10 tips for developers to minimise settlement risk in off-the-plan sales
With changing market conditions, including higher interest rates, increased construction costs and softening property prices, settlement risk for developers is currently a hot topic.
Pre-sale sale contracts are particularly vulnerable to settlement risk.
This is due largely to, firstly, long lead time between the day of sale and settlement (during which time purchasers’ circumstances, market conditions and government and lending policies may change).
Secondly, there are very strict statutory safeguards that apply in relation to off-the-plan contracts. These are designed to protect purchasers from the perceived risks associated with buying off-the-plan and allow purchasers to terminate their contract and obtain a refund of their deposit in certain circumstances.
So how can developers reduce the settlement risk with off-the-plan contracts and ensure settlements occur in a timely fashion? Some key tips are set out below.
1. Get the master contract right from the outset
Although it might seem obvious, accurate and compliant sale documentation is of paramount importance when planning to mitigate settlement risk.
A contract of sale should incorporate special conditions designed to give developers broad rights and limit (to the extent lawfully possible) a purchaser’s right to terminate the contract, delay settlement or seek compensation. Sale documentation should not be adopted “off-the-rack”.
Tailoring sale documentation to the specifics of a project is critical in allowing the developer to carry out the project in any way necessary and manage unforeseen outcomes, whilst minimising the risk of a purchaser becoming entitled to terminate the contract.
2. Make sure your pre-sales are “bankable” from a construction funding perspective
- Lenders are just as concerned with the settlement risks associated with off-the-plan contracts as developers, and will almost always have the pre-sale contracts vetted and qualified by the bank’s panel solicitor prior to any drawdown of funds.
- Lenders have their own commercial criteria for determining whether sales contracts will be counted as “qualifying”, and it is important that you and your sales team understand what these are and that the contract and the agreed sale terms comply with that criteria. For example, most major banks now require the sunset date to be at least 12 months after the estimated date of practical completion.
- This is to ensure presales are not excluded by lenders, and the work done and commission payable in achieving those sales is not wasted.
3. Engage with purchasers as early and regularly as possible
- Communicate with purchasers and their lawyers/conveyancers in advance of the Plan of Subdivision being lodged for registration (about 6 to 8 weeks beforehand). Although not required under the Contract, this does provide the opportunity for them to prepare and finalise their settlement arrangements in a timely manner.
- Pre-empting and managing requests to rescind, change ownership details, and on-sell sooner rather than later gives you more time to manage the purchaser’s individual circumstances and how you deal with various situations prior to settlement.
- Contacting buyers early enough gives ample time to guide the buyers through the settlement process and work towards assisting them with their situation.
4. Proactively manage valuation risk
- Settlement risk may come from property valuations being at risk of coming lower than the contract price.
- Knowing your project’s market position early is critical in managing your settlement risk. Producing valuation packs to assist valuers in their assessment of the property can be a very useful tool.
- For developers and their settlement team, this is an opportunity to study the current local market, review recent sales and comparable projects. For valuers, a valuation pack that is short, clear and to the point is essential to identify key areas of importance.
5. Understand the expectations of outgoing mortgagees
- Realisation that a timely settlement is not just dependent on purchasers being ready to settle at the required time. It also depends on the readiness of all other parties, including their banks and their lawyers/conveyancers, your lawyers/conveyancers, your discharging mortgagee(s) and their lawyers (where applicable), as well as the owners corporation(s) (where applicable – more on this below).
- Being organised and implementing necessary steps at the right time will assist others in dealing with their tasks and therefore, contribute to you achieving timely settlements.
6. Engaging an owners corporation manager early
- Early engagement of your owners corporation management is important so as not the delay settlements.
- Opening the communication lines between your owners corporation management, yourself as the developer, and your lawyers/conveyancer will ensure that tasks are being progressed and all parties are on the same page.
7. Complete State Revenue Office duties forms promptly
- Arrange for an authorised officer of the developer company to answer any questions pertaining to the information required to complete the State Revenue Office forms and be available to review and electronically sign the duties forms as and when invitations to sign are being sent by your lawyer/conveyancer.
- Ensure that the method of calculating duty is decided upon early on in the development and maintain a record of your figures as the development progresses. That way, when it comes time to provide those figures to your lawyer/conveyancer, you know those figures are up-to-date and accurate.
8. Set up a system for final inspections
- Establish a system, early, for managing final inspections and bank valuations; at least 6 to 8 weeks prior to the anticipated date for lodgement of the Plan.
- Notify your lawyer/conveyancer of the plan you have implemented so they can communicate this to purchasers’ lawyers/conveyancers and their banks who often enquire on these very things.
9. Prepare early, for how adjustments will be handled
- Decide early on whether you, as the developer, need to review the adjustments. An alternative to reviewing all sets of adjustments is to review the first few only and if you are happy with those, the remaining sets of adjustments for other lots will be done similarly and/or review sets of 3 lots of adjustments randomly throughout the settlement process.
- If you wish to review and approve each set of adjustments, ensure the right (authorised) person or persons are appointed to achieve a quick-turn-around for this task.
10. Use a legal team with experience and intimate knowledge of the off-the-plan industry to act on your behalf during the sales process.
This almost goes without saying, but engaging the right legal firm that understands both the legal and commercial issues and pressures of off-the-plan conveyancing is critical to any project.
Successful settlements – the Nine Dots way
It is clear how a bit of forward-thinking, proper preparations and planning, clear instructions and communications, cooperation and generally just being organised, can assist in a process that does not have to be as stressful as it often is.
At NDL, we know how important it is for you to achieve timely settlements and we will do everything we can to assist you in achieving this for your developments.
Please reach out to Ted Vlahos and the conveyancing team at NDL should you wish to discuss your upcoming development settlement or wish to engage NDL to act for you in relation to your next development. We are here to answer your questions.
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