Off Plan Development Contracts – Deposits Paid Towards Purchase of Property

June 29, 2021

in Building & Construction,Property

Deposit provisions in an ADLS Agreement for Sale and Purchase of Real Estate govern how a purchaser’s initial deposit that is paid in part satisfaction of the purchase price is handled, essentially providing a form of protection for the parties in an event of avoidance or cancellation of the agreement.

Once the deposit is paid to the vendor’s agent or vendor’s stakeholder, the deposit is to be held by the stakeholder in accordance with the terms of the agreement. In practice most agents will release the deposit to the vendor prior to settlement, meaning that once the deposit is released to the vendor the deposit may no longer be available and the purchaser would need to take steps to try and enforce the deposit provisions through court if the agreement was validly cancelled or avoided by the purchaser prior to settlement.

It is common to find that the standard deposit provisions in off-plan/turn-key agreements have been heavily modified. These provisions are extremely important to a purchaser as there is much more risk involved with buying off-plan in that the development may ultimately not proceed. In such cases where the deposit provisions allow release of the deposit to the vendor prior to settlement, the purchaser may struggle to get their deposit back if the development did not proceed.

There have been some developments recently that have failed, as the development was no longer financially feasible for the vendor, resulting in receivers being appointed. If the deposits that purchasers have paid towards these properties have been held by a stakeholder, then the deposits will be protected should the development not proceed, as the agreement requires the deposit to be held by the stakeholder until settlement takes place. This essentially restricts the vendor’s ability to utilise the deposit amounts to fund other areas of the development and prevents a purchaser from ending up at the bottom of a long line of creditors.

When entering into an off-plan contract it is extremely important for the purchaser to obtain advice on the treatment of the deposit under the agreement before the purchaser confirms the contract. For obvious reasons, the deposit should be held by the stakeholder, usually in the vendor’s solicitor’s trust account until settlement and should be returned to the purchaser if the development does not proceed, otherwise released to the party so entitled to it. Care should be taken in preparing stakeholder provisions to ensure protection for both parties on the treatment of deposits.

We advise both vendor and purchaser clients on the pitfalls of off-plan development contracts. If you are intending to purchase a property in an off-plan development, or are developing and selling as such and require a robust and marketable contract that offers the best options for all parties involved please contact the lawyer at Farry Law who normally advises you, or alternatively contact:

Rula Alemdar
ralemdar@farry.co.nz
09 353 6675

The information contained in this publication is intended as a guide only. It does not constitute legal advice and should not be relied upon as such. Professional advice should be sought before applying any of the information to particular circumstances. While every reasonable care has been taken in the preparation of this publication, Farry Law does not accept liability for any errors it may contain.

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