From a legal and a practical point of view, the purchase of a new house - or the purchase of a house in the course of construction, or the purchase of a house "off the plans" - is very different from the purchase of a second-hand house.
The contract will involve the purchase of a site together with an agreement between the purchaser and the development company to build the house according to certain plans and specifications. Timelines, stamp duty issues, loan offers, payment arrangements and legal documentation usually tend to be a bit more complicated with new houses than those involved in the purchase of second-hand houses.
This blog post sets out some of the issues involved. It tells you some of the things you, as a purchaser, need to be aware of and about which your solicitor should be able to advise you.
The contract will involve the purchase of a site together with an agreement between the purchaser and the development company to build the house according to certain plans and specifications. Timelines, stamp duty issues, loan offers, payment arrangements and legal documentation usually tend to be a bit more complicated with new houses than those involved in the purchase of second-hand houses.
This blog post sets out some of the issues involved. It tells you some of the things you, as a purchaser, need to be aware of and about which your solicitor should be able to advise you.
Building Agreement and Contract for Sale
These are two documents usually combined into one. The first document is the agreement between you and the builder to build the house in accordance with the plans and specifications. It shows what the builder is to do and how you are to pay him for it. The second document is the agreement for the transfer of the site to you. It deals with technical matters such as the legal title to be provided.
Deed of Transfer/Conveyance
The solicitor for the builder will compile a book for the purchaser's solicitor containing most of the important documentation in connection with the development, called the "Booklet of Title". Within this booklet should be a draft of the Deed of Transfer/Conveyance. This deed will transfer the ownership of the site to you. It will be subject to various exceptions, easements, reservations and covenants. These easements and covenants are for the use and benefit of other properties in the development which properties should likewise be subject to similar easements and covenants for the use and benefit of your property.
Site plan and specifications
The specification should set out in exact detail what materials, fittings and standards the builder is going to use in the construction of your house. The house plan should set out the proposed floor plan and all other relevant details.
Sometimes, the plans and specifications provided can be vague or inaccurate. You should examine the plans and compare them with the show house (if there is one) in order to ensure that they accurately represent what you believe you are buying. Before you proceed with the purchase, you should seek advice from a qualified architect/engineer in relation to the plans and specifications and satisfy yourself that they are in order and whether you have any issues or further requirements.
After construction works are complete, your architect/engineer will be able to verify that the plans and specifications have been adhered to. It is also advisable that your architect/engineer should attend on site on a number of occasions during construction of the house to ensure that all is proceeding in compliance with the plans and specifications. If you intend making any alterations to the original plans you should ensure that the necessary planning permission is obtained for any proposed development.
Planning Permission and Building Regulations
At the conclusion of the build, the purchaser's solicitor will require a certificate of compliance from the builder's architect confirming that all conditions in planning permissions have been complied with, together with a certified copy of the architect’s certificate of compliance with the Building Regulations and proof it has been registered with the Building Control Authority. The solicitor for the builder should furnish your solicitor with drafts of the necessary documents with the Booklet of Title. This should also contain a copy or certified copy of the Commencement Notice and confirmation that it was registered by the Building Control Authority.
You should read through the planning permission carefully and address any questions that you may have to your architect/engineer. In addition, you or your architect should attend the offices of the relevant local authority and satisfy yourself that there is no major road proposal or other proposed developments in close proximity to the estate and which might have a bearing on whether you wish to proceed with the purchase.
Deposit
In the case of a new house build it is normal for the purchaser to pay a booking deposit to the builder or his/her auctioneer in order to secure the house. When executing the contract, the balance deposit (usually to make up 10 per cent of the total purchase price) becomes payable by the purchaser. The balance of the purchase money will be payable on completion. Subject to what arrangements might be made if you are availing of the Help-to-Buy Scheme, your solicitor will forward the balance deposit (if any is due) to the builder's solicitors. Usually, contracts for a new build contain a provision that the builder’s solicitor will pay the deposit directly over to the builder rather than holding it as stakeholder. In such circumstances, it is important for the purchaser to be aware that in the event of the builder going into liquidation or running into financial difficulties, they could lose all money paid with no guarantee of recovery. Moreover, in the event that the builder holds the site subject to a mortgage (which is nearly always the case), the bank would have a prior claim should the builder go into liquidation prior to the completion of the sale.
If the builder is a member of HomeBond (see below), there is some measure of protection for deposits in the event of fraud or insolvency of the builder up to a maximum of €30,000 or 10% of the purchase price (whichever is the lesser) and a limit of €1,000,000 in relation to claims against a single developer.
HomeBond
From the purchaser's point of view, it is important to ensure that the builder is registered with HomeBond. This is a form of insurance that provides the purchaser with protections for structural defects as well as cover for the deposit and stage payments, subject to certain limitations and exclusions. Your solicitors should furnish you with the HomeBond documentation when they receive it from the builder’s solicitor and you should review it carefully and understand what it covers, what it does not cover and what the limits of the cover are.
Briefly, HomeBond provides the following:
Loan Offer
Once you sign a contract to purchase the property, you commit yourself to complete the purchase and pay the purchase price.
Accordingly, prior to entering into the contract, you should ensure that you have a satisfactory letter of loan offer from your lending institution. You should also ensure that you are in a position to comply with all conditions of any loan offer as your lender will only issue funds once all such conditions have been met. Obviously, in the event of any delay in complying with such conditions, this would impact on the release of funds thereby delaying the transaction and leaving you open to interest charges.
Loan approval only lasts for a fixed period, typically 6 months, whereas a new build usually takes much longer, up to 18 months or even 2 years. Sometimes, between getting loan approval and completing the purchase, buyers run into difficulty and end up being unable to draw down the expected loan. Difficulties can arise for any number of reasons: the buyers might, for example, suffer a fall in income, or run into a problem getting life insurance, or the bank’s valuation of the completed property might come in at less than the purchase price. If you cannot comply with the loan conditions and, as a result, you become unable to complete the purchase, you will lose your deposit and be subject to a legal action from the builder for losses sustained.
In order to minimize the likelihood of such a situation occurring, you should instruct your solicitor to insist upon the insertion of a “subject to loan clause” in the contract. Such a clause gives protection to you in the event that, in between signing contracts and completing of the purchase, your loan approval is withdrawn or made subject to conditions with which you cannot comply.
Services and Common Areas
It should be a provision of the Building Agreement that the builder will provide what is called an “Indemnity under Seal” whereby he undertakes to ensure that all the estate services and common areas – roads, sewers, pathways, communal grass areas, public lighting and so on – will be provided for up to a standard acceptable to the local authority so that the local authority will take them in charge following the completion of the estate. Usually, the local authority will make it a requirement in the planning permission that the builder enter into a financial bond to guarantee satisfactory completion of the common areas and services prior to their being taken in charge.
You should be aware that the contract will likely include a condition that you cannot delay the closing of the sale because the common areas – kerbs, pathways, roads, grass margins and so on – are not yet complete.
Price Variation
The standard Building Agreement often includes a Price Variation Clause which states the price can change due to any increase or decrease in the costs to the builder of materials. It also often includes a clause that if the VAT rate (charged on the price payable for the building work) changes then the total purchase price will likewise be adjusted. Given that a fixed price is usually agreed between the purchaser and the auctioneer, we generally advise that the purchaser should resist the inclusion of the first part of the price variation clause. Usually, the VAT adjustment clause will remain so purchasers should be aware that that the price can go up or down to that extent.
Stamp Duty
Stamp duty is usually charged on a transfer of a site at a rate of 7.5% of the value on the basis that a site is non-residential property. However, if you buy a site with a connected agreement to build residential property on it, the site is deemed to be residential property and stamp duty is charged at a rate of 1% on the consideration paid for the site plus the consideration paid for the construction works (exclusive of VAT). The building contract will need to specify the amount of the total consideration related to the purchase of the site and the amount (exclusive of VAT) related to the building works. Stamp duty will be paid by you at a rate of 1% on the total amount exclusive of the VAT.
Help To Buy Scheme
The Help to Buy (HTB) incentive helps first-time buyers of newly-built homes to buy a new house or apartment. It only applies to properties costing €500,000 or less. We are a registered solicitors’ firm approved by Revenue to act for applicants under the scheme.
Where you are relying on the Help to Buy scheme for the tax relief under the scheme to fund part of the deposit in the transaction (or all of the deposit under the enhanced scheme), the contract and building agreement should contain provisions concerning your application to Revenue and it being approved within an agreed period.
The developer should confirm in the contract that they are a qualifying contractor for the purposes of the scheme. Correspondingly, it will be necessary for you to confirm that you qualify under the scheme and that you are eligible for a refund of income tax in a sum no less than the sum needed to bring the deposit paid up to 10% of the purchase price. You will also need to agree to provide evidence that the Help to Buy claim has been validly submitted to include your claim number, access code, application number and any other information required by the qualifying contractor to verify your Help To Buy application.
A developer should not seek a 10% deposit from the purchaser in respect of whom they are also due to obtain part or all of deposit directly from Revenue under the scheme. Consequently, we advise purchasers to resist such terms if they are proposed. Whatever is agreed it is important that it be made clear in the contract.
You and the developer may agree in the contract that if your application under the scheme is unsuccessful, the contract will remain in being if you can top up within a set period of time the initial deposit to 10% of the purchase price or pay the shortfall on closing. If you do not so agree, the contract can provide for termination where you application is unsuccessful.
It is important to be aware of the clawback provisions in the HTB scheme, including the requirement that the house be bought by you within 2 years of the refund being paid to the contractor and that you live in the property for a minimum of 5 years. It is also important to note that if a clawback arises, you – and not the builder – will be responsible to make the repayment to Revenue. Accordingly, if the HTB payment is released to the builder as the deposit, the contract should contain a provision that, if the house is not built within 2 years, the builder will repay the amount to Revenue.
Completion
For completion to take place, the builder must serve a completion notice confirming the completion of the house in accordance with the building agreement. You will then have a specified period to attend on the site with your architect or engineer to inspect the property and carry out a list of minor defects called a “snag list”. This snag list is furnished to the builder and the defects should be remedied before completion takes place. If the builder disputes the defects and/or refuses to remedy certain matters, you may still be forced to close and would potentially be liable for interest if you delay or, if you continue to delay, the loss of your deposit. Disputes may be resolved afterwards by arbitration or as provided for in the contract. When your solicitor is happy that all the documentation is in order he or she will release the purchase money to the solicitor for the builder and the keys will then be released to you. Your solicitor will then stamp and register your deed and, if you have obtained a loan, will certify title to your lender.
These are two documents usually combined into one. The first document is the agreement between you and the builder to build the house in accordance with the plans and specifications. It shows what the builder is to do and how you are to pay him for it. The second document is the agreement for the transfer of the site to you. It deals with technical matters such as the legal title to be provided.
Deed of Transfer/Conveyance
The solicitor for the builder will compile a book for the purchaser's solicitor containing most of the important documentation in connection with the development, called the "Booklet of Title". Within this booklet should be a draft of the Deed of Transfer/Conveyance. This deed will transfer the ownership of the site to you. It will be subject to various exceptions, easements, reservations and covenants. These easements and covenants are for the use and benefit of other properties in the development which properties should likewise be subject to similar easements and covenants for the use and benefit of your property.
Site plan and specifications
The specification should set out in exact detail what materials, fittings and standards the builder is going to use in the construction of your house. The house plan should set out the proposed floor plan and all other relevant details.
Sometimes, the plans and specifications provided can be vague or inaccurate. You should examine the plans and compare them with the show house (if there is one) in order to ensure that they accurately represent what you believe you are buying. Before you proceed with the purchase, you should seek advice from a qualified architect/engineer in relation to the plans and specifications and satisfy yourself that they are in order and whether you have any issues or further requirements.
After construction works are complete, your architect/engineer will be able to verify that the plans and specifications have been adhered to. It is also advisable that your architect/engineer should attend on site on a number of occasions during construction of the house to ensure that all is proceeding in compliance with the plans and specifications. If you intend making any alterations to the original plans you should ensure that the necessary planning permission is obtained for any proposed development.
Planning Permission and Building Regulations
At the conclusion of the build, the purchaser's solicitor will require a certificate of compliance from the builder's architect confirming that all conditions in planning permissions have been complied with, together with a certified copy of the architect’s certificate of compliance with the Building Regulations and proof it has been registered with the Building Control Authority. The solicitor for the builder should furnish your solicitor with drafts of the necessary documents with the Booklet of Title. This should also contain a copy or certified copy of the Commencement Notice and confirmation that it was registered by the Building Control Authority.
You should read through the planning permission carefully and address any questions that you may have to your architect/engineer. In addition, you or your architect should attend the offices of the relevant local authority and satisfy yourself that there is no major road proposal or other proposed developments in close proximity to the estate and which might have a bearing on whether you wish to proceed with the purchase.
Deposit
In the case of a new house build it is normal for the purchaser to pay a booking deposit to the builder or his/her auctioneer in order to secure the house. When executing the contract, the balance deposit (usually to make up 10 per cent of the total purchase price) becomes payable by the purchaser. The balance of the purchase money will be payable on completion. Subject to what arrangements might be made if you are availing of the Help-to-Buy Scheme, your solicitor will forward the balance deposit (if any is due) to the builder's solicitors. Usually, contracts for a new build contain a provision that the builder’s solicitor will pay the deposit directly over to the builder rather than holding it as stakeholder. In such circumstances, it is important for the purchaser to be aware that in the event of the builder going into liquidation or running into financial difficulties, they could lose all money paid with no guarantee of recovery. Moreover, in the event that the builder holds the site subject to a mortgage (which is nearly always the case), the bank would have a prior claim should the builder go into liquidation prior to the completion of the sale.
If the builder is a member of HomeBond (see below), there is some measure of protection for deposits in the event of fraud or insolvency of the builder up to a maximum of €30,000 or 10% of the purchase price (whichever is the lesser) and a limit of €1,000,000 in relation to claims against a single developer.
HomeBond
From the purchaser's point of view, it is important to ensure that the builder is registered with HomeBond. This is a form of insurance that provides the purchaser with protections for structural defects as well as cover for the deposit and stage payments, subject to certain limitations and exclusions. Your solicitors should furnish you with the HomeBond documentation when they receive it from the builder’s solicitor and you should review it carefully and understand what it covers, what it does not cover and what the limits of the cover are.
Briefly, HomeBond provides the following:
- Structural Insurance – 10 years cover for the repair of major structural defects
- Smoke Penetration / Water Ingress – 5 years cover for remedial work in the event of smoke penetration/ water ingress.
- Physical Danger – 5 years cover for certain physical fire safety risks.
- Damage – 5 years cover where damage affects the use of a significant portion of the habitable areas for ordinary and reasonable residential purposes.
- Deposit Cover – as set out in Clause 5 above
- Certain specified mechanical and electrical defects insurance
Loan Offer
Once you sign a contract to purchase the property, you commit yourself to complete the purchase and pay the purchase price.
Accordingly, prior to entering into the contract, you should ensure that you have a satisfactory letter of loan offer from your lending institution. You should also ensure that you are in a position to comply with all conditions of any loan offer as your lender will only issue funds once all such conditions have been met. Obviously, in the event of any delay in complying with such conditions, this would impact on the release of funds thereby delaying the transaction and leaving you open to interest charges.
Loan approval only lasts for a fixed period, typically 6 months, whereas a new build usually takes much longer, up to 18 months or even 2 years. Sometimes, between getting loan approval and completing the purchase, buyers run into difficulty and end up being unable to draw down the expected loan. Difficulties can arise for any number of reasons: the buyers might, for example, suffer a fall in income, or run into a problem getting life insurance, or the bank’s valuation of the completed property might come in at less than the purchase price. If you cannot comply with the loan conditions and, as a result, you become unable to complete the purchase, you will lose your deposit and be subject to a legal action from the builder for losses sustained.
In order to minimize the likelihood of such a situation occurring, you should instruct your solicitor to insist upon the insertion of a “subject to loan clause” in the contract. Such a clause gives protection to you in the event that, in between signing contracts and completing of the purchase, your loan approval is withdrawn or made subject to conditions with which you cannot comply.
Services and Common Areas
It should be a provision of the Building Agreement that the builder will provide what is called an “Indemnity under Seal” whereby he undertakes to ensure that all the estate services and common areas – roads, sewers, pathways, communal grass areas, public lighting and so on – will be provided for up to a standard acceptable to the local authority so that the local authority will take them in charge following the completion of the estate. Usually, the local authority will make it a requirement in the planning permission that the builder enter into a financial bond to guarantee satisfactory completion of the common areas and services prior to their being taken in charge.
You should be aware that the contract will likely include a condition that you cannot delay the closing of the sale because the common areas – kerbs, pathways, roads, grass margins and so on – are not yet complete.
Price Variation
The standard Building Agreement often includes a Price Variation Clause which states the price can change due to any increase or decrease in the costs to the builder of materials. It also often includes a clause that if the VAT rate (charged on the price payable for the building work) changes then the total purchase price will likewise be adjusted. Given that a fixed price is usually agreed between the purchaser and the auctioneer, we generally advise that the purchaser should resist the inclusion of the first part of the price variation clause. Usually, the VAT adjustment clause will remain so purchasers should be aware that that the price can go up or down to that extent.
Stamp Duty
Stamp duty is usually charged on a transfer of a site at a rate of 7.5% of the value on the basis that a site is non-residential property. However, if you buy a site with a connected agreement to build residential property on it, the site is deemed to be residential property and stamp duty is charged at a rate of 1% on the consideration paid for the site plus the consideration paid for the construction works (exclusive of VAT). The building contract will need to specify the amount of the total consideration related to the purchase of the site and the amount (exclusive of VAT) related to the building works. Stamp duty will be paid by you at a rate of 1% on the total amount exclusive of the VAT.
Help To Buy Scheme
The Help to Buy (HTB) incentive helps first-time buyers of newly-built homes to buy a new house or apartment. It only applies to properties costing €500,000 or less. We are a registered solicitors’ firm approved by Revenue to act for applicants under the scheme.
Where you are relying on the Help to Buy scheme for the tax relief under the scheme to fund part of the deposit in the transaction (or all of the deposit under the enhanced scheme), the contract and building agreement should contain provisions concerning your application to Revenue and it being approved within an agreed period.
The developer should confirm in the contract that they are a qualifying contractor for the purposes of the scheme. Correspondingly, it will be necessary for you to confirm that you qualify under the scheme and that you are eligible for a refund of income tax in a sum no less than the sum needed to bring the deposit paid up to 10% of the purchase price. You will also need to agree to provide evidence that the Help to Buy claim has been validly submitted to include your claim number, access code, application number and any other information required by the qualifying contractor to verify your Help To Buy application.
A developer should not seek a 10% deposit from the purchaser in respect of whom they are also due to obtain part or all of deposit directly from Revenue under the scheme. Consequently, we advise purchasers to resist such terms if they are proposed. Whatever is agreed it is important that it be made clear in the contract.
You and the developer may agree in the contract that if your application under the scheme is unsuccessful, the contract will remain in being if you can top up within a set period of time the initial deposit to 10% of the purchase price or pay the shortfall on closing. If you do not so agree, the contract can provide for termination where you application is unsuccessful.
It is important to be aware of the clawback provisions in the HTB scheme, including the requirement that the house be bought by you within 2 years of the refund being paid to the contractor and that you live in the property for a minimum of 5 years. It is also important to note that if a clawback arises, you – and not the builder – will be responsible to make the repayment to Revenue. Accordingly, if the HTB payment is released to the builder as the deposit, the contract should contain a provision that, if the house is not built within 2 years, the builder will repay the amount to Revenue.
Completion
For completion to take place, the builder must serve a completion notice confirming the completion of the house in accordance with the building agreement. You will then have a specified period to attend on the site with your architect or engineer to inspect the property and carry out a list of minor defects called a “snag list”. This snag list is furnished to the builder and the defects should be remedied before completion takes place. If the builder disputes the defects and/or refuses to remedy certain matters, you may still be forced to close and would potentially be liable for interest if you delay or, if you continue to delay, the loss of your deposit. Disputes may be resolved afterwards by arbitration or as provided for in the contract. When your solicitor is happy that all the documentation is in order he or she will release the purchase money to the solicitor for the builder and the keys will then be released to you. Your solicitor will then stamp and register your deed and, if you have obtained a loan, will certify title to your lender.
