New build exemptions and benefits have supported the residential development market for the last few years. Even with the current economic climate—increasing construction costs and delays due to supply chain and workforce issues—buying off the plans is still a favourable option for home buyers and is supporting this burgeoning market.
But what happens when costs become too much, deadlines are pushed way back, and the money starts to dry up?
Why it matters: The slowing of construction invariably results in developers bearing the brunt of additional costs. Added to this, there is another factor for developers who have sold “off the plans” to consider section 225 of the Resource Management Act 1991 (section 225).
How it works: It’s standard practice to have an express sunset date in an agreement for a section or house being sold “off the plans.” An express sunset date will give one or both parties the right to cancel the agreement if they reach a certain date in the future and title to the property or settlement has not been achieved. Naturally, this sunset date is usually a long way out from the date the development is expected to be completed.
Yes, but: In addition to an express sunset date, there is also a cooling off period and statutory sunset date contained in section 225 which applies to the sale of all properties that do not yet have title or a survey plan approved. While these statutory conditions are referred to in the standard Auckland District Law Society Agreement for Sale and Purchase of Real Estate, they are often overlooked.
Cancellation of agreements
For developers the impact of these statutory conditions will become front and centre if delays in residential development continue.
Section 225 operates as a consumer protection mechanism so purchasers are not left bound to an agreement where the title to the property they have purchased will not be issued within a reasonable time. It provides a neat exit from an agreement avoiding the need for litigation. Being a consumer protection tool, section 225 cannot be contracted out of.
Section 225 can be broken down into two conditions:
The first condition provides the purchaser with a 14-day cooling off period after entering into the agreement.
The second condition provides the purchaser with a right to rescind the agreement if after two years after the date of granting of the resource consent or 1 year after the date of the agreement, whichever is later, the vendor has not made “reasonable progress” towards submitting a survey plan for approval or has not deposited the survey plan within a reasonable time after the date of its approval.
If a development has been delayed the key question for a developer becomes: what is “reasonable progress”? And there is no clear answer to this.
As noted in North Shore Developments Limited v McKay, an objective assessment is required, and each situation will need to be assessed against its facts. To date, the Courts have indicated that a “robust, broad-brush approach” is to be taken when assessing whether reasonable progress has been made and it is clear that the Courts will not allow a developer to simply sit on its hands.
Affecting the developer’s bottom line
As more robust developers look to take on developments from developers exiting the market, it’s important for those developers to take into consideration the possible effect of section 225 when assessing the purchase of a mid-project development.
Due diligence should include reviewing if there are any sale agreements in place for the development. These will all be conditional on the statutory sunset date and if reasonable progress has not been made by the original developer, those agreements could be cancelled. This would starkly change the commercial outcome of the deal.
Development delays are inevitable but manageable
Delays are a reality of residential development and will not in themselves result in “reasonable progress” not being achieved. However, choosing to delay a development and waiting for the next economic cycle, better interest rates or pursuing other projects may trigger the unintended consequences of this statutory condition.
In the climate we currently find ourselves in, section 225 is a condition that both developers and purchasers must not overlook.
Special thanks to Senior Associate Nadine Prutton for preparing this article. For more information about section 225, or for any other property-related advice, contact a member of our Property Law team.
Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.