What happens when developers collapse?


The current downturn in the property market across Australia is seeing an increased risk of property developments not being completed, which is evidenced by the collapse of several high profile developers over the past 12 months.

When a developer is unable to complete a project, there is a direct impact on buyers that have committed to purchasing a property off the plan, in particular, the deposit that has been paid to secure the property. In most cases, your deposit held in trust by a third party and will be returned to you if the project cannot be completed. However, this is not the case if you have unwittingly agreed to release your deposit to the developer, often in the form of a loan and this makes the recovery of the deposit more difficult.

What options are available if the developer is unable to complete the project?

Recovery of your Deposit

The standard course of dealing when purchasing ‘Off the Plan’ properties is for the deposit to be invested with a third party. In this instance, the Vendor’s Solicitor will ask for the Purchaser’s Tax File Numbers and provide a Trust Account Receipt confirming the account details and funds held. The deposit will usually be invested in an interest-bearing account. If the Developer were to go into liquidation, the deposit will then be recoverable from the money held by the Vendor’s solicitor (potentially together with interest accrued).

 You should always check your Contract, or request your legal representative to check for you, to identify where the deposit is to be held. While it is unlikely that the contract won’t specify that the deposit is to be held by the Vendor’s solicitor, there is no legislative barrier to prevent the deposit being released to the Vendor on Contract exchange. You should ensure that the deposit must be held by the Vendor’s solicitor, otherwise, the Vendor may be able to access the deposit immediately after the exchange of contracts. This is risky because if they were to go into liquidation the deposit would be difficult to recover. Therefore ensure your legal representative requests the removal of a ‘Deposit Release Clause’  (or the equivalent) to protect your deposit.

Recovery of Stamp Duty

When purchasing in NSW, stamp duty is paid to Revenue NSW. Should your contract be rescinded or terminated due to default, the process to recover your stamp duty should be reasonably straightforward. Revenue NSW will require you to complete a form, together with evidence of your terminated contract and account details so the stamp duty can be refunded. This process has a turn around of about 10 business days (time frame may vary, and you should contact Revenue NSW for more accurate information) once you have provided Revenue NSW with all required paperwork.

Recovery of Additional Costs

Should you wish to recover additional costs, such as progress payments, from a developer in liquidation the terms of the Contract would outline the procedure. While this procedure may vary from Contract to Contract, typically a notice of default would need to be issued by your legal representative to the developer’s liquidator. This is uncommon in a purchase for land, as usually payment is only provided once completion has occurred.

It is prudent practice to ensure your legal representative has reviewed all your contract documentation before locking you into a purchase. 

As with most investment assets, purchasing off the plan property does come with its own set of risks however researching your options and ensuring your deposit is held in trust will ensure that your deposit remains safe and can be returned to you should a developer go bankrupt. If you are concerned about the safety of your deposit, speak to a conveyancer about your options.

If purchasing off the plan is appealing to you, please make sure you seek professional advice from a real estate professional that can work with your adviser to consider how it fits into your situation and goals before you commit to the purchase.

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General Advice Warning

We do not guarantee that the information in these articles is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person. 

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