After a period of little or no activity developers are now increasingly engaged in building and selling new houses and apartments. The attractions of buying a newly built residence are (or at any rate should be) that:
- It is designed and built to current standards and accordingly will be more energy efficient and less expensive to run;
- Apart from furnishings and decoration it should not be necessary to incur significant expenditure on renovations and repairs;
- The Purchaser may be able to avail of the “Help to Buy” incentives;
- The Purchaser may (to some extent) be able to choose finishes (and in some cases “extras”) to customise the property;
- If problems emerge in the works done the Purchaser may be able to look to the developer or to avail of an insurance backed scheme (such as Homebond or Premier Guarantee) to deal with them.

THE LEGAL FRAMEWORK

You might assume that buying a “new” house or apartment is similar to buying a new washing machine or car and that in exchange for the agreed price that the seller hands over a finished product but that is not (legally) what happens. A new house or new apartment consists of two elements, the physical components that are built (floor, walls, roof etc.) and the land (or sometimes in the case of an apartment the airspace) where the building (or for an apartment, part of the building) is located. The agreement for the purchase of a new house or new apartment will accordingly involve these two elements, the completion of the building works and the sale of the site or airspace. Usually both elements will be combined in one agreement but occasionally there will be a separate agreement for each element for instance when the owner of the land and the party agreeing to do the building works are not the same. The vast majority of agreements for the sales of new houses and apartments are based on two documents:

- for the site or airspace element – the Law Society of Ireland General Conditions of Sale (2017 is latest edition) (“Contract for Sale”);
- for the building works – the Law Society of Ireland/Construction Industry Federation Building Agreement (2001 is latest edition) (“Building Agreement”).

The Contract for Sale is the document used for most sales of land or existing houses or apartments, it is an agreement whereby the developer or landowner (“Vendor”) agrees to sell and the Purchaser agrees to purchase the site or airspace. The Contract for Sale consists of a “Memorandum of Agreement” which states the names of the Vendor & Purchaser, the sale price, a brief description of the property, the “Closing Date” (date when the transaction is to be completed, the balance of purchase monies paid and possession given to the Purchaser), “General Conditions of Sale” which are standard conditions that apply to most sales and “Special Conditions” that are particular to the property being sold and which may vary the General Conditions of Sale.

The Building Agreement is commonly used for speculative residential developments. In the Building Agreement the Purchaser “employs” the developer or builder (“Contractor”) to build a house or apartment on the site or in the airspace. Like the Contract for Sale the Building Agreement comprises two parts, firstly a part similar to the “Memorandum of Agreement” with the names of the parties, building cost, brief description of the works to be carried out and the “Completion Period” (the time allowed for the Contractor to complete the building works) and the Building Agreement Conditions which are standard conditions that apply to most speculative building ventures and these Conditions may be varied by the initial part of the Building Agreement in a similar manner that the General Conditions of Sale may be varied by Special Conditions.

The Contract for Sale and Building Agreement were designed to do separate jobs and were not tailored to be combined and problems can arise from this when they are combined in one document or when they are intertwined as separate documents.

CLOSING DATE & COMPLETION PERIOD ISSUES

If one was a buying a “second-hand” house or apartment it would be sold under the Contract for Sale only and that would state the details of the Vendor, Purchaser, property being sold, purchase price and “Closing Date” which is usually about 6 to 8 weeks from the date of the Contract. The position if either the Vendor or Purchaser refuses or fails to complete the transaction on the Closing Date is spelt out in the General Conditions and is reasonably clear-cut. Either party can give a 28 day notice to the other to complete the purchase and sale and if the defaulting party fails to do so the innocent party has various options including treating the contract as at an end, forfeiting the deposit paid and taking steps to compel the defaulting party to carry out his or her obligations.

Looking at the Building Agreement in isolation the Contractor agrees with the Employer to carry out certain building works for an agreed price. The Contractor agrees to complete the works within the “Completion Period”. When the works are completed the Contractor notifies the Employer of this and the balance of the price for the works is payable 14 days after that or 14 days after the Employer has accepted the works are finished whichever is the sooner. The “Completion Period” will often be stated as 18, 24 or even more months from the date of the Building Agreement. The Contractor will be normally be keen to complete the works as quickly as possible as he does not get paid until the works are completed but the Employer does not have any comeback if the works take longer than expected provided they are done within the Completion Period. Even if the works are not completed within the Completion Period the likelihood is that the Employer cannot terminate the Building Agreement or engage someone else to complete the outstanding works without going through quite a few hoops which would include calling upon the Contractor to complete the outstanding works.

Where the Contract for Sale and Building Agreement are combined or intertwined what usually happens is that the Closing Date for the land/airspace element is triggered or linked to when the building works are completed and accordingly the Closing Date is not a fixed date the parties have agreed upon. Serious difficulties arose from this arrangement when the property market crashed and purchasers were tied into Building Agreements/Contracts for Sale. Banks withdrew funding from developers, building works stalled on many developments but purchasers were still tied in to Building Agreements/Contracts for Sale and had in many cases to sit out the “Completion Period” despite the fact that it was clear that there was no realistic prospect of the works being completed before being able to extricate themselves from the Building Agreement/Contract for Sale, often having to deal with liquidators or receivers in the process. It was a very unfair and stressful position for purchasers to find themselves in through no fault on their part.

The fact of the Closing Date being linked to or triggered by the date of completion of the building works is still a potential pitfall particularly where Contractors (as some do) insist on a lengthy “Completion Period”. While currently demand for new dwellings is strong and bank funding is available the issue may be academic but if problems do arise in these areas purchasers could again find themselves in an unenviable position.

PLANS & SPECIFICATIONS

What is to be built is described by reference to plans and specifications referred to in the Building Agreement. The specifications will usually be in very general terms and are not very useful in ascertaining what will be built particularly as regards details of finishes, kitchen appliances, bathroom fittings and suchlike and the plans will generally at a small scale and again with little in the way of detail. Where there is a “showhouse” most Contractors will be willing to confirm that finishes etc. will be to a similar standard as in the showhouse and that reduces the uncertainty in most area. The plans will almost universally state that any dimensions or scale on them cannot be relied upon as the Contractor does not want to be held up where for example a Purchaser claims the kitchen is three centimetres shorter than it should be. Due to modern construction methods, particularly pre-fabricated timber frame components, material discrepancies in the size of rooms rarely arise, more attention should probably be paid to the layout of and extent of external features such as gardens where these are part of the property.

THE BUILDING CONDITIONS

The Building Conditions were drafted in conjunction with the Construction Industry Federation which represents the construction industry and it is fair to say that the Building Conditions generally put the Contractor in a stronger position than the Employer. The Building Conditions are for the most part written in reasonably clear language, but we would comment on certain of them:

1: Note that the “Completion Period” can be extended where there is a delay not reasonably within the control of the Contractor. An example of this would be where due a strike at ports there is difficult in getting delivery of essential materials.

2(a): As indicated above the specifications tend to be of an outline nature, where materials or workmanship are not specified they must be of “reasonable quality”.

2(c): If what is built is different from the plans in a minor way this will not invalidate the agreement.

4(a): If the Employer fails to pay monies due to the Contractor (other than the balance due on closing) in accordance with the agreement the Contractor can charge interest on the outstanding balance. In practice this will only arise where there are “stage payments”, i.e. payments between the initial deposit and closing;

4(b): If the Employer fails to pay on time the Contractor can suspend carrying out of the building works. Unless the agreement provides for “stage payments” this will not be relevant.

4(c): If the balance due on closing is not paid on time, the Contractor can charge interest on the outstanding balance;

4(d): If the balance is not paid by the Employer to the Contractor in accordance with the agreement, the Contractor can give 14 days’ notice to the Employer requiring the Employer to pay and if the Employer fails to do so, the Contractor can treat such failure as a repudiation by the Employer of the agreement. The significance of this is that the Building Agreement and Contract for Sale will almost always be combined in single document or linked to each other and each will state that a termination of either will terminate the other, so if the Building Agreement is terminated under this condition it will also result in the termination of the Contract for Sale.

6(a): This is a price variation clause, it is almost always agreed to be deleted;

6(b): The price in the Building Agreement is inclusive of Value Added Tax (VAT). The current VAT rate is 13.5%. If the VAT rate changes the price will be adjusted upwards or downwards to take account of this. It would probably be political suicide in the current climate to add to the cost of new homes by increasing the VAT rate but though unlikely it is not impossible.

8(a): The Contractor agrees to make good major and minor defects arising within certain periods where the building is registered under the Homebond Scheme;

8(b): Similar to 8(a) specifies the relevant periods where the building is not registered under the Homebond Scheme.

8(d): Certain defects are excluded from 8(a) & 8(b), these are generally minor defects which can be spotted when a snag list is being prepared;

8(e): “rights at Common law” what this means is that the overriding obligation on the Contractor is to carry out the building works in a “good and workmanlike manner”.

9(b): This is usually varied to allow the Contractor to sub-contract all of the building works. Building works have become highly complex and most building works are now carried out by specialist sub-contractors who will each deal with a different element of the building works;

11: If there is a dispute it must be referred to arbitration but see 12(d) below.12(a): The “Completion Date” is the date on which the Contractor notifies the Employer the building works are completed or the date the Employer agrees they are completed if earlier;

12(b)(c)(d)(e): If the Employer does not agree the building works are completed and if the uncompleted works are not of a minor nature the Contractor must complete the outstanding works and give notice again to the Employer under 12(a). If the parties cannot agree whether the outstanding items are of a minor nature that question can be referred to an independent expert for determination. If the uncompleted items are agreed or determined to be a minor nature the Employer is obliged to pay over the balance due provided the Contractor promises to attend to the outstanding items within a reasonable time.

UNFAIR CONTRACT TERMS

In a High Court Action by the Director of Consumer Affairs in 2001, terms similar to many of those inserted as additional or special conditions in Building Agreements/Contracts for Sale in respect of the sale of newly built houses or apartments were found to be unlawful under Regulation 8(1) of the European Communities (Unfair Terms In Consumer Contracts) Regulations 1995. The Regulations protect persons who deal as consumers (i.e. not in the course of business) in respect of any terms that are not negotiated. The Order made by the High Court sets out 15 types of condition that offend the Regulation. Notwithstanding the High Court Order some developers are still inserting these types of conditions in Building Agreements/Conditions of Sale. The High Court Order means that many of such offending conditions would not be enforceable if it came to it.

COMPLIANCE WITH PLANNING PERMISSION & BUILDING REGULATIONS

Up to recently compliance with Planning Permission and Building Regulations was proved by “Opinions on Compliance” given by an Architect or Engineer. Typically the Architect or Engineer had no input or involvement in the building works and did a walk-through of the completed building when the works were finished so that the Opinion was based on a “visual inspection” and also on the main contractor and sub-contractors confirming they had done everything correctly. The Opinion could take no account of works that had been covered up or were not easily visible or detectable. Accordingly such Opinions were of very limited value if some instance of non-compliance later came to light and examples of this happening arose particularly with some apartment developments such as Priory Hall, Beacon One, Longboat Quay and others where breaches of Building Regulations (particularly as regards fire safety) were found.

The history of building control in Ireland does not inspire confidence. Outside urban areas there were no Building Regulations and in urban areas all there were was Building Bye Laws some of which were of Victorian vintage. A countrywide system of Building Regulations was eventually introduced following the “Stardust” fire. While Building Regulations were introduced in 1990 the system of proving compliance with Opinions on Compliance based on post facto visual inspections has been found to be deeply flawed and there is now a new “Building Management Control” scheme in place. This requires sign off at various stages of construction and is certainly an improvement and seems to have some “teeth”, time will tell if it is robust and adequate.

HELP TO BUY SCHEME

The Help to Buy (HTB) incentive is a scheme for first-time property buyers. If you are a first-time buyer, it may help you with the deposit you need to buy or build a new house or apartment. You must buy or build the property to live in as your home.

When you buy or build your home, the incentive will give you a refund of Income Tax and Deposit Interest Retention Tax (DIRT) that you paid in Ireland over the previous four years. To avail of the HTB incentive the contractor you are purchasing your home from must be approved by Revenue. The amount that you can claim is the lesser of:

– €20,000;
 -5% of the purchase price of a new home
 -the amount of Income Tax and Deposit Interest Retention Tax (DIRT) you have paid in the four years before your purchase.

HOMEBOND, PREMIER GUARANTEE & GLOBAL HOME WARRANTIES

These are insurance backed products that are offered by many developers selling new homes that provides insurance against certain defects arising within a certain period and also covers deposits paid to its member in the event of insolvency. These schemes are of some worth but they each have their limitations (and the financial limits mentioned below were correct at the time of writing but can be varied so look at the relevant websites to check current limits) and the following should be borne in mind:

In the case of Homebond:
• Loss of deposit – period of cover is two years which should be adequate for the vast majority of situations, there is a monetary limit of 50% of the contract price or €100,000.00 for any single unit and a limit to overall claims against any one builder of €1m so if overall claims exceed that amount you may not recover all of your deposit;
• Defects Insurance – period of cover is five years – covers water damage, smoke ingress, matters causing physical danger, latent defects – maximum amount recoverable is €200,000.00 for a single unit and for all units in a continuous structure €2,000,000.00. There is an overall limit of €2,000,000.00 for claims against the builder so if this is exceeded you may not recover all off the loss suffered;
• Structural Insurance – period of cover is 10 years –maximum amount recoverable is €200,000.00- pyrite related claims are specifically excluded.

In the case of Premier Guarantee:
• Loss of deposit – similar to Homebond;
• Defects Insurance – similar to Homebond;
• Structural Insurance – similar to Homebond, pyrites are not specifically excluded.

In the case of Global Home Warranties Limited:                                                                                                                                                                                                                                                                                                                                                     It  is a relatively new entrant to the Irish market and the product is broadly similar to Homebond & Premier Guarantee. This is an insurance backed scheme (as are the others). The Insurer is Acasta European Insurance Company Limited which is authorised and regulated by the Gibraltar Financial Services Commission.  Check with your lender that they are happy to accept what is offered. You may be aware that there is a concern that some insurance companies that were based in Gibraltar (e.g. Setanta) were not subject to the same the level of scrutiny that would be applied (now at any rate) in Ireland or the UK.  There are limits on the cover including:
o Damage arising from pyrites or sulphides are excluded;
o Limit on payments due to insolvency of developer (usually repayment of deposit) limited to €100,000 for all claims in respect of any one new development – in my view in the event of the insolvency of the developer that limit could easily be exceeded;
o Limit on defects and structural cover, €1,200,000.00 per Residential Property or where Residential Properties form part of one structure, €1,800,000.00 for all claims on that structure.

PYRITES

Pyrites is a naturally occurring mineral common in sedimentary rocks and is not as such hazardous. Pyrites expands when it is exposed to moisture. In some residential developments it has emerged that pyrites was included in the backfill beneath the floor slabs or foundations. When the pyrites became wet, it expanded upwards lifting the structures above and causing cracks and leading to serious structural defects.

STAMP DUTY

As a general rule Stamp Duty is payable on transfers of residential property at a rate of 1% of the price paid (up to €1m with any excess over that at 2%). When you are purchasing a new property the price will include VAT (rate at time of writing 13.5%). Stamp Duty is not payable on the VAT element of the purchase price.

MANAGEMENT COMPANIES & SERVICE CHARGES

If you own a stand-alone house it is your choice as to whether you maintain it or not. That does not generally give rise to a problem as if there is a hole in the roof you are the only one who is getting wet. Similarly you can choose to insure the house or not. In the case of an apartment or similar type development where you only own part of a building that set up will not work. If the roof is not repaired it is not only the apartment directly beneath it but also those on lower floors who will (sooner or later) feel the effects. For this reason it was realised that in the case of apartment developments it was in everyone’s interests to have an arrangement in place whereby the basic fabric of the building would be insured and maintained and where all of the owners would pay for this. So in apartment developments responsibility for maintaining the roof, external walls, structural parts of the building and also lifts, car parks, hallways, lobbies, gardens – in short the parts of the development other than the apartments themselves is placed with a “management company”. The members of the management company are all the apartment owners and will adopt and approve a budget, collect service charges and apply the funds received in insuring and maintaining the building for the benefit of the owners. Many management companies (particularly in the case of larger developments) will employ a “managing agent” who is a professional firm which (for a fee) provides property management services to look after the day to day running and to arrange meetings of the management company and so on. Management companies were initially confined to apartment developments but later that set up was also adopted for quite a number of housing developments, sometimes the planning authority insisted that this be done. In the case of houses the owners will usually maintain and insure their own houses and the management company will maintain external landscaped areas, roads, footpaths, public lighting etc.

REPUTATION & TRACK RECORD

The most important thing to do when you wish to buy a new house or apartment is to check out the reputation and track record of the developer. Have problems arisen with previous developments? Does the developer provide a good “after sales” service? Speak with purchasers who have bought from the developer and see what they say. If a developer is professional and competent (and most are) you are unlikely to have to concern yourself with the complexities of building agreements or the fine print of Homebond or Premier Guarantee. You can have a building agreement and the associated paperwork in satisfactory terms but if what is built is not well done that will not save you from expense, uncertainty and stress, so do the homework if you will pardon the pun.

The above is intended for information purposes only, and is not intended to be relied upon as legal advice. Please contact us on 01 – 676 3257 for advice specific to your needs. We can guide you through the entire process of purchasing your newly built home.

by John Redmond
Principal of Fitzsimons Redmond Solicitors