supreme Court and prove the delays were genuine and unavoidable.

That said, the pros and cons are not always clear-cut. In a dispute heard under the new laws in the Supreme Court in Sydney last week, there had been some genuine delays due to the original developer’s inexperience.

However, the company that took over the project clearly bought into the struggling project with the hope of using sunset clauses to rescind the original contracts and thereby maximise their profits.

The case, awaiting judgement, is a significant test of the NSW legislation. Other state governments may look at adopting similar regulations if cooling sales prices don’t take care of the issue.

But in volatile markets the potential is always there for jiggery-pokery. And it’s not just apartments that are subject to sunset clawbacks, as some house buyers in Melbourne have discovered, to their cost.

Outside of NSW, off-the-plan buyers can still challenge sunset clawbacks in court, but the onus is on them to prove that there’s something dodgy afoot.

If you’ve bought off the plan and the sunset clause deadline is approaching with no sign of completion, it may be worth a little private investigation.

Take a drive past the site and see how many people are actually working on it.  Snap off a few shots on your smartphone and ask neighbours if there’s been a slowdown in activity.

Gather your evidence, just in case that deadline clicks over and your contract is shredded.

This column originally appeared in the Australian Financial Review.

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