How To Get Out Of A New Construction Home Contract?

It can be very frustrating when things are not going to plan during a construction project. Deviations from delivery schedules and variations to plans during the build can lead to delays and blown out budgets. However, there are only limited circumstances where you will have the right to terminate your building contract. You will have these rights either under the law or under clauses within the contract itself. This article will explain the different ways that you can get out of your building contract.

Australia is home to one of the most thriving real estate markets on the planet – aspiring homeowners and investors alike are jumping in, eager to take advantage of the prospects. There is no shortage of interested property buyers even with the current market slowdown.

That said, sometimes mistakes are made. For example, overeager would-be investors or homeowners end up signing something they later regret, or circumstances change overnight, and the property’s location is no longer ideal.

Simply having second thoughts about the property is not typically a justifiable reason for you to get cold feet and cancel your contract. Not only will this cost you, but it may also lead to a lawsuit, especially if you put your seller at a great inconvenience. However, there are instances when you can successfully opt-out of your contract. First, though, it’s important to know what you’re getting into.

Written Contract Should Be Made

A written contract is vital if you are going to build a house or intend to repair, renovating or extend your home, regardless of how much you are spending. In addition, it is a crucial document in settling any dispute with your building contractor. Essential requirements for home building contracts are set out in the Domestic Building Contracts Act 1995. We recommend you have a written contract for all building works, regardless of size and price. By law, you must have a written ‘major domestic building contract’ for work worth more than $10,000, including:

  • erecting or constructing a home and associated landscaping, paving, retaining structures, driveways, fencing, lighting, heating, air conditioning, water supply or sewerage
  • renovations, alterations, extensions, repairs and any other improvements
  • Work associated with renovation, alteration, extension or repair of a home. This includes landscaping, paving, retaining structures, driveways, fencing, garages, workshops, swimming pools and spas.
  • preparation of plans or specifications by the builder (unless prepared by a registered architect, engineer or draftsperson)
  • demolition or removal of a home
  • Any work associated with building on land zoned for residential purposes requires a building permit.

Only registered builders can:

  • enter into a major domestic building contract and take out domestic building insurance, which is required for work over $16,000 and protects you if the builder dies, becomes insolvent or disappears
  • Reblock, restump, demolish or remove a home, regardless of the value of this work.

You are not required to have a domestic building contract for jobs that involve only one of the following:

  • plastering
  • tiling (wall and floor)
  • electrical work
  • glazing
  • insulating
  • painting
  • plumbing, gas-fitting and draining
  • installing floor coverings
  • attaching external fixtures (awnings, security screens, insect screens and balustrades)
  • erecting a chain wire fence around a tennis court
  • erecting a mast, pole, antenna, aerial or similar structure.

how to get out of a new construction home contract (3)However, we recommend you have a written contract for all work carried out on your property. The builder is required to give you sufficient time to have the contract documents reviewed by your legal representative before you sign. Some building contractors use standard contracts prepared by industry organisations. Even if your contract is standard, we recommend you get independent legal advice before you sign - although this means you no longer have five days to change your mind after signing the contract. The builder must also give you a copy of the contract signed by you and the builder. Please do not accept a copy unless the builder has signed it.

Before You Sign A Major Domestic Building Contract

Check:

  • the builder is registered with the Victorian Building Authority (VBA) by using the Building practitioners search on the Victorian Building Authority website
  • the domestic building insurance policy, and that your builder is eligible to purchase domestic building insurance by using the Builder Search on the Victorian Managed Insurance Authority website
  • the procedure for changing the plans and specifications
  • you’ve only agreed to pay progress payments for work already completed
  • You’ve had enough time to review the contract thoroughly.
  • You automatically have the rights to visit your building site. For more information about this, view our Building progress page. Before you sign, we recommend you:
  • delete any clause in your contract that limits your rights to visit your building before you sign
  • Get a building lawyer to review your contract before you sign. The Law Institute of Victoria has a referral service to help you find a building lawyer.

Check these costs are included in your contract price:

  • the building fee, which may or may not include the cost of mandatory inspections by the building surveyor and may vary between companies
  • planning permit fees (if your council requires a planning permit)
  • lodgement fee paid to the local council for recording purposes
  • crossing deposit or asset protection fee paid to the local council and refundable at the end of the project, if no damage has occurred to council property
  • inspection fee, a non-refundable fee paid to the council for the cost of their inspection of council assets
  • Government levy charges when the contracted work cost is more than $10,000. There are three levies based on the total cost of your building, which also applies to owner builders. Your building surveyor can advise you of these costs.

FAQs About Construction Home Contract

Termination of a contract is the process of ending or cancelling the contract before the parties have fully performed their obligations. Once a contract has been terminated, all remaining performance obligations created by the contract cease to exist.

Legal Grounds To Terminate A Contract

Under the law, three grounds that give rise to termination:

Termination By Agreement

You can terminate a contract when you and the other party agree to. This can be either an express agreement or an implied agreement. Although you can expressly terminate an agreement verbally, it is recommended to do so in writing. Any implied agreement to terminate must be clear through the parties’ conduct. This conduct must indicate that neither party requires the other to perform their obligations under the contract.

Termination For Breach Of Contract

When looking to terminate a contract because you believe the other party has breached it, you must first clearly identify which clause has been breached. Then, it would be best if you determined whether the clause is an ‘essential’ term or a ‘non-essential’ term. Essential terms are the fundamental terms of the contract. A non-essential term is described as a warranty and is sometimes known as an ‘intermediate’ term.

If the other party has breached an essential contract term, you will be entitled to terminate the contract. Essential terms in building and construction contracts commonly relate to payment and time stipulations. However, a ‘sufficiently serious’ or substantial breach of a non-essential term may also provide you with a right to terminate. Commonly, a sufficiently serious breach is one that:

goes to the root of the contract; is an obligation of basic importance; and substantially deprives you of the benefit of the contract.

Termination For Repudiation Of Contract

An act of repudiation will occur where one party demonstrates an intention that they are either unwilling or unable to perform their obligations under the contract. This demonstration can be either:

  • express: the party tells you that they will not perform their obligations under the contract; or
  • Implied: the party’s actions clarify that they will not perform their contractual obligations. e.g. they sell off assets that they require if they were to perform the contract.

Termination will only occur if the repudiation relates to a fundamental or sufficiently serious contractual obligation. You must accept that repudiation and be able to show that you were ready and willing to perform the contract if it were not for the other party. Suppose you are looking to terminate a contract either for breach or repudiation. In that case, you may be able to claim compensation, particularly if you suffered financial loss due to the non-completion of the contract. You should seek legal advice before pursuing these pathways.

Contractual Right Of Termination

In some situations, building and construction contracts can allow for automatic termination. Furthermore, a contract may generate a right to terminate based on specific events or defaults.   

Automatic Termination

Like any other type of contract, building contracts might contain clauses that allow for automatic termination when a specified event occurs. Automatic termination clauses are more commonly formed as pre-conditioning with a time stipulation.

Unless you agree with the other party to terminate, you need a reason to terminate the contract. Reasons to terminate a contract include breach of an essential term, a serious breach of a non-essential term, or if the other party repudiates the contract.

Repudiation can be implied. You do not need the other party to say that they intend to fulfil the contract explicitly. However, their conduct may be enough to indicate repudiation.

Back Out Of A Real Estate Contract Consiquences

The Cooling-Off Period

Private home sales typically have contracts that indicate cooling-off periods. This clause can be discussed and agreed upon by both parties. However, different states have different legislations surrounding cooling-off periods and financial penalties for cancelling sales contracts.

For example, buyers in Queensland and New South Wales have five business days after the contract exchange to sign the deal. This time is the cooling-off period. Once the time lapses and the buyer decides not to push through, the seller is entitled to a penalty of 0.25% of the purchase price. Remember, you should use your cooling-off period to discuss any clauses that you want to add to or remove from the contract between your conveyancer and your seller. Check with your local real estate institutes and law societies’ to know more about their particular rules with regards to cooling-off periods.

Playing Your Contingency Cards

Assuming that you already inked the contract, other problems may arise. For example, after signing a real estate deal, backing out is sometimes caused by denied home loan applications. This is one of the most common issues buyers face when entering a real estate contract. The workaround here is obtaining a pre-approval with your lender -- this way. You are increasing your chances of getting your application approved.

Other issues that could lead you to terminate the contract may arise from inspections. For instance, if your property inspector finds that the house needs major repairs that would cost significantly, then you can discuss with your solicitor or conveyancer how you can terminate your deal. Another example is when your inspector uncovers pest infestation or poor foundation quality. In such cases, it is important that you fully understand the conditions stated in your contract. Finally, if you wish to pursue buying the property, you might want to renegotiate the price with your seller.

Dealing With Buyer’s Remorse

how to get out of a new construction home contract (1)The sense of regret after buying something, be it the latest phone or a new pair of jeans, is usually because of fear of making the wrong decision. Most property buyers feel the same way, particularly first-timers.

Typically, property buyers deal with remorse after discussing their purchase with family and friends, often questioning their decisions. While it is not necessarily bad to ask other parties regarding your choices, it is best to stand your ground and know how to weigh their inputs. You should not be easily swayed by others’ opinions, especially those of someone who may not necessarily know the ins and outs of the market. Talk to your real estate agent should you encounter any problems.

Another common reason for buyer’s remorse is your continuous search for other properties even after signing a purchase contract. You will always assume that there are better choices if you keep looking. As you continue searching through listings, you might overlook properties that would turn out to be the best fit to your standards.

Knowing What The Contract Contains

A sales contract is an essential part of any real estate transaction, whether you are buying a property for an investment or as a new place to lay your head. The contract contains all the relevant information about the transaction, including the property's price, the settlement and cooling-off periods, and all pertinent attachments such as zoning and property certificates and home warranty certifications.

This document also puts into detail several conditions which are agreed upon by the buyer and the seller. We’ll skip the details now, but if you’re interested in the nitty-gritty of sales contracts, they can be found in our home loan guide on the topic; we have an entire article dedicated to it.

Settlement And The Non-Refundability Period

Most contracts contain a clause indicating the non-refundability of the initial deposit should you fail to settle within a given time. This time frame, known as the settlement period, begins on the day both parties sign the contract and can range from two weeks up to three months. As each state has different rules and regulations regarding settlement, it’s best to see our in-depth article on the process.

Before signing, make sure that you and your seller agree to any clauses that will be listed. Don’t be afraid to seek legal help if necessary – no one wants to face a lawsuit for breaking a sale if it’s possible to avoid.

Seeking Professional Help

The best thing to do in every part of the home buying process is consult a legal professional. Have the contract closely checked by a legal advisor to ensure your interests are protected. There are also plenty of real estate organisations that can help you in your home buying process. They can also help determine possible solutions to immediate problems so you would not have to break your contract.

Termination After Default

Often, building and construction contracts contain a termination clause that sets out the specific breaches of contract that will give rise to a right of termination. These breaches are sometimes referred to as an event of default. However, only fundamental and sufficiently serious breaches will give rise to a right to terminate. Common examples in building and construction contracts include the failure to:

  • make payment on time;
  • complete building works;
  • supply the requisite quality materials; or
  • supply materials by a stipulated date.

Termination of a contract after default is not automatic. There has been an event of default. The building contract will generally include a ‘notice clause’. Here, you will need to provide formal written notice to the defaulting party that provides details of the breach. The defaulting party will then have an opportunity to rectify the breach within a specified time frame. If the defaulting party fails to rectify the breach, you should provide another written notice which confirms that you have terminated the contract.

Unfair Contract Terms

Victoria has laws to prevent unfair terms in consumer contracts, including contracts to build and renovate, extend or repair an existing house. Make sure your contract does not include these unfair terms:

  • a clause requiring any dispute to go to arbitration (a compulsory arbitration clause)
  • a caveat (a warning of some right or interest on the land title) on the building site land
  • any statement that restricts or denies your rights to implied warranties (see building warranties and insurance)
  • a cost escalation or ‘rise and fall’ clause, unless the contract price exceeds $500,000. The onus is on the builder to calculate any likely rise in costs caused by inflation, wage increases, and the like into the contract price. If the builder wants to include a cost escalation clause, the Director of Consumer Affairs Victoria must approve it. The director has not yet approved any cost escalation clauses
  • an agreement to pay the builder by a cost-plus method if your contract is less than:
  • $500,000 for contracts entered into before 1 August 2017, and
  • $1 million for contracts entered into on or after 1 August 2017. An example of a cost-plus method is when a builder charges by the hour and does not have a fixed price for your contract. You can use a cost-plus contract to renovate an existing house, but only in very limited circumstances. Get legal advice before you sign any cost-plus contract
  • the expression ‘practical completion. If you find it in your contract, delete it and insert ‘complete by the plans and specifications.

Conclusion:

However, if a specific event occurs, contractual termination may arise automatically. Furthermore, it is essential that you strictly comply with a notice clause to ensure effective termination. If you need help determining whether you can terminate your building contract.

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