Property experts warn about new-build contract trouble

Property lawyer outlines factors causing the issue

Property experts warn about new-build contract trouble

Real estate agents, mortgage advisers, and lawyers are warning Kiwis about trouble with off-the-plan developments across New Zealand, leaving many clients without a home despite already paying for it.

Jeremy Stronach, for example, claimed via Stuff that he already signed a fixed-price contract with developer F&P Dream Homes last year for a $699,000 three-bedroom townhouse in Auckland.

However, last month, the developer told Stronach and his partner that it could not finish the home by the original settlement date of December 20, 2021. Instead, it informed the couple that it moved the settlement date to October 2022.

If the delay is not enough to leave the couple disappointed, the developer also informed Stronach and his partner that they have to agree to a price increase of $150,000 by December 10 for the sale to continue. 

Real estate agents, mortgage advisers, and lawyers shared that they have received many reports of such cases.

According to Auckland property lawyer Joanna Pidgeon, some developers claim that a pre-sold development cannot be completed at the sale price due to increased costs. Therefore, they will negotiate price increases to stop them from cancelling under the feasibility clause.

However, Pidgeon claimed that some developers delay work to try using sunset clauses rather than working quickly to complete their project.

“Sometimes, even when a sunset clause is for a purchaser only, developers are still trying to negotiate price uplift. That is because some contracts can’t be completed at the cost stated and developers’ allege possible insolvency if forced to complete,” Pidgeon said, as reported by Stuff.

Read more: Mortgage brokers warn about effect of tougher lending laws on buyers

Pidgeon pointed to several factors consuming developers’ margins while property values continue to soar, pushing developers to delay their projects:

  • COVID-19 restrictions have pushed up completion costs;
  • Supply chain issues have caused delays;
  • Shortages have increased labour and material costs; and
  • There are delays at council and with title issuance from Linz.

“This means developers carry the cost risks while purchasers receive the uplift in value. Some developers are looking to claw back some costs either by increasing prices or by seeking to cancel and then resell to pick up the value uplift in properties sold off the plan,” Pidgeon said.

Master Builders Association chief executive David Kelly said the red-hot housing market these past few months pushed many people to buy a property under pressure. Therefore, many most likely did not seek legal advice on the contracts they signed.

“As a result, when some clauses are employed, it can come as a surprise. But a buyer can still ask the builder or developer to justify any cost escalation,” Kelly said, as reported by Stuff.

“Consumers have rights. A builder or developer can’t just say the price has gone up by 20% and not provide solid evidence of why and how. A buyer can ask for that evidence, and they can check to see if comparable builds have had the same level of increase.”

Another issue that experts warned buyers about was the impact of Consumer Finance Law changes on some buyers.

Auckland mortgage adviser Karen Tatterson shared via Stuff that some borrowers already paid a deposit to developers after their banks approved their loans. However, because these approvals have expiry dates, some borrowers have to reapply and risk losing their deposits if they get turned down by their banks if they do not qualify under the new policies anymore.