Saturday, November 27

Developers rescue homebuyer contracts through expiration clause

The risks to home buyers from developers using forfeiture clauses to redeem contracts are increasing.

A construction site closed in a southern Auckland suburb on day 1 of the closure.

Photo: RNZ / Claire Eastham-Farrelly

The situation has prompted lawyers to begin work on a more secure contract in a market plagued by unprecedented pandemic disorders.

Suspension clauses have generally been used for houses and apartments purchased outside of the plan, primarily to protect buyers by allowing them to withdraw at certain points in a project that suffers from long delays.

They also help protect suppliers, but some are now using them to void contracts, to resell at a higher price in a rapidly growing market, leaving the buyer stranded.

A buyer, whom RNZ agreed not to name, signed in April to purchase a three-bedroom home for $ 630,000 in Rolleston, with a November delivery date.

In August, the builder canceled.

“I trust the builder, I trust [sic] my lawyer, and then do something like this, “said the father of two young children.

“It’s not fair, it really isn’t fair, and then I need to spend more money on a similar house for August, compared to April.”

The family just purchased an existing home, smaller than the one that was canceled, for more than $ 800,000.

“I was too naive,” the man told RNZ.

Auckland real estate attorney Joanna Pidgeon has witnessed four such “extinction” attempts, and heard from four other attorneys across the country about others.

Auckland Real Estate Attorney Joanna Pidgeon.

Joanna Pidgeon.
Photo: Photo supplied / White Lynx

“What we’re seeing is … instead of the clause being there for the benefit of a buyer, some providers are canceling deals, taking advantage of the price hike and selling properties for more money,” Pidgeon said.

“Having thought that they had set foot on the ladder of the real estate market, [buyers] you can tear it off.

“And they have no control over that, if that clause is there.”

The founder of the Canterbury firm, Property Factory, which matches sellers to buyers, Campbell Venning, is witnessing something similar.

“Some companies … are actually using it as an excuse to resell the land or properties for much more in a rate or price increase exercise,” he said.

It was hard to prove, but it was happening.

“We have seen people who sold property a year ago. They are waiting for their property to be delivered. It has not been delivered. And now they are struggling to enter the market,” Venning said.

“And those are the people we really feel for.”

Sunset clauses abound in multiple legal formats in New Zealand contracts, unlike NSW and Victoria, which have cracked down on or banned them.

“Unfortunately, some buyers are not trying to negotiate those clauses or push those deadlines further, so they don’t get blown away,” Pidgeon said.

Another buyer told RNZ that he blamed the developer and himself, after signing for a $ 710,000 home, only to be scrapped months later in September, and is now off the market.

“I think it was totally stupid to sign the contract … a total waste of time and energy,” he said.

“Because when I look back, they [were] I don’t think he’ll ever sell me the house from the start. “

He believes that the developer simply wanted his signature, to show the bank, to obtain financing.

Many developers are facing a problem due to Covid-19-related supply chain disruptions that are driving construction costs to unforeseen heights, so deals made earlier in the year now appear unfeasible.

But buyers say a well-meaning developer would try to renegotiate a deal, rather than quickly cancel it.

Jane Pidgeon cautions against sunset clauses that can be invoked in a few months. You have been asked to renegotiate the longer ones.

“I have heard of expiration clauses … which are only for four months, six months from being signed.

“For me, that’s a pretty cynical approach in the short term, because the supplier should know what their schedule is.”

The expiration clauses must be at least one year after the expected end date, he said.

Venning and the Institute of Real Estate say sunset clauses can and are being responsibly enacted in many cases.

The Institute’s executive director, Jen Baird, said that most of the clauses balance the rights of the buyer and the seller.

Jen Baird, Executive Director of the Real Estate Institute.

Jen Baird.
Photo: Supplied

“I have heard anecdotes [of their misuse] … but it’s certainly not something I’m hearing a lot about, “Baird said.

“Developers have reputations. And if they want to have a long-term business, they absolutely want to deliver on the promises they are making to buyers.

“Word is getting out, so we don’t expect to see a lot of activity like this.”

However, the market was changing rapidly as housing escalation accelerated, and when buyers were afraid of missing something, they could act rashly.

“They need to take a breath,” Baird said.

“Particularly in a development environment where you are dealing with a contract that is not a standard contract, getting the additional legal advice to know exactly what you are signing up for.”

Work is underway to deliver a clearer, more secure, and standardized contract to address the risk of the sunset clause and other new risks arising from Covid-19, such as deal delays and further escalation.

Jane Pidgeon is on a committee of the Auckland District Law Society working on this, along with the Institute of Real Estate.

He agreed with buyers who say the government should legislate.

“It would certainly be a protection for buyers to have that prohibited clause,” Pidgeon said.

This does not have to penalize developers.

“Suppliers can implement other protections, to see if they have had enough pre-sales, to see if they have their consent.

“When they have funding, you will often see that the developers have those clauses up front.”

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