Phuket Post :: Article :: Plan out your construction contract when buying off-plan

Sales in the off-the-plan market will often involve a construction contract under which the buyer or future lessee is expected to become the employer of the developer who is then obliged to carry out the work. Sometimes, an off-plan sale will be structured as a sale and purchase and in that instance the seller is simply obliged to deliver the unit as agreed.

In a construction contract the employer�s obligations often require more attention than in a straightforward sales scenario. A buyer may be unaware of this distinction and will simply envisage receiving their villa or apartment on the completion date.

Additionally, many buyers will not be experienced in the construction industry, so will not be privy to what a rounded and clear construction contract should contain.

The focus of the first draft of a construction contract will often be on the payments and what the penalties are for such payments not being made by the buyer, as the developer will not want to reach a certain stage in construction only to have to slow down due to buyer�s default, impacting on the rest of the development.

From a buyer�s perspective, a contract should contain at the very least a number of protections and provisions as standard and ideally additional protections if the buyer is one of the first buyer�s in a new development. Here is just a selection:

When is the Real Completion Date?

Inevitably, a developer would seek to move the completion date for reasons beyond its control, which of course means that these �reasons� should be clearly defined. The use of the words �practical� completion are often a sign that real completion could be removed from the advertised completion date.

It is preferable for a developer to provide a liberal completion date, building in additional time, and limit �extension� provisions, so that the buyer has an honest assessment of completion.

What will be completed at the Completion Date?

A project will be advertised as comprising various facilities, which may include a clubhouse, communal swimming pool, spa facility, sports and leisure facilities and technology-based services (ADSL, Wi-Fi etc).

If payments are tied to completion and the final payment is of a reasonable amount, there is an incentive for a developer to finish and complete common areas as contemporaneously as possible with the units.

Additionally, if completion is defined in a contract as comprising delivery of the unit and proper use of completed common facilities, the end position for a buyer will be clearer.

There may still be provision for a buyer to take possession early if he wishes to do so, but this shouldn�t be mandatory as possession will often trigger common area fees in relation to common areas which are not complete. A temporary management agreement could cover this situation dealing with escalation of provision of services.

What are my choices in the event there are defects?

The length of a defects period may be stipulated by Thai law or, in the instance of leasehold sale, it may not be. Therefore there will be commercial negotiation on its length that will also depend on the sub-contractor�s preparedness to guarantee its work to the developer.

The practical issues of a defects guarantee are often overlooked. A developer may well be obliged to remedy a defect � but what happens if the developer is working on Phase III and is under resourced to repair defects on Phase II, so is unacceptably slow in dealing with the repair.

A provision in the contract stipulating that failure to remedy repairs will permit a buyer to appoint another contractor to complete and to bill the developer is one solution. This could be strengthened by the addition of an administration fee payable to the buyer for having to complete work it has paid for in terms of service provision.

There may also be penalties for late �snagging� or �remedial� work. Such provisions will not be popular with developers who, in some circumstances, may have good commercial reasons for refusing a particular point.

Am I responsible for the behaviour of the contractor as an owner?

There are contracts which permit the registration of a lease to a purchaser as a lessee earlier than or before construction commences. At that point, who becomes responsible for the insurance of the works in the event of damage or destruction?

Should the lessee bear responsibility for the negligence of sub-contractors even though he is only a layperson with no project management experience? If a construction contract is supposed to correspond with a leasehold interest, the two documents should fi t together and work with the envisaged off-the-plan structure at the forefront of the draftsperson�s mind.

These are just four points out of many relating to construction contracts. The construction industry is a separate practice of law from acquisition and disposal of real estate in most legal jurisdictions, which explains why construction contracts need to be analysed properly to ensure they are balanced and fair to both parties. Buyers should be aware that a construction contract is a complex instrument.

If oversimplified it could result in serious ambiguity and risk in relation to delivery, quality and expectations of remedies available for default. Conversely, buyers will not necessarily understand the pressures and constraints that prevent a developer from making certain contractual commitments.

As the off-plan market continues to evolve, there will be instances where tensions result in an improvement of disclosure and understanding at the point of sale and commitment by a buyer.

Desmond Hughes is a partner in Belmont Limcharoen.
Tel: +66 (0) 76 342 882-4
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desmond@belmontlimcharoen.com
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