17 November 2023

THE IMPORTANCE OF THE ‘OFF PLAN’ CONTRACT TO PURCHASE A NEW HOME

When buying a newly built home, whether this is your first home, you are moving house, or you are buying this as an investment property, you will be encouraged by the developer to exchange contracts ‘off plan’.

What does ‘off plan’ actually mean?

You will reserve the property based on the marketing materials provided by the developer, including a plan and an agreed specification.  The property will not have been fully constructed, and so it is likely you will be legally committed to purchasing a property without having the opportunity to see it.

The Purchase Contract

Exchanging contracts is a crucial stage in buying an ‘off-plan’ property.   This is the point at which you will enter into a legally binding purchase agreement with the developer. Understanding the contract terms is vital, as this stage often occurs long before the property completion date.

Once contracts are exchanged, you are legally committed to the purchase. Failing to complete the purchase risks losing the deposit. Therefore, thorough due diligence and understanding of the legal contract is critical to protecting your investment.

What terms to look out for in the contract?

Deposit: – Typically a 10% deposit is required on exchange. However, a staged, further advance payment is sometimes required closer to completion.  It is important to understand how the deposit is to be held by the developer’s solicitors and whether this will be released to the developer or not.  If this is to be released to the developer, then you will want to ensure that the deposit is protected under the terms of a new home warranty such as NHBC, in case the developer acts fraudulently or goes insolvent.

Construction Obligations: – You will want to ensure that there are contractual obligations upon the developer to build the property in accordance with the planning consents, with due diligence and in a good and workmanlike manner, to the agreed specification and plans, in compliance with the relevant codes of practice and to the requirements of Building Regulations and the new-home warranty provider.

Material Changes: – It is fundamental to check what recourse is available to you should the developer deviate away from the agreed size and specification for the property.  If, for example, the developer builds the property smaller than was agreed, so much so that this significantly affects the value of the property, then there should be a provision within the contract to ensure that they obtain your consent first.   There should also then be a provision to allow you to bring the contract to an end if you do not agree to this change, or to be entitled to compensation.  You should also ensure that you fully understand the changes that the developer is entitled to make without having to notify you, as you will still be compelled to purchase the property, notwithstanding these changes.

Termination: – Always ensure that there is right to bring the contract to an end and receive your deposit back in full should the construction of the property be delayed significantly past the estimated completion date.

Completion: – Check the arrangements for completion, in terms of (1) how much notice you will be given to complete; and (2) those completion documents that will be provided, such as, buildings insurance, an EPC, final completion certificates for the new home warranty and Building Regulations compliance.

The ‘off plan’ contract is comprehensive and important to get right and fully understand.  For that reason, always ensure you use a specialist lawyer.  Our expert Residential Real Estate team would be delighted to help!

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