Buying off-the-plan? Let the developer choose your lawyer!

AccomNews Tuesday, December 18, 2012

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I guess I should not have been surprised that protecting our clients against ridiculously uncommercial off-the-plan deals should have put us offside with a developer.

It was though, somewhat of a shock, when the developer told the selling agents, because we had dared to question more than once the developer’s blatantly absurd pricing structure, that the developer will not deal with buyers using our firm!

The well known developer tries to sell the management rights to unsuspecting buyers on the basis of a flawed formula under which the less units that are in the letting pool, the higher multiplier the buyer pays for the actual income. In one case the total purchase price was based on a multiplier of 3.8 which, although a number at the higher end of the range, nevertheless one acceptable to the proposed buyer. However the developer required that with the clawback for units not in the letting pool, a multiplier of only 2.9 would be allowed.

The impact of this was at least three-fold:

Although the buyer had to pay for letting appointments (if the maximum number were in the pool) at a multiplier of 3.8 or around $6500 each, if there were less than the maximum, the buyer would only receive a clawback/reduction of $5000, a multiplier of just 2.9
The less the number of units in the letting pool, the greater the problem and the greater the effective multiplier the buyer was paying for the actual income (when if anything it should be the opposite), to the point where if there were minimal numbers in the pool the buyer would have paid a multiplier of over 4.7 on caretaking remuneration;
The buyer in that situation would have bought a management rights business off-the-plan that could never be sold at the price paid for it.

This scenario is one where, if the number of units in the letting pool falls below the number the price is based on, the buyer takes on a massive risk and the developer almost none.

The same developer tried this trick on other clients and after advice from us and our clients’ banks, which quite understandably would not fund such an uncommercial transaction, our clients withdrew when the developer refused to negotiate a fair and commercial contract. That prompted the developer to issue a directive that they would not deal with clients of ours again, no doubt hoping that any future buyers of their off-the-plan rights would use a lawyer inexperienced in off-the-plan transactions (or management rights generally) or one not willing to challenge the developer.

These experiences once again highlight for me the dangers of poorly advised people buying management rights off-the-plan as there are a small number of developers who have no interest in the fairness of the transaction from the buyer’s perspective. It also highlights why it is critical that anyone buying off-the-plan should obtain and follow sound legal advice from a lawyer who has nothing but their clients’ interests at heart.

A very small number of selling agents adopt a similar attitude to lawyers who look after their clients’ interests ahead of the interests of the agent or the developer. Thankfully though most agents care more about the buyers and the industry and are happy to have buyers represented by a law firm like us – many also realise that encouraging buyers to do so actually reinforces the agent’s own credibility.

It was reassuring to recently act for a new client in an off-the-plan purchase who, like so many clients referred to us, said that almost all those in the industry to whom he spoke recommended us. When the agent suggested he should not use us, it made him all the more determined to do so – and he was thankful he did. Like many of our off-the-plan buyers he benefited from using a genuinely independent law firm with specialist off-the-plan experience, a sophisticated, comprehensive checklist of what to look out for and how to structure the transaction and unafraid to challenge the developer.