The idea of a home and back yard is a New Zealand dream, and many developers and builders are looking to make this come true by offering house and land packages to prospective purchasers. The idea of moving into a brand-new home is attractive – there are no immediate renovation costs and all appliances and fixtures are brand new. That said, it is crucial that purchasers understand what they are getting into, as purchasing a house and land package is one of the more involved and complicated forms of purchasing a residential property. It is not uncommon for complications to arise.
An overall picture
As a starting point, house and land packages usually involve two contractual components, which are:
- A contract to purchase the land – As these are often entered into early in the development process and before titles are available, a settlement normally takes place shortly after legal title issues; and
- A contract to build which sets out the contractual arrangements between the builder and the future homeowner. The build process usually occurs after the title has issued and settlement of the land purchase takes place (although exceptions, such as turnkey arrangements, do exist).
Buying the Land
The developer usually prepares land purchase agreements. These agreements include provisions that enable the developer to carry out the development, such as creation and registration of easements, land covenants (which restrict what owners may do with the land once they own it), completion of development works, and prohibitions on objections to developer activities (to ensure that you cannot lodge an objection to works required to complete the development).
Purchasers tend to have less room (particularly with larger developments) to vary the standard terms of land purchase agreements, as developers usually want agreement terms to be consistent across the development. That said, developers will often be flexible with settlement dates where there is a good reason, i.e. in the case of Kiwisaver withdrawals or First Home Grants, which have relatively inflexible timeframes.
Thorough due diligence must be completed before the land purchase agreement becomes unconditional. This is because once the land purchase agreement is unconditional, there are generally very few ways to avoid cost blowouts under the building contract for certain types of works. For example, the builders could discover stability issues with the site during excavation which means the house will require engineered foundations – in this case, and there is little that the owner can do apart from absorb the cost. We, therefore, recommend that as part of due diligence, that site-specific geotech reports be obtained as part of section purchase due diligence. Such reports can be critical in confirming whether building on the section is practical or affordable.
We also recommend that any proposed land covenants should also be checked before going unconditional. Developers often register restrictive land covenants against the title that control what house size, design and building materials that can be constructed on the site. These land covenants are usually intended to maintain specific aesthetic standards within developments. Restrictive covenants can often contain ongoing obligations for land use, upkeep and maintenance, which can sometimes be quite onerous. If the land covenants are not dealt with as part of due diligence, this can sometimes require redesigns or amendments, which can result in delays and unforeseen expense.
Another important consideration is to ensure the contract contains a sunset date for the titles to issue. Sunset clauses provide a time limit for the completion of the development and the issuing of titles. If the development is not completed and titles issued within the specified timeframe, vendor and/or purchasers may be able to cancel the agreement (and the purchasers get their deposit back). It is critical to check who can use the sunset clause, as a sunset clause that a vendor can use creates a risk for the purchaser that where an unforeseen delay occurs, the developer could threaten to cancel the agreement unless the purchaser agrees to a purchase price increase. Although uncommon, this does occur.
The Building Contract and Construction
Building contracts are complex documents, and many are drafted in favour of the builder. Future homeowners are intimately involved in the construction of their new homes, but sometimes when this close involvement is mixed with the contractual complexity and the building process, misunderstandings and disputes can arise.
Disputes between contractors and future homeowners can be difficult and expensive to resolve, without taking into account the souring of the relationship between owner and builder (and if the disagreement arises at the start of the build, you could potentially be dealing with a poor relationship for the entire length of the build).
It is therefore critical that owners understand what obligations the building contract creates, and where potential problems can arise. Your solicitor can help by reviewing your particular contract and ensuring that either the appropriate changes to the agreement are made, or that you are aware of the risks (and so can mitigate them) of certain parts of the building contract.
Your Build
Confirmation from the builder should be obtained that any preliminary plans produced comply with land covenants (or that the plans have been approved by developers). If any site-specific geotech reports have been obtained during land purchase due diligence, these should be provided to the builder as well. This is because building contracts generally contain provisions which allow cost increases if unforeseen ground conditions require additional works.
In terms of the finished product, careful inspection of the plans and specifications attached to the building contract is also a must. These plans and specifications may differ from the brochures and advertising materials that have been provided to you. In fact, some advertising materials may just be artistic impressions, and not actual renderings of the building (the materials shown for cladding, interior stairwells or balconies may not yet be confirmed). Accordingly, we recommend close inspection of the plans and specifications to ensure that they are sufficiently detailed and that they include what you are expecting. We also recommend that it is clear whether the plans or specifications take precedence in the case of inconsistency – this will reduce the potential for disagreements to arise during the build.
Builders may be happy to provide you with further information regarding their plans and specifications or may also have showrooms showcasing the materials used in the build. In any case, it is worth clarifying any questions you may have with the builder or their agent.
It is also important to understand how variations and requested changes will be accommodated in the building contract. Most agreements allow you to request changes, however requests for variations can often result in unexpected cost blowouts, so it is better to ensure, insofar as you can, that everything you want or expect is included from the outset.
Assuming all goes well, the build should proceed smoothly, and there should be no cost blowouts. Legally, you are entitled to move in once the Code Compliance Certificate, which is confirmation from Council that the house has been constructed in accordance with the building consent, has issued, and the builder’s final invoice has been paid.
For more information
These are some of the many factors to consider when purchasing a house and land package. Our property lawyers, Sarah Mathews and Helen Nathan are happy to walk you through this process. Please call 07 348 20 30 or email helen.nathan@morrisonkent.com for more information.
