What Counts as a Presale: The Test Behind the Number

A presale is not counted because it is encouraging. It is counted because it is a contracted source of repayment. The facility is repaid from settlement proceeds, so the question a lender asks of each contract is narrow: if this project reaches practical completion and title issues, will this purchaser be obliged to settle, and will the money arrive?

Every criterion below follows from that question. A contract that a purchaser can walk away from, or that expires before the building is finished, contributes nothing to repayment no matter how good the price looks on the schedule.

The first test is that a deposit of at least ten percent has been paid and is held in a solicitor's trust account as stakeholder. Twenty percent is commonly required where the purchaser is not a New Zealand or Australian citizen or resident.

This is where the largest single gap usually appears. Developer contracts frequently make the deposit payable only once the purchaser's own conditions have been satisfied. The contract is signed, the schedule records a deposit figure, and no money has been received. A contract in that state is a signed contract with nothing behind it.

Ask the question in the form the lender will ask it. Not what the deposit is, but how much is actually sitting in the trust account today, lot by lot. In a thirty-lot project the answer is often materially less than the schedule implies.

The contract must be free of conditions that could delay or avoid settlement once the project is complete. Purchaser conditions of the usual kind, solicitor's approval, finance, due diligence, cooling off, run for around ten working days and are ordinarily satisfied or waived long before a facility is drawn. Those are a timing issue, not a structural one.

The condition that gets missed is the vendor's own. Developer schedules commonly include a clause making the agreement conditional on the vendor being satisfied as to economic viability, or as to reaching a stated level of sales, by a nominated date. While that clause is unsatisfied the agreement is not unconditional, and the party who controls it is the developer. Contracts sitting behind an unsatisfied viability condition
are not counted, and the fix is simply to confirm satisfaction and record it.

Every off-the-plan contract carries a sunset date, the longstop beyond which either party may cancel if title and code compliance have not been achieved. The test is not whether a sunset date exists but where it sits relative to the quantity surveyor's forecast practical completion date.
A sunset date that falls before or immediately after forecast completion gives the purchaser an exit at exactly the point the market is deciding whether the finished product is worth what they agreed to pay. Facilities therefore require a margin, commonly nine or twelve months past the forecast practical completion date, and the required margin should be checked against the specific facility rather than assumed.

Two practical points follow. The sunset date is one of the terms most often amended by hand on the executed document, so the schedule and the contract disagree more often here than anywhere else. And where a sunset date fails the test, the remedy is an executed variation signed by the purchaser. An email from the developer saying the dates have all been extended is not a variation, and will not be accepted as one.

The contract should require settlement within a short defined period, usually ten working days, of the developer obtaining the section 224c certificate, the record of title and the code compliance certificate. Anything looser leaves the repayment date floating.

Deferral rights are worth reading closely. Contracts sometimes allow settlement to be pushed out pending landscaping or minor completion items. Those clauses transfer control of the repayment date to the purchaser, and a lender will want to have consented to them.

Three further requirements sit under this heading. The purchaser must be genuinely at arm's length, not a shareholder, director, employee or family member of the borrower or a guarantor, unless the lender has expressly accepted that presale. Where the purchaser is a company or a trust, all directors or trustees should personally guarantee the obligations, because otherwise the contract is only as good as an entity with no assets. And the purchaser must have New Zealand or Australian status, or the required consent under the overseas investment regime.

The contract must also be the sole record of the sale. Side letters, rebates, furniture packages and nomination arrangements sitting outside the agreement change the economics and, in some cases, the enforceability of what has been presented.

On an off-the-plan subdivision, section 225 of the Resource Management Act gives the purchaser a cancellation right if the vendor has not made reasonable progress toward submitting and depositing the survey plan within the statutory timeframes, commonly measured from the date of each agreement. Separately, a subdivision consent can lapse under section 125 if the plan is not progressed within the consent period.

Neither is a contract term, and neither appears on a sales schedule. Both can remove a presale from the count. The relevant dates should be identified per contract at the same time as the sunset dates.

In practice the discrepancies come from comparing sources rather than from reading any single one. The executed contracts, the sales schedule, the credit memorandum, the solicitor's certificate and the developer's own correspondence rarely agree on first pass. Typical mismatches are lots recorded as sold that are unsold or double counted, deposit figures that are contractual rather than held, aggregate values that mix
inclusive and exclusive of goods and services tax, and sunset dates that were extended for some lots and not others.

The executed document governs. Everything else is a summary of it, and summaries drift.

Three things make the difference, and all can be done in advance.
Obtain a presale certificate from your solicitor addressed to the lender, confirming for each contract that it is validly executed and enforceable, that it is the sole record, that the deposit is held in trust, the sunset date, and the conditionality position. This 3 document resolves most of the questions above at once, and it is very often the piece that is missing when a file otherwise looks complete.

Reconcile your own schedule against the executed contracts before it is sent out, so that the number you give is the number that survives review.
And where contracts are deficient, particularly on sunset dates, obtain executed variations early. Purchasers are considerably more willing to sign a variation before construction starts than they are once the market has moved.

A project with fewer presales that all qualify is easier to fund than a project with more presales that do not. If you would like the criteria applied to your contracts before you commit to a structure, we are happy to look at them early.