When purchasing a property in a new development directly from the Developer, normally one of the agreements entered into between the parties is a Building Agreement. Apart from the daunting fact that the Purchaser signs an agreement instructing a Contractor to build your dream house on a vacant piece of land at the time that the agreement is entered into, the legal jargon contained in the Building Agreement can in itself be incomprehensible or just downright confusing. Read more about what you need to know and understand about the payment of building draws
Most new developments requires a Purchaser to sign a Deed of Sale for the purchase of a vacant plot, together with a separate Building Agreement to be entered into between the Purchaser and the Developer regarding the terms and specifications for the erection of your house on the plot, subsequent to transfer. The simultaneous conclusion of these two agreements is normally made subject to each other. It also sometimes happens that the building contractor with whom a Building Agreement is entered into, is not the same entity as the Developer from whom a plot within the development is bought.
The terms of a Building Agreement between the prospective Purchaser (called the “Employer” in a Building Agreement) and the Contractor, set out the contract sum for the house to be build, and also normally includes a detailed list of the specifications of the house, as well as the cost and detail of any extra additions required by the Employer to be added to the property.
The clause containing the contract sum will also deal extensively with the dates and times by when the Employer is required to pay instalments of the contract sum to the Contractor. By means of example, the Building Agreement will normally refer to payment of 20 (twenty) percent of the contract sum when the dwelling reached floor height, 20% when the dwelling reached roof height and so forth, up until 100 percent of the contract sum have been utilized.
The Building Agreement will normally also contain further clauses relating to the financing of the contract sum, for example, by means of a building loan or otherwise, as well as the completion date for the erection of the dwelling, public liability insurance and the like.
The Contractor will not commence any building operations until the full contract sum is secured, either in terms of a building loan with a financial institution, and/or the payment of the full contract sum into the trust account of the Conveyancers instructed to attend to the registration of the development.
It is important to note that the Employer is only liable for payment of the contract sum in accordance with the instalment percentages agreed upon in the Agreement, and only once the Contractor have reached the various levels of progress with the erection of the dwelling as agreed upon. As such, a Contractor is for example not entitled to request a progress draw payment/instalment prior to commencement of the erection of the dwelling if the Building Agreement stipulates that the first progress draw payment can only be requested from the Employer when the dwelling reached floor height. Even though this is common practice, there is no contractual basis for a Contractor to request payment of any instalments towards the contract sum prior to commencement of the building operations if the Building Agreement does not make provision for any upfront payments. The Employer is also under no obligation to entertain such a request for payment if the Agreement does not provide for same.
The above also applies in respect of the payment of each progress draw or instalment to the Contractor. Should the Employer’s contract sum be invested in the trust account of the Conveyancers dealing with the development, the Contractor should request payment of a written building draw instalment to the Conveyancers upon the Contractor reaching a specific stage in the building process requiring payment of a building draw. The Conveyancers should obtain the written consent from the Employer authorizing payment of the amount of the building draw instalment prior to any payments being made to the Contractor. The above measures are protecting the Employer from losing control over the payment of building draws and preventing a Contractor from receiving any portion of the contract sum without the required progress in the building operations being made.
The Employer should also make the necessary enquiries with the Conveyancers to ascertain the exact amount of fees charged by them to administer the payment of building draws and to obtain the relevant parties’ consent. As this requires the Conveyancers to make payments from the Employers investment held on the Conveyancers’ trust account at the office of the Conveyancers, a nominal administrative fee is normally charged by them for each building draw instalment having to be paid to the Contractor.
In short, Employers, be sure to keep close tabs on the progress with the building of your house, and make sure that you know exactly when and for which amounts building draw instalments is being requested. Keep diligent records of any payments being made, and seek independent legal advice should you feel that you are being pressurized to make payments without the Contractor living up to the terms of the Agreement.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)