Building certainty: Could off the plan contract reforms help solve the housing crisis?

It seems barely a day goes by without reference to housing affordability in the news. The pressures are real, particularly in a city like Sydney. The NSW Government has identified housing as a key priority. On a number of fronts, it is seeking to increase housing supply, promising to deliver 377,000 new homes across the state under the National Housing Accord.

There are planning reforms, including Transport Oriented Development, aimed at lifting density around key transport hubs. Local councils are being handed their own targets, adding pressure to permit new developments in established areas. In some cases, local government can now be bypassed by a new Housing Delivery Authority, which has been tasked with fast-tracking the approval process for projects deemed ‘state significant’.

For the whole of last year, interest rates were higher than they had been since late 2011. A growing population has created economic opportunity on the one hand but made housing more difficult to find on the other. And the trend is only headed one way. Greater Sydney’s population is projected to reach 6.3 million by 2041.

There’s one form of home purchase that is certain to play a role if the state’s future housing needs are to be met: off the plan contracts. It’s a method that can benefit developers and buyers, helping to secure funding ahead of construction and offering a price reflective of an earlier, usually lower priced market, by the time of settlement. But the arrangements come with risk on both sides. Circumstances can change, projects can be delayed, and buyers can be left bitterly disappointed.

Change is on the horizon. The Office of the Registrar General (ORG) is conducting a review of the current laws and has set out a series of possible reforms aimed at strengthening protections for buyers. The review is also looking to simplify the removal of obsolete restrictive covenants, which limit how land can be used or developed. But how far outside the box will any changes go? Will they build confidence in the housing market, or do they risk discouraging developers from bringing projects forward? The Journal has spoken to property lawyers from across the spectrum, to gauge their sentiment at this important juncture.

Mark Smith is Principal at Brander Smith McKnight Lawyers in Sutherland. He has many years of experience in property law and has advised clients about off the plan contracts. Smith sees purchasers often coming to such deals, not fully understanding what they’re entering into. “They tend to treat them just as a … normal purchase agreement, which it’s definitely not,” he says.

“It’s much more complicated than that so they should definitely be getting proper legal advice.”

How did we get here?

This isn’t the first time the legal framework for off the plan contracts has been examined. As outlined in the ORG’s discussion paper, the state’s conveyancing legislation was amended in 2015, preventing developers from using sunset clauses to end contracts, without first obtaining an order from the Supreme Court.

Further amendments in 2019 included doubling the cooling-off period to 10 days and requiring deposits and other payments to be held in trust until settlement. A disclosure statement was also adopted, with key information for purchasers. Developers were required to notify of changes to a ‘material particular’ (something that adversely affects use or enjoyment of the lot). In some cases, buyers are able to rescind contracts due to such changes. Developers were also forced to provide a copy of the final registered plan, at least 21 days before settlement.

Although these measures have been seen as helpful, other issues have since arisen. Economic circumstances have changed, and the housing shortage has worsened. Reports have emerged of buyers facing lengthy delays, with no way forward. Some are anxious for building to start and to move in, while for others, their situation has changed, and they want out.

“Every contract is different, and bespoke provisions can allow for multiple extensions of sunset dates, so that buyers can be effectively locked in indefinitely,” notes the ORG’s discussion paper. “Sometimes, there is no mechanism in the contract that allows buyers to withdraw, as there is no limit on the developer’s ability to extend the sunset date.”   

It’s a scenario familiar to lawyers like Mark Smith and a number of his clients. “[T]hey put down their deposit, they’re hoping that in a year or two they can move into a house, but they can actually just be sitting there indefinitely with the deposit tied up, no means by which to buy another house, and the sunset date just keeps getting extended and pushed further out.”

The developer perspective

Vanya Lozzi is a Partner at Holding Redlich and heads up the firm’s off the plan sales team. He has acted for major developers, including Frasers Property Group, Lendlease and Billbergia. He says off the plan contracts usually involve a property that hasn’t been built yet. “[W]hat you’re doing is you’re signing a contract that will describe what it is you will receive at some point in the future.”

Off the plan contracts, also known as pre-sales, play a critical role in a developer’s ability to raise the finance needed to proceed with construction. “[A]lmost always the developer cannot fund the development itself, it needs to borrow the money,” explains Lozzi. “And the lenders have a number of criteria before they will lend any of the money to let the developer commence construction. And one of the key criteria is that the developer has to have a number of off the plan sales contracts that have been entered into by purchasers.”

What’s on the drawing board?

Among the ideas flagged in the discussion paper is expanding the disclosure requirement for developers. Off the plan contracts can be entered into very early in the development process, including before development approval has been granted and before the developer actually owns the land.

Options for additions to the Disclosure Statement issued to buyers include the progress of milestones such as Section 68 Approval (local government regulations), Subdivision Works Certificate (work cannot start before this is issued), Section 73 Compliance Certificate (for properties serviced by Sydney Water) and any modification applications.

The Law Society of NSW is among those to have made submissions to the review. It notes the Disclosure Statement was intended as a one-page document, setting out key items for purchasers. It’s questioned the value of the proposed new milestones. “Generally, these matters are preliminary in nature and may not be meaningful to a prospective purchaser,” says the submission.

Another question for the review is whether developers should be required to give updates of development milestones being met. In its submission to the review, The Law Society says this change is unnecessary and could risk the feasibility of projects. “Providing a legislative rescission right where a vendor fails to serve notice of a certain development milestone will cause substantial issues with project funding, and may result in financial institutions only being willing to provide funding once all legislated development milestones have been achieved,” says the submission.

This concern about the impact of greater disclosure on the ability of developers to borrow money, is shared by Vanya Lozzi. He says the issue is not with disclosure per se. “There should be no problem with any developer being required to disclose things like how long they think something might take or whether they’re the owner of the property or whether they have development consent,” he says.

“Where we have the most concern is where those things are linked to a right for the purchaser to terminate or rescind the contract and walk away. “Every time there’s an additional requirement on a developer to do something … and should that something not be done, then there’d be a right for a purchaser to walk away, that makes a funder nervous,” says Lozzi.

On the question of whether a developer should reveal the ownership status of a development site, the Law Society says they should, and that this is already best practice. It says a developer shouldn’t have to reveal how it expects to become the owner but indicating when it expects to, would be helpful. However, the submission says buyers should not be able to take action over this. “We do not support any remedy for a purchaser based on the developer failing to disclose that it does not own the land.”

Sunset clauses

Another major focus of the review is sunset clauses. These are the provisions often used in off the plan contracts, setting a deadline for a ‘sunset event’ to occur. If a sunset event does not occur by the specified date, either party can end the contract, but the developer needs Supreme Court approval, unless the buyer agrees. 

Right now, section 66ZS of the Conveyancing Act 1919 defines a sunset event as the registration of the plan of subdivision and the issuing of the occupation certificate. According to the ORG’s discussion paper, issues have arisen in two categories: 1) conditional contract terms allowing developers out, in situations that don’t attract sunset clause protections and 2) purchasers facing protracted delays being unable to terminate because there is no sunset clause for that situation.

In addition to mandating sunset clauses with the two existing sunset events, it’s been suggested the list of sunset events could be expanded. They could include a specified number of pre-sales, the developer obtaining development approval and acquiring title to the land. Defining these milestones as sunset events would require the developer to go to the Supreme Court to rescind, if they haven’t been met in the agreed time. The court could also consider compensation for purchasers.

In its submission, The Law Society says it does not support expanding the definition of a sunset event. It says because the suggested new milestones happen early in the development process, “these events do not have the same risk profile as the current sunset events which occur at the end of the off the plan process.” 

According to Mark Smith, developers should have to explain why they are seeking to get out of a contract. “[T]hey should demonstrate … there is a genuine reason to terminate, but also that if the market has risen, there is a mechanism whereby the rise in the market is shared between the vendor and the purchaser.”

The purchaser perspective

Andrea Laszczuk is a radiation therapist who now lives in Traralgon, in the Latrobe Valley, east of Melbourne, with her young family. But a few years ago, the far north coast of NSW was home. Laszczuk says she and her partner Scott sold their unit in Ballina and entered an off the plan contract to purchase a block of land at nearby Cumbalum. The site was in an estate called Banyan Hill, where lots were being offered up by developer Intrapac.

“And the price we received for our block was $420,000 and we had to put a five per cent deposit down,” says Laszczuk. It was early 2021 and the couple planned to build on the site. “[W]e’d just had our second child at that stage, so yeah, planned to live there in our ideal dream home.”

They understood that some delays were possible, but they had no inkling of anything else. Laszczuk recalls the climate at the time. “A lot of builders were pressuring people to put deposits down to lock in contracts to build. Fortunately, we did not do that … the prices of builds were just going up and up and up but … that was a bit too risky for me. I didn’t want to lock myself into a contract,” she says.

In 2022, while they were waiting for their land, the three-bedroom unit they were renting in West Ballina flooded, forcing them to relocate to another unit. 

Then in September 2023, the developer emailed to say it was rescinding all stage 10 sale contracts, including Andrea and Scott’s. The developer said it had encountered substantial delays in receiving Development Approval and the contract included a provision which made it conditional on receiving a DA within 18 months of exchange.

“Obviously that came as a big shock to everyone,” says Laszczuk. “Land prices had gone up, for us at least 50 per cent, but to some of the other people that were buying … probably 100 per cent on what they’d initially signed the contract for. So yeah, it was quite upsetting times, very stressful.”

Having settled in the Ballina area and envisaging a future there, the family was forced to reevaluate and couldn’t escape the fact that they had been priced out of the market. They ended up having to move interstate to realise their dream of owning a house.

“The only thing we could afford to buy in the area was going to be a unit, but with two small kids, we just wanted something a little bit bigger. They’re two wild boys, so we knew we weren’t going to be able to afford to buy what we wanted in the area, what we needed for our family, so we decided to pack up and move down to Victoria, back where I was from, where we could afford something that was suitable for us,” she says.

In response to written questions from the Journal, Intrapac CEO Maxwell Shifman said it was their “reasonable expectation” that planning approvals would be received shortly after the contracts for these lots were first entered into from late 2020.

He said there was already a DA permitting subdivision, the planning application was only a modification and there had been engagement with the local council, with no red flags.

“The decision was made to rescind the subject contracts only in September 2023, nearly three years after the initial planning process had commenced, as there was no end in sight. Our great preference would have been to receive timely approvals and to have completed the lots with our original purchasers,” said Shifman.

He acknowledged that land prices increased in the area during the intervening period but added that development costs also rose by almost 50 per cent. Shifman defended the purchaser protections in the contracts. “The sunset provisions correctly played their intended role by preventing both parties from being caught indefinitely due to systemic or external delays,” he said.

Where are the issues?

Clarissa Huegill is a property law specialist from Ballina, who acted for local government for more than 20 years, in the fields of planning and development. She has also acted for developers and purchasers in the area. Having recently retired as a solicitor, she now runs her own conveyancing practice and is also Deputy Chair of the Law Society’s Property Law Committee.

Huegill says off the plan purchases can have a real impact on families, in particular if there are significant delays, or the sale doesn’t proceed. And the expectations of purchasers usually aren’t tempered. “[P]urchasers are told by agents, ‘Oh, it’ll be done in the next 18 months, it’ll be finished’. So, they put their lives on hold. They don’t have babies, for example. [P]urchasers are left bereft sometimes … It can be very impactful on individuals and families, and extended families,” she says.

It’s a sentiment echoed by Mark Smith. “We’ve had clients that these have gone for … four years. That’s a long time for a young family to wait to get the property that they thought they were going to have to wait one or two years (for),” he says.

Another of the questions being considered by the ORG’s review is whether there should be a limit on the ability of a developer to extend sunset dates. On this issue, the Law Society’s submission says there needs to be a balance between flexibility for developers and ensuring purchasers aren’t locked into what amounts to an open-ended contract. It proposes a maximum period, rather than a limited number of extensions. “We suggest consideration could be given to an implied term to the effect that where the contract is silent as to the developer’s ability to extend a sunset date, then an 18-month cap applies for the maximum period of extensions for any sunset date,” says the submission.

Huegill says the move would take away the uncertainty that currently exists. “[T]here would be a certainty for everybody in NSW that the longest there could be an extension past the sunset date is 18 months. The banks know, the developers know, the councils know, the bloke doing the earthworks knows, the purchasers know. It’s about certainty and I think that’s very important, for development to continue.”

Smith warns a cap could have unintended consequences. “On first blush, you’d say, ‘yeah, great, everyone knows the date’. And 80 per cent of the time, that will work. But if there is a very valid reason why that project can’t happen, then it’s going to be a disaster.”  Huegill remains of the view that obtaining development consent should be added to the list of legislated sunset events. “Then they’re not pre-selling off the plan before they’ve even thought about what their consent might look like,” she says.

“[A]t least they know there’s a limit to how long they can keep people hanging on before they say ‘Oh, we just can’t do it. We can’t talk council into it. It’s too difficult. We’re not going to get our consent. Sorry everybody, you can all go home.’ And I don’t understand why that is not fair to a developer if the period of time is appropriately long.”

Heugill says there’s another scenario not really addressed by this review, but one that requires attention. “There’s no legislative weapon for a purchaser where a developer simply doesn’t proceed with a development but doesn’t seek to rescind,” she says.

“[T]he remedies for purchasers are expensive and risky because it’s an application to the Supreme Court. There are all sorts of implications depending on the way the contract has been drafted as to what rights the purchaser might have.”

In answer to a question about what mechanisms could assist in compelling developers to perform their obligations under the contract, the Law Society’s submission to the review points out that there is currently no remedy under section 66ZS of the Conveyancing Act 1919 for the above scenario, nor is there one for situations where a developer’s application to rescind is refused. The submission says given the common law remedies for these situations can be expensive and lengthy, a legislative regime better protecting purchasers could be considered. 

Protecting contractual interests

Another concern for purchasers is when developers seek to transfer a development site to another entity. This could have big implications for purchasers, because the new entity may claim not to be bound by the original off the plan contract. Their only option is to take legal action against the original developer, which may have become insolvent.

The ORG’s discussion paper proposes notifying an off the plan contract on the title of development land through a Registrar General’s caveat. A caveat is an injunction preventing dealings or plans being registered on a title and acts as a warning about a person’s claimed interest on the title. “The process could be designed so that the caveat would not prevent registration of a dealing ordinarily necessary as part of the development process,” the paper notes.

There would be rules to ensure development wasn’t impeded unreasonably. Certain things could still be registered without impacting the caveat, such as subdivision plans, infrastructure leases and perhaps mortgages.

On this issue, the Law Society agrees, saying a requirement for developers to request a Registrar General’s caveat would not add unreasonable cost or delay to the process. “In our view, this is an appropriate way of notifying third parties and protecting the purchaser’s interest under the contract,” says the Law Society’s submission.

But the prospect of such a caveat has alarmed Lozzi’s colleague, fellow Holding Redlich Partner Elly Ashley, who sits on the Law Society’s Property Law Committee. “A financier is not going to like having their title restricted. It’s going to prevent, for example, them exercising mortgagee and possession rights, so them stepping in, which is the whole, really, security of their mortgage,” she says.

Ashley argues a caveat would stand in the way of developers doing a number of things, including consolidating a site and registering substation easements and leases. “So, all of those things, that caveat would prevent. So, I think it’s a knee jerk reaction to a couple of instances, but that’s one of the really big ones in this paper that I think would really hamper the industry if it was brought in.”

Some say existing laws already provide protection to purchasers. Ashley says this includes limits on the way contracts can be drafted. “Australian consumer law says you can’t have a contract where one party has the right to continually extend a key date, so I think most off the plan sales contracts in the market would have a sunset date and then a cap …”

She says most off the plan contracts already require reasonable endeavours to construct a building and deliver title. “So, if the developer is sitting on their hands and not doing anything, my position to a purchaser would be, you do have a remedy. You don’t have to wait for the sunset date.”

According to Ashley, in the current environment, some developers are having to take a hit, to maintain their good standing in the industry.

“Most developers really care about their reputation. So much so that we’re aware of developers in the market that are building projects with their own equity, because they can’t get building funding, at a loss, because they don’t want to be in a situation where they’ve promised a purchaser an apartment and they can’t deliver,” she says.

“So, if I was acting for a purchaser and we do from time to time in off the plan, my biggest advice to purchasers is, look at who’s building the project, look at the developer, look at their reputation.”

‘Certainty and security’

The NSW Government says the reforms are aimed at providing certainty and security for homebuyers, protecting them from the impact of unforeseen changes and protracted delays, through greater transparency and fairness.

But what about the impact on developers? Will they still be able to secure the finance needed to proceed with their projects? Ashley says you have to consider the way such developments get off the ground. “[R]ealistically to fund one of these projects, you’re looking at hundreds of millions of dollars, depending on the size and the scale of the project. And most developers don’t have the funds in their book to be able to fund that with equity alone,” she says.

“And so the way it would normally work is a developer would fund, usually the acquisition of the land … they would then go and get a development consent, but at the time they’re looking to commence construction, they’re really looking at the banks to tip in the funds …”

Her colleague Vanya Lozzi says the bar for rescinding a contract is incredibly high and a number of factors have made conditions more difficult for developers. “So, they’re sitting there, a lot of them, looking at a site that construction costs have gone up multiples, looking at a feasibility that no longer stacks up, meaning that banks will not lend them money and now they have no way out.”

Clarissa Huegill acknowledges the concerns about securing finance are real and so a balance needs to be struck. “That’s the line I’m talking about. It’s how do you achieve certainty for the banks in giving the finance, against protecting the purchaser and having some sort of certainty for the purchaser that there is going to be an end if something goes drastically wrong,” she says.

Huegill concedes that unforeseen circumstances can arise that nobody could have imagined. “And somebody has to bear the risk of that,” says Huegill. “Is it the developer or is it the purchaser? And that’s the difficulty.”

Mark Smith agrees that it’s a difficult problem to solve. “[I]n an environment where the government … want the supply of properties to increase, you also don’t want to diminish the returns to developers because obviously, less return to developers, less properties get supplied to the market,” he says.

Elly Ashley predicts that the reforms, as proposed, would lead to a change in the sort of developers able to bring projects to the market. “If a lot of these changes were to go through, I think what would happen is you would still have the large developers in the market who have the balance sheet or have the relationship with banks and the parent companies who can guarantee and satisfy banks who will still be able to do development,” she says.

“But what it will do will knock out that small to medium player or developer in the market, which will reduce housing stock, because they … don’t have the balance sheets or the ability to fund these projects without the pre-sales and I think banks will certainly see pre-sales as being a lot less secure, if a lot of these propositions come in, because it’s giving purchasers a lot more rights.”

Obsolete restrictive covenants

The review is also examining proposals to make it easier to remove restrictive covenants which have become outdated. A restrictive covenant limits the way land can be used or developed, such as setting a limit of one main building on a piece of land, height limits and imposing a style of development.

They are usually imposed by the landowner at the time of subdivision but bind future owners. Because sunset dates are rarely incorporated in the terms, restrictive covenants can continue indefinitely.

Among the proposals is expanding the class of covenants which can be deemed obsolete after 12 years, simplifying the notice provisions for removal and imposing time limits for new covenants.

Mark Smith agrees with the need for reform in this area. “Building design, the building code, and particularly with our changing weather, it means that it has to keep moving forward. And I think we’ve seen so many of these restrictive covenants that … just don’t work in today’s building environment,” he says.

Elly Ashley agrees that covenants can act as an obstacle. “[T]here’s a lot of obsolete covenants on titles around Sydney and so … to have a bit more flexibility to remove those is a good thing. It will help development.”

However, she notes that changes could prove controversial, if they result in people losing harbour views, for example. “I think there are a lot of covenants around Sydney where people have paid a lot of money to restrict views, and I don’t know how those people would feel if you could suddenly remove those covenants on 12 years,” she says.

Is off the plan the solution?

Everyone working to tackle the complex issues of housing supply and affordability would recognise the need for a whole suite of measures to be applied. Building new homes requires long lead-in times. Some of the policies implemented won’t make a difference for years. And patience appears to be wearing thin, particularly among young people.

The NSW Government has clearly identified off the plan contracts as a key part of the mix. Property law specialists agree that they’re an important way of unlocking development potential and converting concept into reality. “Off the plan is definitely a solution because it enables the developer to investigate the propositions and to know its position before it has to commit,” says Huegill. “[A]nd if the developer knows that they’ve got sufficient pre-sales, then away they can go.”

Mark Smith sees them playing a continuing role in efforts to make more housing available. “[W]hile off the plan contracts have some risk associated with them, I think they are important for the supply of new housing, particularly for apartments.”

He says part of the challenge is to educate the public about what these contracts represent. “An off the plan transaction is not a standard conveyance … The purchaser needs to make sure they go to a law firm that has experience with off the plan contracts and has a … broader experience in contracts generally.”

Vanya Lozzi says off the plan can work in tandem with other policies, such as Transport Oriented Development, to stimulate the construction of new housing in areas where people want to live. “The whole idea is to add density to where we already have infrastructure, like a station,” he says. “And the only way you do that is with buildings and to do that, unless you’re a large player, it means off the plan sales. It’s the way to fix it.”

Andrea Laszczyk and her partner may have got their deposit back, but still feel they lost out. “[W]e had a place that we sold, so even the equity on that place, we lost. We lost equity in the potential of the land, so we came out, whilst not losing money, we lost potential equity. So, yeah definitely (there) needs to be systems in place to help protect the small people.”

Clarissa Huegill wants it known that the process of developing and amending property law in NSW works well, because it draws on the experience and views of a wide variety of people. She says it is an approach the government doesn’t have to adopt, but one that has been consistent for at least the past 10 years, regardless of who’s been in power.

“There are a lot of clever minds coming together to try and resolve these really fraught issues in the best interests of the public,” she says. “And I just think it’s a really important part of the community service that we do … not just for our solicitors but for their clients and our community … and for developers. We’re trying to help the government find that line.”