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08 March 2023

Buying off the plans - The “secret" right to cancel

The real estate property market is struggling.

In the current economic climate, some developers and purchasers may regret the terms of their sales and purchase of off-the-plan dwellings (i.e. settlement requires a new title to issue for the property) because the:

(a)   Slowing of construction and increased prices invariably results in developers’ losing profits; and

(b)  Reducing property values and higher home loan interest rates, results in purchasers no longer wanting to (or being unable to) complete their purchases.

However in this case, developers and purchasers should consider section 225 of the Resource Management Act 1991 (section 225).

Sunset clauses

It is general practice for many agreements for dwellings sold off the plans to include an express sunset clause. An express sunset date will normally give one or both parties the right to cancel the agreement if the title to the property or settlement has not been achieved by a certain date.   

However, if the sunset clause is not drafted to give the developer a right to cancel, as is often the case, then section 225 may help.

Section 225(1)

Section 225(1) makes it a condition of every agreement which requires a new title to settle, that the survey plan to create the new title is deposited.  No time is specified in section 225(1) so as a matter of law, the condition period is what is a reasonable time.  If an agreement has no sunset clause or it does, but the developer does not have a right to cancel, a developer may still be able to cancel under section 225(1).

Purchaser’s right to cancel

Section 225 also expressly assists purchasers.  Section 225(2):

1. Provides the purchaser with a 14-day cooling off period after entering into the agreement for an “off-the-plan dwelling”.  This means a purchaser can cancel the agreement in the 14 day period even if there is no finance condition etc.  A purchaser’s lawyer should point this out on receiving the agreement.

2. A purchaser can cancel an agreement if after 2 years after the date of granting of the resource consent for the subdivision or 1 year after the date of the agreement, whichever is later, if the vendor has not made “reasonable progress” towards submitting a survey plan.

 What is “reasonable progress”?

Reasonable progress is an objective assessment, but the Courts will take “robust, broad-brush approach”. A developer may not simply sit on their hands. If a purchaser’s agreement does not have a sunset clause, or if the sunset date is unduly long, a purchaser may still be able to cancel.

As a consumer protection tool, section 225 cannot be contracted out. Therefore, section 225 is a condition that both developers and purchasers must not overlook.

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