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Full risks of buying off the plan - damages claims

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cc | 11 Aug 2018, 10:24 PM Agree 0
I am interested to hear experiences of other investors who may have experienced similar issues and any advice they may have.

I placed a deposit for an off the plan property in Melbourne 2 years ago when I was living in Sydney (I am Australian) and working full time. The property was not due to be settled for two years. I sought advice from a mortgage broker and conveyancing lawyer about risk and process. At the time, I understood the risk to be losing my 10% deposit.

Fast forward two years and the property is now settling. I have since moved to the UK and after a time without work, set up my own consultancy 6 months ago. As a result I have been unable to secure a loan, despite best efforts with about 6 brokers, nor have I been able to nominate another buyer via family or friends, or using a reputable agent and advertising for 2 months.

The developer flagged several months ago that I was liable for "damages" if I did not settle. I was confused by this and asked my conveyancing lawyer what "damages" meant, he initially brushed it off. As it became increasingly clear that they were serious, the lawyer then said it was my fault and it was a standard contractual term. After reviewing the contract I was unable to locate the term (the lawyer has since directed me to it), I also reviewed all communications with my lawyer and cannot find any mention of this risk, despite a very specific email where I asked about "risk" when departing Australia.

Additionally I have had the property agent who initially sold me the property and appears to have a commercial arrangement with the developer, wanting to take management authority of the property, which from what I understand to mean they will have authority to sell the property at any price. And I would then have to pay "cash" to cover the difference. E.g. the property is worth $500K, I paid a $50 deposit. If they sell it for $300K I will have to pay $150K in cash + commissions + fees. When I questioned this approach, they responded to my lawyer saying if I passed in the property I would "cop heavy penalties".

I have been quite amazed at how unregulated the industry appears to be, from all angles, including the developer, the agents and legal/conveyancing industry.

I have a few questions for members of the forum:
- Are other investors aware of this risk?
- Why is it not covered broadly in media discussions of the risk associated with off the plan investments? Even now I am aware of it, I have struggled to find a single mention of it (in my view it is clearly a much bigger risk than losing a deposit)
- What are the requirements on the developer to prove they made all attempts to achieve the best price for the property? (e.g. not sell it to a mate for half the price)
- Which body actually governs this and why do they not do more to inform investors, similar to the risk warnings across all other financial investments? (When reviewing my contract I expected perhaps I had missed something on Page 1 in bold stating the risk of damages + losing the deposit, but there is nothing)
- Has anyone else had this experience and how did you deal with it?

I have since been in touch with the legal advisory service in Victoria who has advised that it's possible once a loss is realised I may be able to take action against my lawyer. I am also currently in the process of appointing a lawyer in the UK, on the advice of the legal advisory.

Who would have thought that what appeared to be a strategic way to invest my savings would result in the risk of bankruptcy and months of headaches! I would like to ensure other investors are aware of the true risk associated with off-the-plan. Over the period of two years it is not uncommon for individual's circumstances to change considerably and I think few would invest in off the plan if they had full knowledge.
  • Property88 | 13 Aug 2018, 12:32 PM Agree 0
    Hi there CC,

    Property advisors Multifocus offer the following comment regarding your situation:

    Looks like this investor was not properly advised about the consequences of not performing under the term of his contract. Essentially, all OTP contracts have a clause stating that the investor is liable for the full amount, not just the deposit. In practice, most developers just take the deposit and sell the unit to someone else. If an investor has no capacity to settle, it is pointless to sue him as it would get the developer nowhere.

    Based on standard OTP contracts, I think that legally, the investor has no chance against the developer if the developer decides to sue. The developer must be desperate to sue as the likelihood of effectively getting cash out of him (being in the UK, self-employed and probably with not a lot of cash) is very slim.

    This investor seems to have done everything he can do in the circumstances, ie contact some legal service in VIC. He certainly understand the position he is in. All he can do now is to hire a legal firm to represent him and get their advice on the next steps. If he needs a recommendation, here it is:

    Tony Raunic
    Principal
    image002
    Level 5, 114 William St, Melbourne, VIC 3000
    GPO Box 1533, Melbourne VIC 3001

    T 61 3 8602 9266
    F 61 3 8602 9299
    E TRaunic@huntvic.com.au
    www.hunthunt.com.au
  • CC | 14 Aug 2018, 07:43 AM Agree 0
    Many thanks Tony. I am currently pursuing advice here in the UK but I will be in touch if I require a local lawyer.

    It is a most peculiar situation as I do not see the benefit in undertaking a costly international lawsuit against someone who can't even raise a loan either! I wonder if because it is not usual for developers to actually claim damages, might explain why this risk is not covered in press articles about the risk of buying off the plan?

    I can only assume that the developer, in this case, is in a dire situation as it would appear from the number of other apartments for sale in the development over the past few months, that others are also having trouble finalising loans.

    Thanks again!
    • TR | 15 Aug 2018, 05:18 PM Agree 0
      Hi this is Tony.

      Thank you for the recommendation Multifocus.

      CC obviously I can't provide advice specific to your situation without a consultation to receive all the relevant details. However speaking generally, in Victoria a vendor who rescinds a contract by formal notice owing to a purchaser default generally will be compensated by way of their common law right (now reflected in the standard contract documentation) to retain the usual 10% deposit paid.

      In a market trending downward however, a vendor might consider whether to also either retain the property and sue for losses established by valuation or resell and sue for any shortfall realised after taking into account marketing and sales costs.

      But certainly a vendor is not entitled just to accept one of the early "low ball" offers on a re-sale and sue the purchaser for the shortfall. In fact there is usually quite an onerous demonstration required by the courts to show that the vendor has acted in good faith and also made a genuine attempt to "mitigate" losses.

      As in any litigation, the vendor plaintiff would need to weigh up the costs and risks of proceedings, the prospect of non-recovery, whether the purchaser had sufficient personal assets to meet any court order for compensation, and, in your case perhaps, the additional expense and difficulty of service upon an out-of-jurisdiction person.

      Perhaps then it is unsurprising that few vendors actually take the threatened action to sue for losses or contract performance and rather regard any shortfall between the forfeited deposit moneys and the costs/price realised on resale as part of the inherent commercial risk of property development and sales.

      The lesson for purchasers is always do your homework on price and, in the off the plan case, particularly with regard to apartment sales in highly concentrated Melbourne districts to consider carefully comparable completed apartment values and not assume that price always goes up over time. With my own investments, I have followed the maxim that land appreciates in value over time but buildings depreciate in value. Buildings eventually require maintenance, renovation and sometimes rebuilding from scratch. So in my case, an off the plan land purchase usually has a much lower risk profile than purchase of air space and a yet to be built apartment.

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