What Happens to Buyers When a Developer Collapses Before Settlement?

Buying a property before it is finished can look very different from buying an established house.

You might have signed a contract, paid a deposit and been told when settlement is expected to happen. But until the property is completed and settlement takes place, a number of things still need to go right.

One of the biggest risks is what happens if the developer or builder runs into serious financial trouble before the project is finished.

If a developer becomes insolvent, goes into administration or is unable to complete the project, buyers can suddenly find themselves waiting for answers about a property they have already committed to buying.

The outcome will depend on the circumstances, the contract and the laws that apply to the property.

There are some important things buyers should understand before signing up to an unfinished development.

You have a contract, but the property may not be finished

Construction may still be underway, finishes may not have been installed, and services or common areas may not yet be complete.

If the developer collapses during this process, the project can be delayed or potentially stopped while administrators, liquidators, lenders and other parties work out what happens next.

The buyer may still have a contract, but that does not necessarily mean the property will be completed on the original timetable.

What happens to your deposit?

The answer depends on how the deposit was held, the terms of the contract and the protections that apply in the relevant state or territory.

In some transactions, deposits are held in trust or subject to particular statutory arrangements. In others, the circumstances can be more complicated, particularly when there are competing claims over project assets.

A buyer should not assume that paying a deposit means the money is automatically protected in every possible insolvency situation.

Before signing an off-the-plan contract, I would want to understand exactly where the deposit is going, who holds it and what happens to it if the project does not proceed.

That is something for your conveyancer or property lawyer to answer based on the actual contract.

The lender may also be involved

A developer’s financial problems can involve more than the developer and the buyer.

There may be banks or other lenders with security over the development.

If the developer has borrowed money to purchase the land or fund construction, those lenders may have rights that need to be dealt with if the developer becomes insolvent.

This is one reason a buyer should not assume that having a signed contract puts them ahead of every other party involved in the project.

The exact legal position can depend on the security arrangements, the contract, the stage of the development and the relevant laws.

It is not something I would try to work out from a property listing or a sales agent’s explanation.

What if the project is eventually completed?

A developer getting into financial trouble does not mean the project will never be finished.

Another developer may become involved. A builder may be replaced. The project may be restructured or sold.

But the process can take time, and that can create practical problems for a buyer.

You may have planned to move into the property by a certain date. You may have finance arranged, sold another property or be paying rent while waiting.

If the completion date moves significantly, your financial position can change as well.

Interest rates, borrowing capacity, rental costs and your own circumstances may all be different by the time the property is ready.

What if the finished property is different from what you expected?

If a project is delayed or changes hands, the final product may not progress exactly as originally expected.

Contracts will normally contain provisions dealing with variations, finishes, dates and other matters, but the exact rights of the buyer depend on the contract.

A brochure showing a particular design or a sales agent explaining what will be included is not a substitute for understanding what you have actually agreed to buy.

Before signing, I would want to know what happens if construction is delayed, specifications change or the developer needs to make variations to the project.

What happens to your finance?

A pre-approval or loan assessment made today does not mean the same finance will be available when the property eventually settles.

The lender may reassess the application. The property’s valuation could be different. Lending policies could change. The buyer’s income or existing debts could also change.

This can become important if the buyer has committed to the property at a price agreed several years earlier.

By settlement, they still need to be able to obtain the required finance.

Look at who is behind the project

When assessing an off-the-plan property, buyers often concentrate on the property itself.

They look at the floor plan, location, expected rental income, finishes and purchase price.

But I would also want to understand who is actually behind the project.

• How long have they been operating?
• What other projects have they completed?
• Who is the builder?
• Is construction already underway?
• Are there known delays?
• What is the project’s current stage?

None of these questions can guarantee that a project will be completed successfully.

But they can help a buyer understand who they are relying on to deliver the property.

Off-the-plan does not automatically mean bad

A buyer may want a new property, prefer a particular location or like the opportunity to purchase before construction is complete.

The issue is understanding the additional risks that come with buying something that does not yet exist in finished form.

An established property allows you to inspect the actual building, understand its condition and see the surrounding area as it currently exists.

An unfinished development requires you to assess both the property and the people responsible for delivering it.

What I would look at before signing

If I were considering buying into an unfinished development, I would want to understand:

• Who owns the development and who is building it?
• What is the developer’s track record?
• Where is the deposit held?
• What happens if construction is delayed?
• What happens if the developer becomes insolvent?
• What protections apply to the deposit?
• What does the contract say about variations and settlement dates?
• What happens if the project is not completed?
• Could I still obtain finance if settlement was significantly delayed?
• What are my rights if the final property differs from what was originally promised?

I would also have the contract reviewed by an experienced property lawyer or conveyancer before signing.

The sales agent’s job is to sell the property. Your lawyer’s job is to help you understand the contract you are actually signing.

Final word

Buying a property before it is completed can work for some buyers, but it requires more than looking at the floor plan and expected completion date.

You need to understand who is behind the project, how your deposit is protected, what the contract says and what could happen if construction is delayed or the developer runs into financial trouble.

With an unfinished development, you are also relying on someone else to deliver it; this is a risk that should be considered before committing.