Buying a development site in NSW: the due diligence developers can’t skip

The value in a development site is in what you can build on it, not what stands there now. Confirming that before you exchange is where deals are won or lost.

A development site is bought for its potential, not its current use. The price reflects what a buyer believes can be built and sold, which means the value of the purchase rests on assumptions about planning, approvals, and cost. If those assumptions are wrong, or unduly optimistic, the margin disappears.

Most of the risk in a site acquisition sits below the surface. Zoning controls, contamination, heritage listings, and contract terms rarely show up on an inspection. They may show up in the contract, the planning certificate, and the title, and they need to be checked before exchange, not after.

This article sets out the due diligence a developer should complete before committing to a site in NSW, from planning controls through to how the purchase is structured and taxed.

Key takeaways

•  The development potential of a site is set by its zoning and the planning controls that apply, not by its current use or what a neighbouring site was approved for.

•  A section 10.7 planning certificate and a title search reveal most of the legal constraints on a site, including easements, covenants, and current heritage controls.

•  Contract conditions such as a due diligence period, a development approval condition, or a call option can give a developer time and protection before they are fully committed.

•  Contaminated land, flood and bushfire controls, and unregistered services can each make a site unviable or far more expensive to develop.

•  How the purchase is structured affects stamp duty, GST, and the tax on the eventual sale. The margin scheme in particular should be settled before exchange.

Zoning and planning controls

The starting point for any site is the Local Environmental Plan and Development Control Plan that apply to it. The Local Environmental Plan sets the zone, which determines what can be built and what consent is required. It also sets development standards such as height limits, floor space ratio, and minimum lot sizes. The Development Control Plan adds more detailed controls on matters such as setbacks, car parking, landscaping, and building design.

A developer needs to confirm that the project they have in mind is permissible in the zone and achievable within the standards. A site zoned for low density residential may not support a residential flat building, regardless of its size. A floor space ratio of 0.5:1 limits the gross floor area to half the site area, which directly caps the yield.

Before committing to a site, confirm:

1.  The zone and the uses permitted with and without consent

2.  The height limit, floor space ratio, and any minimum lot size

3.  Setback, car parking, and site coverage requirements in the Development Control Plan

4.  Whether any draft planning controls are proposed that could change what is permitted

5.  Whether the site is affected by a state environmental planning policy, such as those covering housing or transport corridors

The development approval position

A site can be sold at three stages: with no approval, with a development application lodged but not determined, or with a development consent already granted. Each carries a different level of risk and a different price.

A site sold with an existing development consent gives the most certainty, but the consent must be checked carefully. Confirm that it is still valid and has not lapsed, that it has been physically commenced if the commencement period has passed, and that the conditions of consent are acceptable. Some conditions impose serious costs, such as section 7.11 or 7.12 contributions, dedication of land, or works to public infrastructure.

Where there is no approval, the developer is buying on the strength of their own feasibility. In that case the contract should give time to investigate, and ideally make the purchase conditional on obtaining a satisfactory consent.

Contract conditions that protect a developer

A standard contract for sale leaves a buyer fully committed on exchange. For a development site, that is rarely appropriate. Several mechanisms can give a developer room to complete their investigations or secure an approval before they are bound.

•  A due diligence period. The contract allows the buyer a set number of days to investigate the site and to rescind if not satisfied. The buyer controls the outcome, which makes this the strongest protection, though vendors often resist it.

•  A development approval condition. Completion is conditional on the buyer obtaining development consent on acceptable terms within a defined period. This suits longer lead times but ties up the vendor’s site while the application is assessed.

•  A call option. The developer pays an option fee for the right to call for the sale within an agreed period. Options are commonly used to secure a site while a development application is prepared and assessed, and they can assist with the timing of stamp duty and resale.

Each of these has consequences for stamp duty, timing, and the vendor’s willingness to deal. The right structure depends on the lead time of the project and the bargaining position of each party.

Physical and environmental constraints

Legal due diligence runs alongside physical investigation. A number of site conditions can increase development costs or stop a project entirely.

•  Contamination. Land with a history of industrial, commercial, or agricultural use may be contaminated. Remediation can be expensive and slow, and a contaminated land affectation can restrict what is permitted. A consultant’s report is often warranted before exchange.

•  Easements and covenants. Drainage easements, rights of way, and restrictions on use can limit where and what a developer can build. These will normally appear on the title and in the section 88B instrument.

•  Flooding and bushfire. Sites affected by flood planning controls or mapped as bushfire prone carry additional design requirements and, in some cases, limits on density.

•  Services and infrastructure. The availability and location of water, sewer, power, and stormwater connections affect both cost and design. A sewer main running through the developable footprint can be a serious problem.

•  Heritage. A heritage listing or location within a conservation area constrains demolition and design.

Stamp duty, GST and the margin scheme

How a site is bought and sold has tax consequences that should be modelled before exchange, not discovered at settlement.

Transfer duty is payable on the purchase and is calculated on the price or value of the site. Where an option is used, duty can apply at different points, and the structure should be set up with that in mind.

GST applies to most sales of new residential and commercial premises. A developer registered for GST will generally be liable for GST on the sale of the completed development. The margin scheme allows GST to be calculated on the margin between the sale price and the original purchase price, rather than on the full sale price, which can reduce the GST payable. Eligibility depends on how the site was acquired and what the contract says, so it needs to be addressed at the point of purchase. The contract should record whether the margin scheme will apply. The same issue arises for developers selling off the plan, where the GST treatment affects the price of every lot.

Working with & Legal

Our property development and commercial teams act for developers across acquisition, due diligence, and structuring. We review contracts for sale and option agreements, investigate planning certificates and titles, and advise on the conditions that protect a buyer before exchange. We also work with your accountant on GST and the margin scheme so the tax position is settled before you commit.

If you are considering a development site, contact us at andlegal.com.au before you exchange. The earlier we are involved, the more we can do to protect your position.

Frequently asked questions

Can I make a contract conditional on getting development approval?

Yes. A contract can be drafted so that completion is conditional on the buyer obtaining a development consent on acceptable terms within a set period. The vendor will usually want limits on the time allowed and on how the application is run. Whether a vendor agrees depends on the price, the bargaining position of each party and the state of the market.

What is the difference between an option and a conditional contract?

A conditional contract is a contract for sale that completes only if a condition is met. An option is a separate agreement that gives the developer the right to call for the sale within a period, usually in return for an option fee. Options are often preferred where a developer needs control of a site while a development application is prepared, and they can affect the timing of stamp duty. The right choice depends on the project.

Do I need a planning consultant as well as a lawyer?

For most development sites, yes. A planning consultant or town planner assesses what can be built and the likelihood of obtaining consent. Your lawyer addresses the contract, title, and legal constraints. The two work together, and a feasibility that relies on planning assumptions should be tested by a professional before exchange.

What is the margin scheme and why does it matter at purchase?

The margin scheme is a method of calculating GST on the sale of property based on the margin rather than the full sale price. Whether it is available depends on how the site was acquired, which is why it should be addressed in the purchase contract and not left until the development is sold. Getting this wrong can increase the GST on every lot or unit sold.

How long should due diligence on a development site take?

It depends on the complexity of the site, but a developer should allow enough time to obtain a planning certificate, a title search, and any consultant reports, and to have the contract thoroughly reviewed before exchange. Where a due diligence period is negotiated into the contract, it commonly runs for several weeks. Rushing this stage is where avoidable losses occur.

This article is general information only and does not constitute legal advice. Planning controls, contract terms, and tax treatment vary depending on the site and your circumstances. You should seek independent legal advice before acquiring a development site or entering into an option agreement.