What is a Price Adjustment Clause in a Presale Contract?
Real Estate transactions have notorious infamy linked to them when it comes to the simplicity of understanding them.
Often, the contract is filled with legal jargon that is not only hard to understand but can be downright terrifying to look at for someone with zero legal background.
This is precisely why homebuyers must take these contracts and every clause in them seriously. Good legal advice is required to get into the details of the contract and read the fine print
What Exactly is A Price Adjustment Clause?
A price adjustment clause is something we are seeing lately in some developer contracts for Presale Condos.
This clause provides a way for the developer to adjust the price if the cost of construction and finishing the condo building gets higher than it was during the signing of the contract.
Let’s say that the price of construction has gone up significantly over the years and this has resulted in an increase in the price of the unit.
If the developer puts this clause in the contract, then the developer has the right to increase the contract price of the unit you have agreed to purchase.
The clause would state that if the Building Construction Price Index rises by more than 4%, the developer has the right to increase the price of the unit by the amount over 4%.
It is important to note that you as a homebuyer cannot cancel the contract because of this increase.
Why Does the Price Adjustment Clause Exist?
Simply put, the price adjustment clause is there to safeguard the developer if things in the market do not go as planned.
When developers set a budget for a project, the budget is a projected figure over the next few years that the builders estimate would be the cost of construction and development.
These are based on various forecasts done on the developers’ side and are based on the current market trends.
Given the unstable nature of the economy and supply/demand, it is nearly impossible to predict how the market will be 2 or 3 years from now. Even making a prediction on the financial state of the country you are a few years from now can be a pointless task.
Now let’s say that in the future the building construction price index rises which makes the price of the property go up. In this case, the developer would be losing money if they go ahead with the old decided price. To safeguard themselves against these price increase, this clause is sometimes added to the contract.
Price Adjustment Clause Example:
A price adjustment clause usually states that if the most recent quarterly building construction price Index (BCPI) goes up as stated by Statistics Canada, The builder has the right to increase the price of property equal to the amount increased as per Statistics Canada’s data.
Let us take a simple example to make things clearer:
You sign a presale condo contract with a developer in the year 2019. The tentative completion date is 2023.
Let us assume that the price of the BCPI for the first quarter of 2019 was 125.2
The developer has added a price adjustment clause stating that if on completion, the BCPI according to Statistics Canada has increased by a factor of more than 4%, then the developer may send a notice to the buyer that the purchase price of the property will be increased by a factor equivalent to the percentage increase above the BCPI Ceiling times the Purchase Price.
Now, let’s say that the condo was successfully completed in the year 2023, and that quarter’s BCPI is 144.0
In this case, the BCPI increased by a fact of 15% which is higher than 4%. The price adjustment clause will come into effect.
If the initial agreed-upon price for the presale condo was $500,000; now the buyer must instead pay $575,000 (15% higher than the original purchase price)
Although Price adjustment clauses can cause alarm on the homebuyer’s side, they do have their benefits.
Price adjustment clauses provide increased cooperation between the parties involved, and allow for greater economic stability and predictability.
But, it is important to have a lawyer go through your entire contract with you before you sign it so that you are well aware of these kinds of clauses.
In fact, there may be cases where during the term of an agreement, various reasons may lead you to ascertain that the price adjustment clause no longer makes sense economically.
Anticipating this, buyers should consider including a clause that allows them to revisit and revise the price adjustment clause.
ipresalecondos.com gives you access to in-house legal advice that educates and guides you so that you are not caught off-guard by clauses such as price adjustment clause.
At ipresalecondos.com Our goal is to provide you with an enjoyable and seamless buying experience. To that end, we’re constantly working on improving accessibility to the latest presale projects in the city of Surrey, Vancouver, Burnaby, Richmond, Port Coquitlam, New Westminster, and the rest of the lower mainland.
If you want to learn more about what kind of market we are in currently and how to get the most out of it, get in touch with Ravi Bhindi, who has 18+ years of experience in real estate and pre-sale condos. Please call or text at (604) 825-8881 or email at email@example.com