Power to the purchaser – what to know before you sell off-the-plan in NSW

The NSW Government is proposing to amend the Conveyancing (Sale of Land) Regulation 2017 to provide NSW purchasers with better protection when purchasing residential property off-the-plan, by:

• increasing mandatory disclosure obligations for developers, such as a Disclosure Statement and the provision of other prescribed documents;
• increasing cooling-off periods;
• wider rescission rights for purchasers;
• introducing a right to compensation (of up to 5% of the purchase price) as an alternative to rescission;
• clarifying current clause 66ZL in relation to sunset clauses; and
• requiring the deposit to be held in a trust or controlled money account.

These measures are designed to improve purchaser certainty so that purchasers end up with the property they bargained for – two bedrooms, two bathrooms and a walk-in robe, please! When a purchaser ends up with one bathroom instead of two and no walk-in robe the result is not only a very unhappy purchaser, but uncertainty in the market, which calls for tighter regulations for developers.

Disclosure Statements for off-the-plan sales of residential properties

Drafting of the Regulations is yet to be introduced into Parliament, but through industry consultations, it is understood that the Regulations are expected to compel developers who are marketing residential properties for sale off-the-plan to provide a Disclosure Statement to potential purchasers in an approved form. This will require the disclosure of various details including:

• whether development consent has been obtained;
• whether the contract is conditional on the developer obtaining finance;
• any proposed sunset date (and the mechanism for extending that sunset date);
• any proposed by-laws or management statements;
• a schedule of finishes to be used in the dwelling.

This is in addition to the existing statutory disclosures required under the Conveyancing Act 1919.

If at any point during the development there is a material change rendering the Disclosure Statement or prescribed documents inaccurate, the developer must notify the purchaser of the change at least 21 days before completion. If the purchaser receives a notice or becomes aware of a change the purchaser may rescind the contract if the following test is satisfied:

• the change reflects a failure to disclose a matter affecting the land; and
• the purchaser would not have entered into the contract if they had known about the matter.

Potential concerns with the proposed changes

Although the above appears to be very purchaser-friendly, there are potential concerns with this test.

Firstly, it is not clear what will constitute a “matter affecting the land”. It can be expected that a significant decrease to the area of an apartment or block of land will be viewed as a "matter affecting the land" as it directly impacts on the amount of land being conveyed. But will a change to the finishes used in the dwelling amount to a "matter affecting the land"? Will the removal of my longed-for walk-in robe be a "matter affecting the land"? If these changes are not matters affecting the land itself, this suggests that some changes to some information provided with the Disclosure Statement will give rise to a rescission right, whereas others may not – resulting in additional confusion for purchasers.

Secondly, determining whether a purchaser would or wouldn’t have entered into a contract “had they known” of the matter is a subjective inquiry. This ambiguity may create uncertainty for the developer as it could potentially allow purchasers to easily get out of contracts (a risk which increases in a falling market). Therefore, the effect of the proposed Regulations and whether they appropriately address the problem without introducing a greater levels uncertainty is unclear.

It is also expected that the Regulations will allow purchasers who have been notified of a change to the Disclosure Statement and are entitled to rescind a contract to elect to claim up to 5% compensation from the developer, instead of rescinding the contract. Depending on what clarity is provided in the tests for rescission, this could result in unintended opportunities for purchasers who are informed of minor changes to claim a 5% reduction to the purchase price where the purchaser asserts that they would not have entered into the contract if they had known about that change – irrespective of whether the purchaser has been disadvantaged or not. Again, this translates as a risk for developers and their financiers, with a potential for this risk to be passed to the purchaser outright and be factored into the contract price. In light of this effect, the proposed Regulations must be carefully considered to ensure they do not have undesirable outcomes for housing affordability in NSW by actually increasing the costs to purchasers.

Similar regulations have been enacted in Queensland to address the same issues. In Queensland the purchaser can terminate the contract after being notified of a change "if the purchaser would be materially prejudiced, if compelled to complete the contract, given the extent to which the disclosure plan was, or has become, inaccurate".^[1] However, in Queensland, the purchaser is not entitled to compensation if they decide to terminate the sale contract, and they must be able to objectively prove they will suffer a material loss from the change in any claim for damages. This objective test creates less ambiguity in comparison to the Regulations proposed in NSW.

It is important that developers, their financiers and of course purchasers in NSW are aware of the scope of these proposed Regulations, the additional protections and the associated risks. The changes will have consequences for all new residential contractual dealings off the plan.

^[1] Land Sales Act 1984 (QLD) s13(4)(b) ^{Back to article}