For anyone planning to buy off-the-plan property in Australia, it is essential to weigh the pros and cons of an off-the-plan purchase, and to pay attention to the clauses and considerations around the 5% tolerance on floor area. This article walks through the advantages and disadvantages of buying off-the-plan property in Australia, answering common questions and helping you avoid the pitfalls of off-the-plan purchases.

What is an off-the-plan purchase?

Off-the-plan property refers to a property that is purchased before it has been built. In most cases, at the time of purchase the buyer may only be able to see some preliminary earthworks. While there are benefits to buying off-the-plan, these advantages must be carefully weighed against the potential risks.

Buying off-the-plan: only a 10% deposit required at contract signing

The main advantage of buying off-the-plan is that the buyer can lock in the price before the property is completed and agree on the purchase price upfront. At the time of signing the contract, the buyer generally only needs to pay a small deposit, namely a 10% deposit, and arranges the loan once the property is completed. This also helps ease the buyer’s cash-flow pressure.

Because of the uncertainty of the property market and possible future fluctuations, if property prices rise significantly between the time the buyer purchases off-the-plan and the developer completes construction, the property value at the time of purchase may be lower than the value once the property is completed, allowing the buyer to enjoy capital growth.

Risks of buying off-the-plan

1. Differences from expectations

Buyers may need to accept some uncertainty when purchasing off-the-plan. For example, at the time of purchase the buyer can only know the property’s location and the developer’s plans, but cannot foresee exactly what the final property will look like once built, and certainly cannot inspect the property in person or examine the internal layout in the way that is possible when buying an existing home.

As a result, buyers may need to be mentally prepared for the finished property to differ from what they had imagined. Most property contracts also allow the seller to make minor changes to the property without needing to consult the buyer.

2. The 5% floor area tolerance

One of the risks of buying off-the-plan is that buyers need to be aware of the 5% tolerance on floor area. Off-the-plan property contracts in Australia typically include a clause allowing the final floor area of the property to differ from the area shown in the pre-contract provided to the buyer by up to 5%.

By signing this contract, the buyer agrees to accept changes in the final floor area of the property and cannot withdraw from the contract or seek compensation from the developer due to an increase or decrease in the floor area.

Many buyers accept this clause when signing the contract, but special circumstances can arise. For example, some buyers have found on settlement that the 5% reduction in floor area affected the structure of the home, significantly reducing their living experience, or affecting both the rental price and the value of the property itself. As a result, the buyer may wish to terminate the contract, giving rise to contractual disputes and similar issues.

Although the buyer initially signed the contract and agreed to the clause that “allows the final floor area of the property to differ from the area shown in the pre-contract provided to the buyer by up to 5%”, exceptional outcomes can still apply depending on the specific circumstances. For example, in one off-the-plan purchase case, after the property was completed the buyer discovered that the floor area had been reduced by 4.5%. Although this was under 5%, the reduced area meant that part of the living space could not be used and the corresponding lighting was also reduced, affecting the natural light in the bedroom. The court therefore held that this seriously affected the buyer’s use and enjoyment of the property and its value, and ultimately ruled that the buyer was entitled to terminate the contract.

This case is also a cautionary reminder to sellers, i.e. developers: even where the reduction in floor area is under 5%, failing to take into account the practical impact of the reduction on the buyer can lead to contractual disputes and even termination by the buyer, which in turn harms the seller’s interests. Sellers should therefore plan ahead before a property goes to market, taking into account the risk of the buyer rescinding the contract and the steps that can be taken to respond.

3. Uncertain settlement dates

Due to construction works or approval processes, the settlement date of a property may be delayed, making the settlement date uncertain. During this uncertain and often long waiting period, if the buyer’s personal circumstances change — for example, their place of work changes, or they can no longer live in their current home, and their personal finances do not allow them to find alternative accommodation while the property they purchased remains incomplete — the buyer may be placed in an awkward position. Buyers should therefore understand the possibility of construction delays when buying off-the-plan and have a plan in place to deal with them.

4. Complexity of off-the-plan contracts

Off-the-plan contracts are often complex and lengthy, containing many clauses that can be complicated for the buyer. If the buyer ultimately wishes to on-sell the off-the-plan property, relatively high legal fees will need to be paid in connection with the transfer.

5. Uncertainty in the property market

During the long and uncertain period between contract exchange and settlement, a fall in the property’s value will disadvantage the buyer. Lenders will rely on the valuation at the time of settlement, and if the valuation is lower than the value at contract exchange, the lender will provide less funding and the buyer will need to contribute more of their own funds.

Final thoughts

Buying off-the-plan has both benefits and drawbacks. The advantage is that only a 10% deposit is required, easing the buyer’s cash-flow pressure when purchasing off-the-plan. The disadvantages include the possibility that the final property differs from the developer’s plans and that construction may be delayed. In addition, because off-the-plan contracts are complex and market conditions change, we recommend that buyers seek advice from a specialist lawyer before purchasing off-the-plan. A property lawyer will help review and clearly explain the various clauses of the off-the-plan sale contract, minimising your risks under the contract. You can view our property legal services to learn more about buying property in Australia. Buyers should also stay actively involved throughout the off-the-plan purchase process, keeping up to date with any potential issues that may arise and responding to them promptly.