Split Contract Townhouse Development

I'm keen to see if anyone in this forum has any experience or views on "split contract" townhouse development? For those that aren't familiar with the term, a split contract is where there is a Contract of Sale just for the land component, and a separate contract with a builder for the construction of the home (or townhouse). A "house and land" package is by definition a split contract (even though they call it a "package", there are still separate contracts for the land and the construction of the dwelling). The standard model for an off-the-plan townhouse development is generally referred to as a "10/90", where the purchaser pays a 10% deposit for the total cost of the townhouse and only enters into a single contract (with the balance due at settlement, once the townhouse is completed). The downside for the developer in a 10/90 development scenario is the longer development period and additional funding requirements to pay for the build.

On the other hand, with a split contract, the developer is essentially only subdividing the land, securing the building contract and novating this contract over to the end purchaser. There are issues for the developer to deal with (like no party walls, no shared services, no common property etc) and it would likely only work on corner blocks where each townhouse has its own street frontage, however the developers involvement in the project can be reduced from approx 2 years (for standard 10/90) to only about 1 year. With less capital tied up and a much shorter development timeframe, the developer can afford to sell the townhouses off-the-plan for much cheaper and still get a decent return. There is also a very significant reduction in the GST payable on the purchase price (given that it’s only the land), and this cost reduction is ultimately passed on to the purchaser.

In Melbourne at least, it seems the split contract townhouse model is used somewhat regularly in greenfield growth areas but I haven't really encountered this for small infill townhouse developments in existing suburbs. Why not? I'm not quite sure. It feels like a win-win for slightly more savvy purchasers and developers, but I could be wrong. As I mentioned, there are drawbacks and each townhouse has to be able to be built independently of the other townhouses (for bank financing requirements – refer “Option 2” below), but this is achievable - hence why I ponder the reason this hasn't been done more.

My main concern is whether Council would agree to issue SOC on the completion of construction for each townhouse independently. If a condition of the 173 agreement or planning permit requires the completion of all townhouses to receive SOC and an occupancy permit for any individual townhouse, then the split contract set up doesn't work from a construction financing perspective for the end purchaser.

Interested to hear all your thoughts on this!

 

Seems like a good summary of split contract for townhouses (at least from my limited understanding). A developer mate uses this method for developing, and in middle-ish ring suburbs of melbourne. Just happened to speak to him last night, he has sold out his latest development over the last few months in the middle of covid so the split contracts mustn't be putting off buyers completely, i think it was about 10 townhouses.

He also describes himself in a similar way you did, that he is basically a land developer. But he is also very very selective with the builder. He says this is probably where others that do split contracts have lost their way, and their brand is damaged through partnering with shonky builders.

I do have a query with your last paragraph, where you are talking about council and what they will allow for SOC etc. Im a land surveyor so may be able to help, but didnt understand your question.

 

We always design with independent walls (option 2), my firm is a boutique practice of Architects and Town Planners. Much better for everyone long term
It would be unusual for a s173 to refer to SOC.
Usually the permit or s173 tries to achieve subdivision after construction has started, or in accordance with endorsed plans - the 2173, ties the development plans to the allotment(s) being created, so that lots are "sold" with approved plans, not as unfettered land.
No reason not to use split contract/approvals, and is good if a staged approach is wanted

 

Hi Tufan, what construction method do you use on the common boundary so its not a shared wall? Two seperate double bricks abutting?

Do you use this method for side-by-dide townhouses (2 lotters) as well? Im interested, as all our clients use a shared party wall setup for the two lotter side by side townhouses.

 

When I was completing a subdivision that was under the minimum lot size, I remember needing to do an 88b to burden the lot with the approved plans so that it could be subdivided prior to construction, what is the S137 is that similar?

 

Thanks for the advice. I realise I may have been slightly confused with regards to Council's role in ensuring compliance with a development permit.

So I'm clear, there generally seems to be two separate planning permits in a standard townhouse development: the developer applies for a planning permit for the dwellings to be built on the land, and then once Council grants the permit, a Plan of Sub is prepared and the developer applies for a subsequent permit to subdivide the land (which is then quite straight forward). Alternatively, the developer could apply for both the subdivision and the development in one permit upfront.

In the event that the developer intends to hold and rent all townhouses as investment properties, there would be no need to apply for subdivision until the developer decided to sell them (and this would have the advantage of avoiding having to pay the public open space levy until the developer wished to sell).

With regards to SOC, I'm fully familiar with Council's role in issuing SOC in relation to subdivision, however I had also (incorrectly?) assumed that Council issue SOC in relation to a development permit, irrespective of subdivision.

Is it fair to say that in terms of complying with the approved development plans, Council outsource the role of ensuring compliance to a building surveyor who must confirm that the development is in accordance with the planning permit before issuing an occupancy certificate?

The reason I ask: let's say Council issue a Permit for a 3 townhouse development (with independent built-to-boundary walls) and then subsequently issue an S173 that allows you to subdivide ahead of construction. What happens if only 2 out of the 3 townhouses get built and the purchaser of the middle townhouse is unable to proceed? The building surveyor still issues occupancy certificates for the 2 townhouses that are complete, leaving the middle block vacant with blank walls abutting each side?

I had assumed that a condition of the S173 would require all 3 townhouse to achieve completion before a building surveyor could issue an occupancy certificate for any individual townhouse (I may be wrong).

 

I'm sure Tufan will answer from his experience, I'll put my 2 cents in from mine

If it's brick construction then yes always brick wall either side of a 50mm gap

If it's framed construction then it's a choice of
Shared with something like this https://www.jameshardie.com.au/prod...coustic-wall-systems-intertenancy-wall-system
Separate with something like this https://www.jameshardie.com.au/prod...e-&-acoustic-wall-systems-zerolot-wall-system

 

Being a bit old school and having seen issues arise with common walls over the years, often well after the original construction too place, I've found that independent walls are better
Yes double skin or brick veneer
It's also better for sound reduction between the units/houses (no matter what anyone tells you a party/common wall is horrible if you have a noisy unthinking/uncaring party animal neighbour)

 

See my comments in capitals
You seem to be confusing the process nd mixing building and planning. It should be something like this:
1.planning application for development and subdivision (your call on the party wall situation)
2.planning permit issues for development and subdivision
3. permit condition - if subdividing prior to development a s173 agreement is to attach to title - ensuring the sites will be developed in accordance with development component of planning permit
4.building permit application - to Council's building dept or private building surveyor
5. building surveyor checks to ensure construction documents accord with planning permit and planning permit conditions
6. build, one or all, or as many as you like (staged building permit)
7. completion, building surveyor issues Occupancy Permit (no reference back to plannign permit)
8. on-going compliance with planning permit (eg landscaping) is Council's planning dept responsibility, no one else's
9.from point 4, if planning to subdivide - start that process, separate from building permit process

 

Really great advice, thanks for your help!

 

Yes, that's exactly what it is (it's an agreement under section 173 of the Planning and Environment Act that attaches to the property title(s)

 

See comments in capitals

 

Hi Nimai was hoping you could private message me about this?