Buying off the plans? – What to be aware of with your finance approval……

A buyer took an opportunity to buy a property off plans a year ago, in a development which was expected to be completed within 6 months of the date of the agreement.  The development was delayed for various reasons, including bad weather (which was allowed under the agreement). 

The buyer’s financial position changed a lot in that time as he lost his job.  He had to re-apply for finance as the timeframe the bank had included in the approval letter had expired. He was shocked to find the bank would no longer lend to him for the purchase, given the change to his financial position.

If you’re purchasing a property ‘off the plans’ - a property in the process of being built - you should be aware that your finance approval from your bank might expire before settlement of the property purchase.

It is not unusual for banks to approve finance conditional on the issuing of the Code Compliance Certificate, and/or title for the property, with a time limit that is not feasible for the completion of the property/development.  Unless agreed otherwise, the finance expiry date is usually within 60-90 days of approval.

If your finance offer is only valid for a 60-90 day period, then you will likely need to reapply for finance closer to the settlement date.  There is an element of risk that at the time you reapply that the bank will change its position on lending to you, if for example of the value of the property has decreased, lending criteria have changed and/or your personal situation has changed, as was the case above.

Where the sunset clause date has passed and a settlement date set, you will no longer have any rights to cancel the agreement. 

You could end up in a situation where you are legally obliged to complete the purchase, but cannot do so if the bank decides not to lend to you, and you cannot find another lender.  In this event, you would forfeit your deposit and the vendor could look to sue you (either for any loss, or for specific performance – that is, forcing you to carry out the terms of the agreement). 

If you find yourself in this tricky situation, there are still some actions you may be able to take:

• Assign or novate your interest under the agreement to a third party. This would involve entering into an Assignment or Novation whereby a third party essentially steps into your shoes as purchaser. You will need to obtain the consent of the vendor to do this. You will also still remain liable for the purchase until such time as settlement has been completed.
• On-sell the property immediately and have a contemporaneous settlement.  You may need to obtain the consent of the vendor to do this (if required by the agreement).  You may still be able to secure funding for part of the purchase price if you are unable to sell for the same or a higher amount. 
• Negotiate with the vendor to release you from the agreement. We would expect that a vendor may be unlikely to agree to this especially if their expected sale price (when attempting to sell the property again) will be lower than what you would have been paying.  In some circumstances they may be willing to release you from the agreement but you might need to forfeit your deposit.
• Walk away. This is a last resort if you are not in a position to settle.  However, the vendor will likely sue you for losses/damages and specific performance. This could become quite costly especially if the matter proceeds to Court.

The issue with all these above options is that if the property has gone down in value since you entered into this agreement, the vendor is unlikely to want to take a loss and any new purchaser will want to pay the current market value for the property.

It pays to speak to a legal professional at all stages of purchasing an off the plans property to make sure that you are fully informed of your options if this risk arises.