COVID-19 – A little bit of positivity goes a long way
OPINION:
Us lawyers, whether we like it or not, are professionally trained pessimists. We are risk-averse by nature and are taught to consider the worst-case scenarios and to plan for them in a contract to avoid them becoming a dispute. I doubt even the best legal minds in the country if locked in a room would have considered and planned for something like the COVID-19 crisis and its impacts. But is the outlook really as bleak as some are saying and should off-the-plan purchasers be worried?
What is happening?
Rewind as recent as 4 months ago and many industry commentators were spruiking the benefits and advantages of off-the-plan purchases, with little regard for the negatives that they outweighed. They can be forgiven though because in a booming market an off-the-plan purchase can be a very wise investment; entering the market early with a long term settlement can allow you to benefit from the capital gain while keeping cash flow open. Not to mention the stamp duty savings available for most purchasers.
Enter the curve-ball, COVID-19. The crisis has created many challenges in the property market on a scale unseen since the great depression. Development permits and construction are being delayed, landlords and tenants are negotiating rental abatements and mum-and-dad sellers are struggling to find willing buyers as earning capacities are diminished and unemployment jumps to concerning highs.
We still find ourselves (for now) in the largely unknown stage – even the Government and the banks are struggling to predict the longevity of COVID-19. It is no surprise therefore that many developers are going silent, leaving purchasers to scramble for updates on their projects. Unfortunately, there is not much protection in most contracts for that behaviour and purchasers cannot force regular updates, especially when there may not be any updates to give! They may need to simply ‘wait and see’. There is always one certainty though; that it is in the best interests of a developer (more so than a purchaser) to finish a project quickly!
So how bad will it get?
Pundits are suggesting property prices in major cities around Australia could fall by as much as 20% over the next year, and even by 30% if strict lockdown measures remain in place for the next 6 months. These are not statistics that I necessarily agree with and I am certainly no expert but I can speak from experience and from sentiment amongst my developer clients.
But what if this fiction does become fact and prices plummet?
Yes, the biggest risk of an off-the-plan purchase is and always will be market volatility. A purchasers’ worst-case scenario? The property bubble bursts, COVID somehow kills demand without impacting supply; 12 months after you signed the contract on your $700,000 unit your bank is telling you it is only worth $600,000. The developer's lawyers are calling for settlement but you can’t get the loan to buy it! You may lose your deposit and be at risk of a further law suit if the vendors suffer damages. (Note: If this is you – call your lawyer as there is always hope).
The other previous risk of developers delaying projects beyond sunset dates intentionally to terminate and exploit buyers has certainly been blocked since the updates to the Sale of Land Act from 23 August 2018. Yes, there is a chance that developers may seek to terminate if COVID-19 interruptions caused the project to blow out beyond the sunset date, however that would need to be argued before a Supreme Court Judge so reason, and justice, would ultimately prevail.
The silver lining…
COVID-19 has been different to the usual peaks and troughs of the property market as it has hit immediately on a global scale and is thus affecting all of us financially (apart from maybe toilet paper and home-gym suppliers). It forced the Government to step in with a freeze on evictions of residential and commercial leases, but all the while, most landlords were thinking ‘What is the point of kicking my tenant out if there is nobody else who could even take their place?” Although no such freeze has been legislated for rescission of off-the-plan contracts, I can confidently say that the majority of developers are thinking the same thing and would rather negotiate a reasonable settlement extension than lose a contracted buyer.
In addition, the banks have taken advantage of monetary policy to offer some of the lowest interest rate loans our country has ever seen; meaning loan repayments and serviceability is easier for most even if the valuations do start to come in slightly under. This is an enormous positive not just for purchasers, but for developers themselves securing construction finance.
…and the light at the end of the tunnel
In my opinion, our response as a country to this pandemic was just as surprising as the pandemic itself. An entire nation raised on sunshine and the outdoors has banded together and locked themselves inside with nothing but toilet paper and beer for weeks on end. We are all spending more time with our children, learning to work more efficiently, caring for our elderly and remembering what traffic used to be like 30 years ago. The ‘evil’ banks have become our new best friend and landlords are actually listening to their tenants without being forced into a courtroom. With one eye closed, the world actually looks like a better place.
We hope of course that we have already survived the worst of this pandemic and that the number of deaths in Australia will be a small percentage of what everyone had feared it would be. The finish line may still look blurry and hard to make out in the distance for now. But I have no doubt that if this community response of empathy, sensibility and reason continues at all levels (from developers, individuals, financiers and Government) the economic aftermath and downturn in our property market will also be a small percentage of the chaos some have been predicting. If we pick up where we left off before COVID-19 struck, off-the-plan buyers should be all smiles!
I will gladly drink my beer behind a locked door for now if it means we all have new doors to open at the end of 2020. So hang in there, work together, help out where you can and more importantly, don’t be afraid to seek help when you need it.
